Lecture 1 - UGBA 103 Summer 2009 Lecture 1 1. 2. 3. 4. Role...

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UGBA 103 Summer 2009 Lecture 1 1. Role of Financial Manager 2. Real and Financial Assets 3. Valuation: a central theme 4. Time Value of Money
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2 Role of The Financial Manager Financial manager Firm's operations Financial markets (1) Cash raised from investors (1) (2) Cash invested in firm (2) (3) Cash generated by operations (3) (4a) Cash reinvested (4a) (4b) Cash returned to investors (e.g. dividend, interest) (4b)
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UGBA103 Avinash Verma 3 Two Important Decisions Investment Decision, also known as (AKA) Capital Budgeting (CB) Decision, and Financing Decision, AKA Capital Structure (CS) Decision Financial Manager (FM) makes two important decisions:
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UGBA103 Avinash Verma 4 Investment Decision Investment Decision: Has to do with allocating capital among various alternative investment projects or assets Examples: Merck invests in R&D, Google buys Youtube, eBay launches www.kijiji.com Affects assets side of the Balance Sheet Determines the firm’s demand for capital
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UGBA103 Avinash Verma 5 Investment Decision (2) Investment Decision: Steps (2) (3) and (4a) on slide 2 have to do with Investment Decision FM chooses among various projects involving firm’s operations [steps (2) and (4a)] in consideration of the return these projects will generate [step (3)]
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UGBA103 Avinash Verma 6 Financing Decision Financing Decision: Has to do with raising capital from various alternative sources of capital (from stock market as equity, or from banks or bond market as debt, for example) Affects liabilities side of the Balance Sheet Determines the firm’s supply of capital
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UGBA103 Avinash Verma 7 Financing Decision (2) Financing Decision: Steps (1) and (4b) on slide 2 have to do with Financing Decision Participants in financial markets agree to finance firm’s operations [step (1)] in consideration of the disbursement that occurs in [step (4b)] However, steps (2) (3) and (4a) are also considered because they affect capital gains on equity and probability of repayment on debt
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UGBA103 Avinash Verma 8 Real Assets Real Assets are assets that a firm needs to run its business Examples: Inventory Intellectual Property Real Assets have Intrinsic Value Value stems from the role they play in business Investment decision has to do with Real Assets
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UGBA103 Avinash Verma 9 Financial Assets Financial assets are claims on real assets issued by firms Examples: Common Stocks Preferred Stocks Bonds Financial Assets have NO Intrinsic Value Derive value from the fact that they represent ( contingent ) claims on the real assets and on the income-generating capacity of the real assets Financial decision has to do with Financial Assets
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UGBA103 Avinash Verma 10 Central Theme: Valuation In order to perform her functions as detailed in the chart on slide 2, Financial Manager has to know how to value both real and financial assets Valuation is therefore a central theme of the
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This note was uploaded on 04/30/2010 for the course L&S 101 taught by Professor Chow during the Spring '10 term at University of California, Berkeley.

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Lecture 1 - UGBA 103 Summer 2009 Lecture 1 1. 2. 3. 4. Role...

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