FIN 300 Final - Lecture1Notes ThreeareasofFinance 1....

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Lecture 1 Notes Three areas of Finance:  1. Managerial Finance – concerned with the financial management of a firm  -Buying/selling assets  -Financing choices  -Control costs  2. Investments – concerned with purchasing & holding assets and securities  -Stocks -Bonds 3. Financial Markets  -Money market  - Capital markets  - Financial intermediaries  Major Principles of Finance:  1. Risk – Return Tradeoff -the higher the risk, the higher the return you require  2. Time Value of Money  3. Cash is king (not profits)  4. Incremental cash flows -the change or improvement in cash flows  5. Competitive Markets 6. Efficient Capital Markets -information spreads quickly and it’s reflected in the stock  price  7. Agency Issue -Who do managers really work for?  8. Tax Impact -investment decisions should be viewed after tax  9. Diversification  10. Ethics  Business Organization Set-up  1. Sole Proprietorship  2. General Partnership  3. Limited Partnership  4. LLP Limited Liability Partnership (hybrid)  5. Corporation – a legal entity subchapter s  How does the particular set-up affect:   Liability   Taxation   Raising capital  Selling   Continuity Lecture 2 Notes Financial Markets & Interest Rates   Purpose of financial markets: Bring the sources of capital and the users of capital  together.   Corporate financing trends:  Bonds 75.5% debt 
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Preferred stock 4.1%  Common stock 20.4% equity  Money Market vs. Capital Market  -Short-term debt  -Long-term securities Securites  -stocks  -T-bills  -bonds  -CDs  Primary Market vs. Secondary Market  -New issues  -reselling of existing  -Investment banker securities  a) purchase new shares “underwriting”  b) distribution (selling) new shares c) advisement capacity  A firm has two types of selling expenses (flotation costs) to pay:  1. Underwriters’s spread gross price – net proceeds  2. Issuance costs  Common Stock (Most expensive) Preferred Stock Bonds (Least expensive)  Regulation:   Securities Act of 1933: firms have to provide full disclosure on new issues.   Securities Exchange of Act of 1934: put the SEC in charge of securities regulation.   Securities Acts Amendments of 1975: creation of a national market system, no fixed  commissions.   Shelf registration: register stock issues in bulk – while selling the stock  over time.  *T-Bills or T-Bonds are considered to be risk free – they are guaranteed by the US  Treasury, there are no safer investments in world.  Rrf : risk free rate = T-Bill or TBond rate   Rrf = r + IRP   Risk free rate = real rate + expected Inflationary Risk Premium    i.e.: Current T-Bill rate is 3.75% ; the real rate is 1.5%; and the expected inflation is
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