Intro to Finance

• What is the purpose of financial markets

  getting money from savers to users
• Real and Financial Assets

  real - generate cash flows

  financial - allocate cash flows
• Types of markets

  primary vs secondary

  money vs capital

  spot vs future

  public vs private
• Primary vs Secondary

  primary - "new" issuer to investor , issuer get the money

  secondary - "used" investor to investor , issuer get no money
• Money vs Capital

  money - short-term securities

  capital - long term (stocks and bonds)
• Spot vs Future

  spot - transactions happen now

  future - agreement for the future
• Public vs Private

  public - anyone

  private - limited
• Risk and Return

  more risk <--> more return

  ( goes both ways)
• Cash Flow vs Income

  CF - money

  Income - number

  income get you cash flow
• Market Value vs Book Value

  market value - money

  book value - number
• Assets = Debt + Equity (define each section)

  assets - stuff the firm owns

  debt and equity - how a firm paid for stuff

  debt and equity also a financial structure
• Money Today vs Money Tomorrow

  time value of money

  move money form time to time

  money in different times have different values
• Value of an asset

  present value of expected future cash flows
• Goal of the firm

  maximize the VALUE of the firm

  ( max stock price)
• Maximize the value of the firm

  all-encompassing

  link to owners

  forward-looking

  determined by "society"
• Agency Problem


  managers not acting in the best interest of the firm, acting in self-interest

  examples: fake sick, embezzling
• Why is there an agency problem

  owners and mangers are separate
• How are owners and mangers different

  mangers don't bear the full cost / benefit if the action
• What are mangers to owners

  agents
• How to fix an agency problem

  stock-based compensation

  ties employees more to the company and keep them loyal
• Balance Sheet

  assets = debt + equity
• Working Capital vs Net Working Capital

  working capital - current assets

  net working capital - (current assets - current liabilities)
• Does book or market value go on the balance sheet

  book
• Wat are the book value of equity

  common stock

  capital surplus

  retained earnings
• Common Stock

  # shares outstanding x PAR value
• Capital Surplus

  # shares outstanding ( Issue Price - PAR value )
• Retained Earnings

  all net income - all dividends paid
• What are the total shareholder investment

  common stock and capital surplus - direct investments

  retained earnings - indirect investment
• Income Statement

  sales

  COGS

  operating cost

  depreciation

  EBIT

  interest expense

  EBT

  tax

  NI

  NCF
• EBT =

  NI / ( 1-T%)
• Sales =

  gross profit / ( 1 - CGS%)
• When working down / up n income statement

  down: subtract

  up: add
• Net Cash Flow

  Net income + Non cash expense
• What is the biggest non-cash expense

  deprecation
• OR you can say NCF =

  NI + depreciation
• If deprecation increases

  NI goes down but NCF increases

  because it shelter NCF form taxes
• Cash available to creditors and stockholders after...

  running the business

  reinvesting in the business
• CF assets =

  operating cash flow - capital spending - change in net working capital
• Operating CF =

  EBIT - Taxes + Depreciation
• Operating CF is for

  running the business

  what you do day to day