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Topic 1 Introductionto Bus. Fin SIM 2010

Topic 1 Introductionto Bus. Fin SIM 2010 - BAFI 1012...

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BAFI 1012 Business Finance Topic 1:Introduction to Business (Corporate ) Finance
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2 Overview In this lecture we will discuss An overview of finance The corporate objective and corporate financial decisions The nature of financial assets and capital markets The flow of funds through the economy The valuation of financial assets The rate of return on securities
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3 What is Finance? Finance is a subfield of economics where the primary focus is on the working of capital markets and the supply and pricing of capital assets. fundamental concern of finance is valuation - what is something worth? “In the end all prices depend on someone’s estimate of future income” Williams J.B. The Theory of Investment Value (1938)
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4 Valuation in Finance Present Value Present Value of Returns of Returns Expected Expected from from Investment Investment Value Value Today Today =
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5 The Discipline of Finance Financial Economics Corporate Finance Investments International Finance Capital Markets and Financial Institutions Personal Finance Real Estate Finance Public Finance
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6 Corporate Finance Corporate Finance “Corporate Finance is a body of knowledge which focuses on explaining and interpreting capital markets . It provides an analytical framework to guide managers of firms and to assist them to evaluate corporate financial decisions . Bishop, Crapp, Faff and Twite (1993)
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7 Forces For Change In Finance Theoretical developments Technological change, especially in communications and information processing Development of new securities Deregulation of financial markets Development of data bases Data types Period of analysis Security type Development of tools of analysis Statistical and other quantitative methods Computational power and speed
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8 Financial Decision-Making Financial decision-making involves the application of a coherent body of theory to enable individuals and firms to choose among alternatives and allocate risky cash flows through time to achieve a desired goal
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9 A Note on Finance and Accounting Both disciplines are concerned with a firm’s assets and liabilities Accounting , with its emphasis on review and compliance, generally has an historical outlook Finance , with its emphasis on valuation and decision-making, generally has a focus on the future
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10 The Focus of Finance The focus of financial decision-making is on the future Decisions are based on estimates or forecasts of future cash flow streams Forecasts are based on all available information , including relevant historical information The outcome of financial decisions is influenced by the passage of time and the resolution of uncertainty
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11 Valuation in Finance Present Present Value Value of Expected of Expected Returns Returns from from Investment Investment Value Value Today Today =
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12 The Theory Of Finance The contribution of theory to financial decision-making:
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