COMPLETE CLASS NOTES ON PRINCIPLES OF FINANCE - INTRODUCTORY FINANCE CLASS FOR YEAR 1 OF BACHELOR IN BUSINESS ADMINISTRATION
HISTORY OF FINANCIAL MARKETS
ROLES OF FINANCIAL INSTITUTIONS
THEORIES AND HOW INVESTMENTS WORK
MAXIMISE RETURNS
HEDGE FUNDS
ETC
LIMITING RISK
LEARNING FORMULAE...
FINANCE FICHE – BY EMA
Edits by me and compression
Chapter: An overview of Finance
I - WHAT IS FINANCE
= area concerned with decisions about money, investment decisions & funding needs
Overall, the management of money for someone (individual, company, country etc.)
All cash received = cash needed to be invested to make it grow in the future
Making sound financial decisions, remember:
• Make money grow: + value is preferred to less
• The sooner cash is received, the + value it has
o 100 euros received today is + valuable than 100 euros a year from now
o Why?
§ Inflation = loss of purchasing power
§ Sooner u receive cash, the sooner u invest --> the + money u get in the future :
the time lost is interest rate you’re losing
• - risky assets are + valuable/preferred to risky assets
o Asset: anything from which u expect value (cash) to be created in the future
o Real asset (ex: machine) vs financial asset (ex: stock/share of a company)
II - FOUR MAJOR AREAS OF FINANCE:
1. Financial markets and institutions: Banks, insurance companies, savings and loans, credit
unions
a. Financial institutions: Any org whose objective is to directly deal with money
b. Financial markets: Field where all financial actors operate (where buyers & sellers meet)
(ex: NY Stock Exchange, London Stock Exchange --> physical locations OR electronic
places, like NASDAQ)
i. Add info
2. Investments
a. Determine values, risks & returns of financial assets
i. Ex: want to purchase a share of Tesla. Investment advisor needs to give feedback
about the value of the Tesla share (good price? Too high? Wait and buy later?
Etc.), risk of the company (the higher stock price variation, the riskier the stock
purchase) & measure value against risks --> return (= amount of money
, predicted to make at the end of It period) : high risk, but for ex 10% int for this
particular It. Would that be of interest to client?
b. Determine the optimal mix of securities that should be held in a portfolio
i. Ex: having 10K & wanting to invest in diff companies’ stocks. Advise how much
money the client should invest in each company according to value, risk and
return of each stock in order to maximize return.
3. Financial Services
a. Deal with management of money
i. Financial institutions can offer financial services
b. Help individuals & companies determine how to invest money
c. One of the largest industries in the world
4. Managerial Finance
a. Area of finance that is found within a business: how money is managed inside a
business
i. Not a bank
b. Decisions made by financial managers:
i. Credit terms for customer purchase
ii. How much inventory the firm should carry (since it represents a cost)
iii. How much cash to keep on hand : keeping cash instead of investing = loss of
money (that would be coming from int)
iv. Investment choices (acquire other firms? How much of earnings to reinvest in
business/how much to pay in dividends)
III – HISTORY
Evolution of Modern Finance
Why do financial institutions need to be regulated ?
Because banks use people’s money. The regulations are there to avoid banks to take too much risk, to
invest all of the money received (smt in risky It) : to protect depositors’ money.
Cycle :
Banks lead risky It --> Financial crisis --> Regulators more strict --> Economic growth --> Banks take + risk
History of Investments
Early 1900s : It made only by very wealthy & well-connected ppl in order to get info abt companies they
were investing in ==> limited nb of ppl
, Today : democratization of financial markets, information on companies accessible online
AMF & SCC (FR & US) : control financial markets, specific laws
Add info from slides
IV – GLOBALIZATION OF BUSINESS
Businesses have been impact by technology and globalization :
• Improvements in transportations & communications
• Consumers have a high political clout (=influence) : consumers can easily judge quality of
products by doing research online. To compete on an international level, companies need to b
aware of these reviews/judgments of consumers
• Cost of developing new products has decreased
Importance of Managerial Finance
Financial managers important objective : maximize value/wealth of shareholders by making sure that
the company is in a good financial situation (all parts of business are collaborating efficiently)
Financial managerial responsibilities :
® Maximize value of shares (market capitalization of company)
o Market capitalization = nb shares issued x share price
® Value of a company (as a general concept) = sum of the present/current value of cash flows
(=liquidity) an asset is expected to generate in the future (during its life)
o Based on Demand
o Demand based on investors’ expectations of a company’s future profit : price
increase/decrease
Liquidity increases when sales increase
When there is an expected increase in D, which will generate + revenue for the company
--> Stock D increases = price increase
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