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Summary Lectures Fundamentals of Finance
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This is a summary of the lectures from week 1 till week 7, covering the chapters 1,2,3,4,5,6,7,8,9,12,13,14,15,16,17,20 and 21.
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[Year]Summary of Lectures
Finance for IB
,Contents
Lecture 1.............................................................................................................................................2
Lecture 2.............................................................................................................................................3
Lecture 3.............................................................................................................................................4
Lecture 4.............................................................................................................................................6
Lecture 5.............................................................................................................................................7
Lecture 6.............................................................................................................................................8
Lecture 7.............................................................................................................................................9
1
,Lecture 1
Introduction to Corporate Finance
Finance is about managing wealth, which is the market value of assets, measured by the present
value of future cash flows. This market value is observable when a company's shares are publicly
traded.
Forms of Business Organisation
There are three basic legal forms of organizing firms: sole proprietorship, partnership, and
corporation. Corporations, as legal entities, have several advantages: unlimited life, easy transfer of
ownership, limited liability, and increased access to funding through capital markets.
Raising Capital
Companies raise the cash they need for operations from investors by utilising financial markets.
Financial markets are classified by the maturity of assets (money market for short-term and
capital market for long-term) and by the owners of assets (primary market for "first sale" and
secondary market for "after sale").
In the primary market, corporations raise external funds by issuing financial assets in the
form of equity and debt to investors through financial intermediaries.
The secondary market facilitates the sale of securities from one investor to another.
What is Corporate Finance?
Corporate finance is about making decisions regarding what assets to buy or sell and when to buy or
sell those assets, considering the timing of cash inflows and outflows and the uncertainty of future
inflows. It encompasses three main areas:
Investment: Deciding on long-term investments to generate future cash inflows.
Financing: Determining how to obtain long-term financing for projects, balancing cash
inflows and outflows to meet obligations.
Liquidity: Managing day-to-day activities and ensuring sufficient short-term cash flow to
cover expenses.
The Goal of Financial Management
The primary goal of financial management is to maximise the market value of the firm, which
translates to maximising share price and shareholder wealth. This involves avoiding financial
distress and managing risk.
However, note that shareholder wealth maximisation has been challenged by the concept of
Corporate Social Responsibility (CSR), including environmental responsibility, leading to discussions
about ESG (Environmental, Social, Governance).
Conflicts of interest can arise between managerial goals and shareholder wealth maximisation,
leading to agency problems.
Corporate governance aims to address agency problems by monitoring management behaviour and
aligning managers' incentives with those of shareholders through compensation plans, threats of
termination, and threats of takeover.
Financial Statements and Analysis
Financial statements provide crucial information for financial management and analysis.
The income statement shows the profitability of the company for a specific period.
2
, The balance sheet provides a snapshot of the company's financial position at a single point in
time.
Financial management involves tracking cash flow, which is the main input for valuing a company's
stock.
Financial Management Decisions
The sources identify three core financial management decisions:
1. Capital Budgeting: Planning and managing long-term investments. This involves evaluating
the size, timing, and risk of future cash flows.
2. Capital Structure: Determining the mix of long-term debt and equity used to finance assets.
This decision involves deciding how much to borrow and identifying the least expensive
sources of funds.
3. Working Capital Management: Managing short-term assets and liabilities to ensure the
company has enough cash to operate efficiently. This involves balancing short-term cash
inflows and outflows to meet obligations.
Cash Flows
Cash flow is a crucial concept in finance, representing the movement of cash in and out of a business.
It is not the same as net working capital.
Cash flow from assets equals the cash flows to creditors and equity investors.
Total cash flow comes from operating activities, investing activities, and financing activities.
Lecture 2
Cash Flows
Cash flow refers to the movement of cash into and out of a business. It is categorised into three main
activities:
Operating Activities: This includes cash flows generated from the core business operations of
a company, such as sales revenue and payments for expenses like salaries and rent.
Investing Activities: These cash flows relate to the purchase and sale of long-term assets,
such as property, plant, and equipment.
Financing Activities: This category encompasses cash flows associated with raising and
repaying capital, including issuing debt or equity, paying dividends to shareholders, and
repurchasing shares.
Calculating Cash Flow from Assets: The sources explain how to determine the cash flow from assets,
which represents the cash flow generated by a company's investments. It's calculated by subtracting
cash flow from investing activities from operating cash flow.
Financial Ratios: Financial ratios are tools used to analyse a company's financial health and
performance. They are calculated by comparing different items from the company's financial
statements and can be grouped into various categories, such as:
Liquidity Ratios: These ratios assess a company's ability to meet its short-term obligations.
Examples include the current ratio, quick ratio, and cash ratio.
Financial Leverage Ratios: These ratios measure a company's long-term solvency and its use
of debt financing. Examples include the total debt ratio, debt-equity ratio, times interest
earned ratio, and cash coverage ratio.
3
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