FINANCIAL MANAGEMENT

Part 1: An introduction to finance

Lecture 1: What is finance?
Lecture 1: What is finance?
1.1. Introduction
1.2. Defining finance
1.3. The Firm: a sistemic approach
1.4. Corporate Finance: the financia function
1.!. The financia o"#ecti$e: $aue creation
1.%. Financia main principes
1.&. Finance: historic e$oution
1.'. (ain programmes in Finance
Lecture 1: What is finance?
1.1. Introduction )1*

I am saving for retirement. Sou!d I use a "ension fund#

mutua! fund# direct stoc$ mar$et investment %

I &ant tat ne& car. Sou!d I use m' cas saving# !ease#
(orro&%

)ic is te (est &a' to "a' for m' o!ida's# for m'

ouse%

I*m tin$ing a(out starting a ne& (usiness. )i!! it

re&ard me ade+uate!'%

Marocco as as$ed for ma,or "ro,ect financing.

Sou!d m' organi-ation "rovide te funds%
Lecture 1: What is finance?
1.1. Introduction )2*

Wh+ stud+ finance?

To manage 'our "ersona! resources
To dea! &it te &or!d of (usiness
To "ursue interesting and re&arding career
o""ortunities
To ma$e informed "u(!ic coices as a citi-en
For te inte!!ectua! ca!!enge
.
/ouseo!d
.
0usiness Firms
.
Government
.
Foreign Sector
Lecture 1: What is finance?
Introduction: (acroeconomic,-pending -ectors
S12PL1S SPEN3ING
1NITS
3EFICIT SPEN3ING
1NITS
.
/as more cas income f!o& tan e4"enditure
on consum"tion and rea! investments in a
"eriod of time. Te sur"!us is ten a!!ocated to
te financia! sector.
.
5ter terms for sur"!us unit are saver# !ender#
(u'er of financia! assets# financia! investor#
su""!ier of !oana(!e funds# (u'er of securities.
Lecture 1: What is finance?
1.1. Introduction: -urpus -pending .nit )1*
.
Te sur"!us unit ma' (u' financia! assets#
o!d more mone'# or "a' off financia!
!ia(i!ities issued ear!ier &en in a deficit
situation
.
Te ouseo!d and foreign sectors are
usua!!' a sur"!us sector
Lecture 1: What is finance?
1.1. Introduction: -urpus -pending .nit )2*
.
/as more e4"enditures on consum"tion and
rea! goods 6investment7 in te rea! sector
tan income during a "eriod of time
.
Te deficit unit must "artici"ate 6(orro&7 in
te financia! sector to (a!ance cas inf!o&s
&it outf!o&s
Lecture 1: What is finance?
1.1. Introduction:Deficit -pending .nit )1*
.
5ter terms for deficit e4"ending unit are
(orro&er# demander of !oana(!e funds# and
se!!er of securities.
.
Te deficit s"ending unit ma' issue
financia! !ia(i!ities# reduce mone' (a!ances#
and se!! financia! assets ac+uired "revious!'
&en in a sur"!us situation
Lecture 1: What is finance?
1.1. Introduction:Deficit -pending .nit )2*
.
Contracts re!ated to te transfer of funds from
sur"!us to deficit (udget units
.
Financia! c!aims are a!so ca!!ed financia! assets and
!ia(i!ities# securities# !oans# and financia!
investments.
.
For ever' financia! asset# tere is an offsetting
financia! !ia(i!it'.
.
Tota! receiva(!e e+ua! tota! "a'a(!e in te financia! s'stem
.
Loans outstanding matc (orro&ers* !ia(i!ities
Lecture 1: What is finance?
1.1. Introduction:Financia Caims )1*
.
Financia! mar$ets offer o""ortunit' for:
8
Financing for 3S1s 6"rimar'7
8
Financia! investing for SS1s 6"rimar' and
secondar'7
8
Providing !i+uidit' via trading financia! c!aims
in secondar' mar$ets
Lecture 1: What is finance?
1.1. Introduction:Financia Caims )2*
T/0 FL1W 1F F.2D- DI3453(
Deficit Spending
Unit (DSU)
Surplus Spending
Unit (SSU)

