Intro_1 - 3 EDUCATING LEADERS FOR 800 YEARS Introduction to...

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1 FINANCE – Han Ozsoylev 1 3 EDUCATING LEADERS FOR 800 YEARS Introduction to Management - Finance Han Ozsoylev Hilary Term 2008 FINANCE – Han Ozsoylev 2 Learning objectives Understand the role of finance within a corporation Familiarity with basic institutional framework Understand a few specific problems related to the financing of a corporation
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2 FINANCE – Han Ozsoylev 3 Structure of the course Lecture 1: What is finance? Lecture 2: Sources of funds Lecture 3: Finance in a less than perfect world Lecture 4: A comparison of financial systems FINANCE – Han Ozsoylev 4 EDUCATING LEADERS FOR 800 YEARS Lecture 1: What is Finance?
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3 FINANCE – Han Ozsoylev 5 The role of finance Households Store funds for later use Firms Use funds now for production Savings Repayment FINANCE – Han Ozsoylev 6 The role of finance Production value of output > value of input repayment > investment (=savings) Households receive interest payment on savings
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4 FINANCE – Han Ozsoylev 7 Financial assets Financial asset: promise of (re)payment Contract specifying conditions of payment ± amount of payment ± timing of payment ± conditions of payment (e.g. don’t need to pay in case of bankruptcy) FINANCE – Han Ozsoylev 8 Financial assets 1. Non-tradable ² Firm X pays Mr Y the amount of £Z. .. 2. Tradable ² Firm X pays the person in possession of this contract the amount of £Z. ..
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5 FINANCE – Han Ozsoylev 9 Financial assets What is the price at which you are willing to trade? In equilibrium: price makes you indifferent between holding or selling the asset Price=intrinsic value of the payments received when holding asset FINANCE – Han Ozsoylev 10 Financial assets Intrinsic value: D t is payment at date t r is discount rate/ rate of time preference Note: same principle for real assets () = + = 0 1 t t t r D P
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6 FINANCE – Han Ozsoylev 11 Financial assets Example: ± one share pays dividend of 50p next year. ± dividend grows at 3% annually ± discount rate is 7% ± what is share price? FINANCE – Han Ozsoylev 12 Perpetuities When a constant cash flow will occur at regular intervals forever it is called a perpetuity. The value of a perpetuity is simply the cash flow divided by the interest rate. Present Value of a Perpetuity ( in perpetuity) = C PV C r
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7 FINANCE – Han Ozsoylev 13 Growing Perpetuities Assume you expect the amount of your perpetual payment to increase at a constant rate, g .
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This note was uploaded on 04/12/2010 for the course ECON DEAM taught by Professor Vines during the Spring '10 term at Oxford University.

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Intro_1 - 3 EDUCATING LEADERS FOR 800 YEARS Introduction to...

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