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SUMMARY BASED ONLEARNING OBJECTIVES
Fundamentals of Finance for IB
,Contents
Financial Analysis................................................................................................................................4
Time Value of Money.........................................................................................................................5
The Valuation of Financial Securities..................................................................................................7
Risk and Return...................................................................................................................................8
Capital Budgeting, Estimating Cash Flows, and Cost of Capital.........................................................10
Financial Structure and Dividend Policy............................................................................................13
Working Capital Management and Financial Planning.....................................................................15
Risk Management.............................................................................................................................16
Financial Management
Distinguish the four main areas of finance and briefly explain the financial activities that each
encompasses.
, 1. Investments: This area focuses on the analysis and management of financial assets. It
involves activities such as security analysis, portfolio management, and asset allocation,
aiming to optimize investment returns
2. Financial Institutions: These institutions, including banks and insurance companies, play a
crucial role in facilitating financial transactions and providing financial services. They connect
borrowers and lenders, manage risk, and offer various investment products
3. International Finance: This area deals with financial management in a global context,
encompassing foreign exchange markets, international trade, and cross-border investments.
It involves managing currency risks and navigating diverse regulatory environments
4. Corporate Finance: The source extensively covers this area, which focuses on financial
decision-making within corporations. It encompasses investment decisions, financing
decisions, and liquidity management to maximize shareholder wealth
Explain the different ways of classifying financial markets.
Financial markets can be classified based on:
Maturity of Assets:
Money Market: This market facilitates short-term debt securities with maturities of less than
one year, primarily for corporations and governments to manage short-term cash needs
Capital Market: This market deals with long-term financial assets, including stocks and bonds,
used by corporations to raise long-term capital for investments
Owners of Assets:
Primary Market: This market handles the initial issuance of securities by corporations to
investors, involving activities like initial public offerings (IPOs) where companies raise
external funds
Secondary Market: This market facilitates trading of securities among investors after their
initial issuance. It provides liquidity for investors and enables price discovery
Discuss the three main categories of financial management.
Investment: This involves evaluating and selecting long-term assets that will generate future
cash inflows for the company, aligning with the goal of maximizing shareholder wealth
Financing: This focuses on determining the optimal mix of long-term debt and equity
financing to fund company assets and operations. It involves balancing cash inflows and
outflows to ensure the company meets its financial obligations
Liquidity: This encompasses managing the day-to-day financial operations of the company,
ensuring sufficient short-term cash flow to cover expenses and maintain smooth operations
Identify the main objective of the financial manager and how that objective might be achieved.
The primary objective of a financial manager is to maximize the market value of the firm, which
translates to maximizing share price and shareholder wealth
This objective is achieved through various activities:
Making Prudent Investment Decisions: Selecting projects with positive net present value
(NPV), indicating that the project's returns exceed its costs
Optimizing the Capital Structure: Finding the right balance between debt and equity
financing to minimize the cost of capital and maximize firm value
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