Funds Funds
Financia! Assets 9 Financia! C!aims
T/0 FL1W 1F F.2D- DI3453(
Deficit Spending
Unit (DSU)
Surplus Spending
Unit (SSU)

Funds Funds
Financia! Assets 9 Financia! C!aims
0orro&er
demander of !oana(!e funds
se!!er of securities
Saver# !ender
(u'er of financia! assets
financia! investor
su""!ier of !oana(!e funds
(u'er of securities.
.
Assets: an' "ossession tat as va!ue in an
e4cange
8
tangi(!e: va!ue de"ends on "articu!ar "'sica!
"ro"erties 6re"roduci(!e and non:re"roduci(!e7
8
intangi(!e: !ega! c!aims to some future (enefit.
Financia! assets
Lecture 1: What is finance?
1.1. Introduction:5ea 6 Financia assets
.
Main "ro"erties of financia! assets
8
2ate of return 627: e4"ected return
8
2is$ 6r7: credit ris$# mar$et ris$
8
Li+uidit' 6L7: o& muc se!!ers stand to !ose if
te' &is to se!! immediate!' against engaging in
a cost!' and time:consuming searc 6;.To(in7
Lecture 1: What is finance?
1.1. Introduction:Financia assets: main properties
T/0 FL1W 1F F.2D- DI3453(
DIRECT FINANCING (Markets)
Deficit Spending
Unit (DSU)
Surplus Spending
Unit (SSU)
INDIRECT FINANCIAL INVESTMENT
OR INTERMEDIATION FINANCING
Brokers
Dealers
Intermediaries
Funds Funds
Funds Funds
T/0 FL1W 1F F.2D- DI3453(
DIRECT
Deficit Spending
Unit (DSU)
Surplus Spending
Unit (SSU)
INDIRECT
Brokers
Dealers
Intermediaries
Funds Funds
Funds Funds
Direct Financial Assets
Purchase
Indirect Financial Assets
Purchase
Direct Financial Assets
Issue
Direct Financial Assets
Issue
Lecture 1: What is finance?
1.2. Defining Finance
.
)at is Finance%
.
T'"es of Finance definitions
8
Lac$ of an' s"ecific definition
8
2aising and s"ending funds
8
Economic decisions &it a time com"onent
8
Micro<Macro: need for integration
.
Finance is ana!'tica!.
.
Finance is (ased on economic "rinci"!es.
.
Finance uses accounting information as an
in"ut for decision:ma$ing.
.
Finance is internationa! in "ers"ective.
.
Finance is constant!' canging.
.
Finance is te stud' of o& to invest and
raise mone' "roductive!'
Lecture 1: What is finance?
1.2. Defining Finance
http://garnet.acns.fsu.edu/~ppeters/fn3403/
.
Finance is te stud' of o& "eo"!e a!!ocate
scarce resources over time
8
costs and (enefits are distri(uted over time
8
(ut te actua! timing and si-e of future cas
f!o&s are often $no&n on!' "ro(a(i!istica!!'
.
1nderstanding finance e!"s 'ou eva!uate
tese uncertain cas f!o&s
Lecture 1: What is finance?
1.2. Defining Finance
0odie and Merton
.
)en im"!ementing decisions# "eo"!e ma$e
use of te Financial System &ic can (e
defined as the set of markets and other
institutions used for financial contracting
and exchange of assets and risks
Lecture 1: What is finance?
1.2. Defining Finance
0odie and Merton
.
Financia! teor' consists of:
8
te set of conce"ts tat e!" to organi-e one*s
tin$ing a(out o& to a!!ocate resources over
time
8
te set of +uantitative mode!s used to e!"
eva!uate a!ternatives# ma$e decisions# and
im"!ement tem
.
Tese conce"ts and mode!s a""!' at a!! !eve!s and
sca!es of decision ma$ing
Lecture 1: What is finance?
1.2. Defining Finance
0odie and Merton
.
A (asic tenet of finance is tat te e4istence
of economic organi-ations 6e.g. firms and
governments7 faci!itate te satisfaction of
"eo"!e*s consumption preferences
Lecture 1: What is finance?
1.2. Defining Finance
0odie and Merton
.
Finance Teor' is te stud' of te (eaviour of
individua!s in te intertempora a!!ocation 6over
time7 of teir resources in an uncertain
environment# and te stud' of te function of
economic institutions and mar$ets in ma$ing tese
a!!ocations "ossi(!e.
Lecture 1: What is finance?
1.2. Defining Finance: Definition 1
Economa Financiera
Marn, Jos M. / Rubio, Gonzalo
Antoni Bosch, Editor, Barcelona, 2!

