An Introduction to Basic Finance

Herbert B. Mayo

The College of New Jersey

The 3 Divisions of the Finance Discipline

Finance – the study of money and its management.

– Financial Institutions

– Investments

– Corporate (business) finance

Sources of Finance Balance Sheet – Financial statement that enumerates

what an economic unit owns or owes and its net worth. A firms financial position

Assets = Liabilities + Equity Assets - Items of property owned by a firm,

household, or government and valued in monetary terms. An economic resource.

Liabilities - What an economic unit owes expressed in monetary terms

Equity - Owners investment in a firm (claim to the assets); a firms net worth or book value

Risk, Return, and Financial Leverage

Return - What is earned on an investment; the sum of income and capital gains generated by an investment

Risk - Possibility of a loss; the uncertainty that the anticipated return will not be achieved

Financial Leverage - Use of borrowed funds in return for agreeing to pay a fixed return; use of debt financing

Risk and Return

Valuation - Process of determining what an asset is currently worth

Goal of management: maximize shareholder value

Over time, the price of a company’s stock is indicative of management performance.