Lecture 1 - Click to edit Master subtitle style BUS 106...

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Unformatted text preview: Click to edit Master subtitle style BUS 106 Avinash Verma BUS 106 Spring 2011 Lecture 1 1. Role of Financial Manager 2. Real and Financial Assets 3. Valuation: a central theme 4. Time Value of Money BUS 106 Avinash Verma 22 Role of The Financial Manager Financia l manage r Firm' s operation s Financia l market s (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) BUS 106 Avinash Verma BUS 106 Avinash Verma 33 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: BUS 106 Avinash Verma BUS 106 Avinash Verma 44 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 firms demand for capital BUS 106 Avinash Verma BUS 106 Avinash Verma 55 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 firms operations [steps (2) and (4a)] in consideration of the return these projects will generate [step (3)] BUS 106 Avinash Verma BUS 106 Avinash Verma 66 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 firms supply of capital BUS 106 Avinash Verma BUS 106 Avinash Verma 77 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 firms 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 BUS 106 Avinash Verma BUS 106 Avinash Verma 88 Real Assets Real Assets are assets that a firm needs to run its business Examples: Plant & machinery 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 BUS 106 Avinash Verma BUS 106 Avinash Verma 99 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 BUS 106 Avinash Verma...
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Lecture 1 - Click to edit Master subtitle style BUS 106...

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