UGBA103_1 - UGBA 103&Introduction to Finance Dmitry...

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Unformatted text preview: UGBA 103 &Introduction to Finance Dmitry Livdan Walter A. Haas School Fall 2011 Dmitry Livdan (Haas) UGBA 103 Fall 2011 1 / 179 0. Introduction Dmitry Livdan (Haas) UGBA 103 Fall 2011 2 / 179 0. Introduction Readings: Berk and DeMarzo: Chapter 1. Dmitry Livdan (Haas) UGBA 103 Fall 2011 3 / 179 The Finance Function and the Financial Manager Broadly stated, the &nance function is concerned with the ¡ow of funds between the capital markets and the &rm¢s operations These ¡ows include: (1) issues of securities to raise cash; (2) purchases of real assets used in the &rm¢s operations; (3) cash in¡ows generated by the real assets; this cash is either (4a) reinvested in the &rm or (4b) returned to the &rm¢s investors. The &nancial manager therefore faces two main tasks: £ Investment decisions (allocating funds to investments) £ Financing decisions (choosing what instruments to issue to raise funds) Dmitry Livdan (Haas) UGBA 103 Fall 2011 4 / 179 The Objective of the Financial Manager Although many claimholders have a stake in the &rm¡s income, the shareholders are the owners, and managers should act in their interest We will see that shareholders are made better o/ by any decision which increases the value of their stake in the &rm. Therefore, managers should act to maximize the value of the &rm¡s shares. ¢ This is more complex than pro&t maximization and requires an understanding of how &nancial assets are valued. Several institutional arrangements exist to ensure that managers will indeed follow this objective: ¢ Stock and option compensation ¢ Reputation in managerial labor markets ¢ Hostile takeovers ¢ Boards Dmitry Livdan (Haas) UGBA 103 Fall 2011 5 £ 179 Objective of this Course The course is intended to provide a framework for analyzing the investment and &nancing decisions made by corporations. Since such a framework requires an understanding of the determinants of value, the course provides an introduction to the concepts underlying both corporate &nance and asset pricing. Dmitry Livdan (Haas) UGBA 103 Fall 2011 6 / 179 Checkpoint: Berk and DeMarzo - Chapter 1 Material relevant to this section: Berk and DeMarzo: Chapter 1 & Problem set: None What is next? Berk and DeMarzo: Chapter 4 and Chapter 5, Section 1. Look at the ¡Math/Stat reminder¢in Additional Materials; this will be useful for the problem sets. Dmitry Livdan (Haas) UGBA 103 Fall 2011 7 / 179 I. Investment Decisions Dmitry Livdan (Haas) UGBA 103 Fall 2011 8 / 179 I. Investment Decisions Dmitry Livdan (Haas) UGBA 103 Fall 2011 9 / 179 I.1 Compounding and Discounting Dmitry Livdan (Haas) UGBA 103 Fall 2011 10 / 179 I.1.1 Constant Interest Rate Dmitry Livdan (Haas) UGBA 103 Fall 2011 11 / 179 I.1.1 Constant Interest Rate Readings: & Berk and DeMarzo Chapter 4 and Chapter 5, Section 1 Dmitry Livdan (Haas) UGBA 103 Fall 2011 12 / 179 Motivation At the most general level, an investment is a claim to a stream of cash &ows....
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UGBA103_1 - UGBA 103&Introduction to Finance Dmitry...

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