Te "ractice of =finance> e4ists for te

creation of value

Financia! contracting (rings a(out te

su(stitution of rea! &ea!t 6i.e. rea!
(usiness assets7 for financia! &ea!t 6i.e.
securities7 Investing in financia! securities as (etter
attri(utes tat in rea! assets. ?a!ue is created in tte rea! assets
e!d (' (usinesses# and ten transmitted into te va!ue of
financia! &ea!t issued (' (usinesses and e!d (' investors.
Lecture 1: What is finance?
1.2. Defining Finance: a ne7 paradigm. Te
?a!ue Creation Function of Finance
Norton ' Scott# =A ne& Paradigm: te va!ue creation
function of finance># ,anuar' @AA1
Finance is te "rocess of transforming
e4isting assets into ne&# contractua! forms#
as &e!! as te ana!'tica! tecni+ues needed
to su""ort tis "rocess# for te "ur"ose of
&ea!t creation in modern# ca"ita!istic
economies.
Lecture 1: What is finance?
1.2. Defining Finance: a ne7 paradigm.
Definition 2
Norton ' Scott# =A ne& Paradigm: te va!ue creation
function of finance># ,anuar' @AA1
.
Financia! management 6Cor"orate finance7 dea!s &it
o& firms raise and use funds to ma$e sort:term and
!ong:term investments.
.
Investment dea!s &it o& te securities mar$ets
&or$ and o& to eva!uate and manage investments in
stoc$s and (onds.
.
Financia! Mar$ets and Institutions inc!udes te stud'
of te (an$ing s'stem and mar$ets.
Lecture 1: What is finance?
1.2. Defining Finance: the three primar+ areas of finance
Peterson and Fa(o--i
FINANCIAL MANAGEMENT
Part 1: An introduction to finance
Lecture 1: What is finance?
)II*
Lecture 1: What is finance? )II*
1.1. Introduction
1.2. Defining finance
1.3. The Firm: a sistemic approach
1.4. Corporate Finance: the financia function
1.!. The financia o"#ecti$e: $aue creation
1.%. Financia main principes
1.&. Finance: historic e$oution
1.'. (ain programmes in Finance
Su(sistema de
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Lecture 1: What is finance? )II*
1.3. The Firm: a sistemic approach
Lecture 1: What is finance? )II*
1.4. The Firm: a sistemic approach
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circu!ante
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Asset
Current
Assets
Costs
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Lecture 1: What is finance? )II*
1.!. Corporate Finance: the financia function
.
Cor"orations face t&o (road financia! +uestions:
: )at investments sou!d te firm ma$e%
: /o& sou!d it "a' for tose investments%
Financia managers are concerned 7ith :
.
In$estment Decisions 6use of funds7:
8
Te (u'ing# o!ding or se!!ing of t'"es of assets
.
Financing Decisions 6ac+uisitions of funds7


