Lecture 1_Introduction to Finance

Lecture 1_Introduction to Finance - Lecture 1: Introduction...

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1 Lecture 1: Introduction to Finance Financial Management 3320 Fall 2010 Indraneel Chakraborty SMU Cox School of Business 2 What is Finance? It is the discipline that studies the pricing of real and financial assets and the financial decisions of individuals and corporations Financial Management SMU Cox School of Business © 2010 Indraneel Chakraborty
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2 3 What is Finance? It is the discipline that studies the pricing of real and financial assets and the financial decisions of individuals and corporations Typical financial decisions made by individuals: Investing their savings: Portfolio Theory Typical financial decisions made by corporations: Planning and managing long term investments: Capital Budgeting Raising the money necessary for these investments: Capital Structure Financial Management SMU Cox School of Business © 2010 Indraneel Chakraborty 4 What is Finance? It is the discipline that studies the pricing of real and financial assets and the financial decisions of individuals and corporations Financial Management SMU Cox School of Business © 2010 Indraneel Chakraborty
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3 5 Asset classes Real assets Assets which generate net income to the economy, i.e., ultimately determine its ability to produce goods and services Natural resources : land, oil, minerals, sun, wind, etc. Physical capital : machinery, buildings, factories Intangibles : human & “cultural” capital like technical expertise, trademarks, patents Financial Management SMU Cox School of Business © 2010 Indraneel Chakraborty 6 Asset classes Financial assets (or securities): Assets which specify level, timing, and condition for the payment of cash, goods, or other financial assets Money : medium of exchange, reserve of value Debt : a claim to a predetermined payment stream Equity : residual claim to a set of real assets (usually of a corporation) Derivatives : their payoff is dependent on the value of some other (usually financial) assets Financial Management SMU Cox School of Business © 2010 Indraneel Chakraborty
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4 7 Example 1: IBM Corporation Real assets : Plants used to build computers Patents and trademarks for software, operating systems, etc. Financial assets : claims to the income generated by IBM’s real assets Equity: IBM stocks Debt: IBM bonds Derivatives : claims on IBM stocks Ex. Call option : a security giving the right (but not the obligation) to purchase IBM stocks at a given ( exercise ) price Financial Management SMU Cox School of Business © 2010 Indraneel Chakraborty 8 Main characteristics of an asset 1. Divisibility : extent to which fractions of an asset can be traded Physical assets are usually indivisible (cars), but not always (ex., gold, oil) 2. Liquidity : the extent to which an asset can be sold quickly with limited price impact (loss of value) Money is the most liquid asset Large firms’ equity usually more liquid than small firms’ equity 3. Standardization
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This note was uploaded on 09/20/2010 for the course FINA 3320 taught by Professor Lewis,m during the Spring '08 term at Southern Methodist.

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Lecture 1_Introduction to Finance - Lecture 1: Introduction...

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