Financial Management Class 1 Commercial paper: o short term financial paper o short term IOU by large well-known & highly rated corporation Basis points o bp= 1/100 of a percent o 100bp= 1% Overnight rate o the rate at which banks borrow each other overnight o commercial banks do not borrow from central bank - borrow from central bank means your banks is not doing well - no one borrows at the bank of Canada rate, works as the benchmark, raise the rate, pass to the citizens 4 Principles of Finance o If it don’t jingle it don’t count o Risk is the possibility that bad or good things may happen - Finance is forward looking, and accounting is backward looking o The greater the risk the greater the expected reward o A $1 today is worth more than a $1 tomorrow Financial manager Investment decisions o Capital Budgeting - What to spend money on, what do we invest in o Capital Structure - How to get the money to invest o Capital Analysis - What is something worth o Working Capital Management - Managing the day to day cash flows o Risk Management - Managing the possibility that bad or good things may happen Goals of the Financial Manager o Maximize Shareholder Wealth o Triple Bottom Line When you make decisions, you consider 3 aspect impact: - Economic - Environmental - Society - Measurement
- Subjectivity - Trade-offs With triple bottom line there is always trade-offs o Maximize Utility o Maximize Earnings o Maximize Cash Flow Difference between stakeholders & shareholders o Stakeholders Who have an interest in a company’s affairs o Shareholders Who owns shares in a company Legally, the goal is max the shareholders wealth , get the share price as high as possible Benefit Corporation (B Corp) A corporation that is not legally bound to solely take into account the economic interests of its shareholders (can operate under triple bottom line); the economics do not legally have to be sole basis for its decisions Corporate governance: How the company is organized from a governance point of view The objective of the company is followed Agency Issue Managers do not behave in the best interest of shareholders Maximize Shareholders Wealth
Value of the firm has 2 components: - MAXIMIZE Free cash flow - MINIMIZE WACC o WACC : how much that will cost the company to do the investment, to get that money o Weighted Average Cost of Capital (WACC): the rate of return required by investors o Market risk: the risk will going on in the broad market CFO cannot control with the market risk, they can only adjust to cope with risk Forms of Business Organization Cost (and hassle) to set up Liquidity and marketability Ability to raise capital Taxation Control issues Liability o Sole Proprietorship: an unincorporated business owned by one individual Control everything Subject to few government regulations Easy and inexpensive to set up All the taxes are personal taxes unlimited personal liability for the business’s debts
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