Lecture 1: What is finance? )II*
1.%. Corporate Finance: the financia function
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Lecture 1: What is finance? )II*
1.&. The Financia o"#ecti$e: $aue creation
.
Goa! of management: ma4imi-e te economic &e!!:(eing# or
&ea!t# of te o&ners 6current sareo!ders7
9F ma4imi-e te "rice of te stoc$
.
Sare "rice toda' 9 Present va!ue of a!! future e4"ected
dividends at re+uired return

+
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1
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Lecture 1: What is finance? )II*
1.'. The Financia o"#ecti$e: $aue creation
.
Financia! managers must create or generate va!ue for teir
sareo!ders.
.
Economic ?a!ue Added 6E?A7 is a measure of a com"an'Gs
financia! "erformance (ased on te residua! &ea!t ca!cu!ated ('
deducting cost of ca"ita! from its o"erating "rofit 6ad,usted for
ta4es on a cas (asis7.
.
Te formu!a for ca!cu!ating E?A is as fo!!o&s:
E?A 9 Net 5"erating Profit After Ta4es : 6Ca"ita! H Cost of
Ca"ita!7

Lecture 1: What is finance? )II*
1.>. Financia main principes
.
2ationa! Financia! (eavior
.
2is$ aversion
.
0udgetar' diversification
.
E4istence of t&o "arts in a!! financia! transaction
.
Measurement (' cas f!o&s
.
Signa!ing and informative as'mmetr'
.
Efficienc' of financia! mar$ets
.
3irect re!ation of ris$ and return
.
E4istence of va!ua(!e ideas
.
Financia! conduct initiative
.
Te Time ?a!ue of te mone' and va!ue additivit'.
Lecture 1: What is finance? )II*
1.1?. Finance: historic e$oution
Princi"!es of centur' II:
0eginning of te researc in finance
E?ENTS
Finance at te "resent
: E4"ansion of te Eears @A
:
Te @J Crises
:
Econom' mi!itar' of te KA
:
E4"ansion of te LA
:
Crises of te "etro!eum of te MN
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1900-
1950-
1970-
1980-
1990-
Classical Approach
APT Model
(Ross, 1970)
Options al!ation Models ("lac# $ %choles, 197&)
Port'olio selection
Theor$ (Mar#o(it),
195*,1959)
CAPM ((idenin+ and re'or,!lation)
-i.idends Polic$ (Modi+liani, Miller,
19/&)
Capital Assets Pricin+
Model (CAPM) (%harpe,
19/&-0, 1intner, 19/5)
23cient
Mar#et
Theor$
(4a,a,
1970)
4inancial %tr!ct!re
(Modi+liani, Miller,
1958)
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(7a!',ann $ 8il, 198/-87)
Chaos Theor$,
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Lecture 1: What is finance? )II*
1.1?. Finance: historic e$oution
Lecture 1: What is finance? )II*
1.11. (ain programmes in finance
.
Managements of Investments: Ca"ita! 0udgeting.
.
Ca"ita! Structure and 3ividend Po!ic'.
.
Mar$et Efficienc'.
.
Te Ca"ita! Asset Pricing Mode!.
.
5"tions Teor'
.
Agenc' Teor'
.
Financia! P!anning
.
Sma!! Firms
.
Oid&e!!# Peterson# 0!ac$&e!!# )id(ee: Financial
Institutions, Markets, and Money# Eigt Edition# ;on )i!e'
P Sons# @AAN
.
Fa(o--i# Modig!iani: Capital Markets. Institutions and
Instruments. Prentice /a!!# @AAN
.
0odie# Qvi and Merton# 2o(ert C.: Finance. Prentice /a!!#
1JJJ
.
Pame!a P. Peterson and Fran$ Fa(o--i: Financial Management
and Analysis# @nd Edition# ;on )i!e' P Sons# @AAN

Lecture 1: What is finance?
8i"iograph+