Ch01 - Chapter 1 Introduction to Finance Road Map Part A...

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Unformatted text preview: Chapter 1 Introduction to Finance Road Map Part A Introduction to finance. Financial decisions and principles of finance. Present value. Part B Valuation of assets, given discount rates. Part C Determination of discount rates. Part D Introduction to corporate finance. Main Issues Financial Challenges. Unifying Principles. Opportunity Cost of Capital and Present Value. Role of Financial Markets. Objectives of Financial Manager. 1-2 Introduction to Finance Chapter 1 Contents 1 What is Finance? . . . . . . . . . . . . . . . . . . . . . . . . 1-3 2 Time and Risk . . . . . . . . . . . . . . . . . . . . . . . . . 1-8 3 Unifying Principles of Finance . . . . . . . . . . . . . . . . . 1-10 3.1 Assumption of A Perfect Financial Market . . . . . . . . . . . . . 1-10 3.2 First Principle: No Arbitrage . . . . . . . . . . . . . . . . . . . . 1-11 3.3 2nd Principle: Preference . . . . . . . . . . . . . . . . . . . . . . 1-13 3.4 3rd Principle: Optimization . . . . . . . . . . . . . . . . . . . . . 1-15 3.5 4th Principle: Market in Equilibrium . . . . . . . . . . . . . . . . 1-18 4 Opportunity Cost of Capital and PV . . . . . . . . . . . . . . 1-19 4.1 Opportnity Cost of Capital . . . . . . . . . . . . . . . . . . . . . 1-19 4.2 Present Value (PV) . . . . . . . . . . . . . . . . . . . . . . . . . 1-20 4.3 Net Present Value and Decision Rule . . . . . . . . . . . . . . . . 1-22 5 Role of Financial Market . . . . . . . . . . . . . . . . . . . . 1-25 5.1 Financial Market at Center of Universe . . . . . . . . . . . . . . . 1-25 5.2 Function of Financial Markets . . . . . . . . . . . . . . . . . . . . 1-27 6 Objectives of Financial Manager . . . . . . . . . . . . . . . . 1-31 7 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-37 8 Homework . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-38 15.407 Lecture Notes Fall 2003 c Jiang Wang Chapter 1 Introduction to Finance 1-3 1 What is Finance? Finance is about the bottom line of business activities. Every business is a process of acquiring and disposing assets: Real assets - tangible and intangible. Financial assets. Two objectives of business: Grow wealth (creat value). Use wealth (assets) to best meet economic needs. Financially, a business decision reduces to: Valuation of assets. Management of assets. Valuation is the central issue of finance. c Jiang Wang Fall 2003 15.407 Lecture Notes 1-4 Introduction to Finance Chapter 1 Questions we would like to answer in this course: 1. How financial markets determine asset prices? 2. How households make financial decisions? Savings decision:- How to allocate wealth over time? Investment decision:- How to grow wealth?...
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Ch01 - Chapter 1 Introduction to Finance Road Map Part A...

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