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Copyright 2011 Pearson Prentice Hall. All rights reserved.

Getting Started:

Principles ofFinance

Chapter 1

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Copyright 2011 Pearson Prentice Hall. All rights reserved.1-2

Slide Contents

Learning Objectives

Introduction

1.Finance: An Overview

2.Three Types o !usiness Organi"ations

#.The $oa% o the Financia% &anager

'.The Four !asic (rincip%es o Finance

)ey Ter*s

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Learning Objectives

1. +nderstand the i*portance o inance inyour persona% and proessiona% %ives andidentiy the three pri*ary business

decisions that inancia% *anagers *a,e.

2. Identiy the ,ey dierences between

three *ajor %ega% or*s o business.

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Learning Objectives !cont"#

+nderstand the ro%e o the inancia%*anager within the ir* and the goa% or*a,ing inancia% choices.

-p%ain the our princip%es o inance thator* the basis o inancia% *anage*ent

or both businesses and individua%s.

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%ntrod&ction

$ive ea*p%es o inancia% decisions acedby corporations and individua%s.

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1"1 F%'('C): ('O*)+*%),

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Copyright 2011 Pearson Prentice Hall. All rights reserved. 1-

,hat is Finance.

Finance is the study o how peop%e andbusinesses eva%uate invest*ents and raisecapita% to und the*.

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0hree &estions (ddressed b theSt&d of Finance:

1. /hat %ong0ter* invest*ents shou%d their* underta,e capital budgetingdecisions3

2. 4ow shou%d the ir* und theseinvest*ents capital structure decisions3

#. 4ow can the ir* best *anage its cash%ows as they arise in its day0to0dayoperations working capital managementdecisions3

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,h St&d Finance.

)now%edge o inancia% too%s is critica% to*a,ing good decisions in both proessiona%wor%d and persona% %ives.

Finance is an integra% part o corporatewor%d

5 4ow wi%% $&6s strategic decision to invest 78'9*i%%ion to produce the hevy ;o%t re

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,h St&d Finance. !cont"#

&any persona% decisions re

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1"2 05+)) 06P)SOF 78S%')SSO+G('%9(0%O'S

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FINC-301, Chapter 1,Russel

7&siness Organiational For;s

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Sole Proprietorship

It is a business owned by a sing%e individua%that is entit%ed to a%% the ir*6s proits and isresponsib%e or a%% the ir*6s debt.

There is no separation between the businessand the owner when it co*es to debts orbeing sued.

>o%e proprietorships are genera%%y inanced bypersona% %oans ro* a*i%y and riends andbusiness %oans ro* ban,s.

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Sole Proprietorship !cont"#

Advantages:5 -asy to start5 ?o need to consu%t others whi%e *a,ing decisions5 Taed at the persona% ta rate

@isadvantages:5 (ersona%%y %iab%e or the business debts5 eases on the death o the propreitor

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Partnership

A general partnership is an associationo two or *ore persons who co*e togetheras co0owners or the purpose o operating

a business or proit.

There is no separation between thepartnership and the owners with respect todebts or being sued.

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Copyright 2011 Pearson Prentice Hall. All rights reserved. 1-1uch prob%e*s are %i,e%y to arise *orewhen the *anagers have %itt%e or no ownership in

the ir*. -a*p%es:

5 ?ot pursuing ris,y project or ear o %osing jobs= stea%ing=epensive per,s.

A%% e%se e

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5o= to +ed&ce (genc Proble;s.

1" @onitoring

-a*p%es: eports= &eetings= Auditors= board odirectors= inancia% *ar,ets= ban,ers= credit agencies3

2" Co;pensation plans

-a*p%es: (eror*ance based bonus= sa%ary= stoc,options= beneits3

3" Others

-a*p%es: Threat o being ired= Threat o ta,eovers=>toc, *ar,et= regu%ations such as >OH3

The above wi%% he%p to reduce agency prob%e*scosts.

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1" 05) FO8+7(S%C P+%'C%PL)S

OF F%'('C)

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P+%'C%PL) 1: @one 5as a 0i;e*al&e"

A do%%ar received today is *ore va%uab%ethan a do%%ar received in the uture.

5 /e can invest the do%%ar received today to earn

interest. Thus= in the uture= you wi%% have *orethan one do%%ar= as you wi%% receive the intereston your invest*ent p%us your initia% investeddo%%ar.

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P+%'C%PL) 2: 0here is a +is-+et&rn0rade-off"

/e on%y ta,e ris, when we epect to beco*pensated or the etra ris, withadditiona% return.

4igher the ris,= higher wi%% be the epectedreturn.

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P+%'C%PL) 3: Cash Flo=s (re 0heSo&rce of *al&e"

(roit is an accounting concept designed to*easure a business6s peror*ance over aninterva% o ti*e.

ash %ow is the a*ount o cash that canactua%%y be ta,en out o the business overthis sa*e interva%.

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Profits vers&s Cash

It is possib%e or a ir* to report proits buthave no cash.

For ea*p%e= i a%% sa%es are on credit= their* *ay report proits even though nocash is being generated.

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%ncre;ental Cash Flo=

Financia% decisions in a ir* shou%dconsider Bincre*enta% cash %owC i.e. thedierence between the cash %ows the

co*pany wi%% produce with the potentia%new invest*ent it6s thin,ing about *a,ingand what it wou%d *a,e without theinvest*ent.

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P+%'C%PL) : @aret Prices +eflect%nfor;ation"

Investors respond to new inor*ation by buyingand se%%ing their invest*ents.

The speed with which investors act and the waythat prices respond to new inor*ationdeter*ines the eiciency o the *ar,et. Ineicient *ar,ets %i,e +nited >tates= this processoccurs very

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