finance intro

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Cameron School of BusinessUNIVERSITY OF NORTH CAROLINA WILMINGTON

An Introduction toFinance:

Chapters 1 – 3 of

Essentials of CorporateFinance

Edward GrahamProfessor of Finance

Department of Economics andFinance


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Outline of the Introduction to Finance Module

Introduction to Finance

I. The Three Primary Duties of the Financial Mana er

II. E!idence of the "esults of Financial Decision#ma$in % TheFinancial Statement and "atio &nalysis


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An Introduction to Finance

What is finance?

' Finance is the study of the art and the science of moneymana ement( it is )ased on the *atin root finis+meanin the end. In mana in ours or our firm,s money+we consider historical outcomes or -endin s+and we propose future results as a function of decisionsmade today. Those outcomes or results aretypically portrayed usin financial statements.


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The Capital "ud!etin! ecision

/ith the capital )ud etin decision+ the financial mana erdecides where )est to deploy monies lon #term. Thepurchase of a new deli!ery truc$ or a new warehouseis a capital )ud etin decision( the payment of a utility)ill is not.

/ith the ma$in of this decision+ we consider three featuresof the cash flows deri!in from the decision%

' The size of the cash flows' The timing of the cash flows' The risk of the cash flows

/e re!iew a couple e0amples of capital )ud etin decisions.


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The Capital #tructure ecision

/ith the capital structure decision+ the financial mana er decides

from where )est to acquire monies lon #term. The purchase of thatnew deli!ery truc$ with cash or with a loan from GM&C or FordMotor Credit is a capital structure decision( the use of lon #term)orrowin to fund a franchise purchase is another.

Perhaps most importantly+ the decision to fund a firm,s rowth withe1uity # such as with funds in!ested )y the firm,s founders+ an elin!estors+ !enture capitalists or pu)lic stoc$ offerin s 2 or de)t+ isa critical capital structure choice. Two features of this choice )earmentionin %

' The risk of the debt ' The loss of control and reduced potential cash flows to the

founders with an equity or stock sale

/e e0pand our re!iew with a few capital structure decisions.


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The $or%in! Capital ecision

/ith the wor$in capital decision+ current assets and current lia)ilities)ecome the focus of the financial mana er.

Such items as cash )alances+ accounts recei!a)le+ in!entory le!els andshort#term accruals 3such as prepaid rent or utilities4 are included amonthe short#term assets that comprise one component of wor$in capital.

&lso with the wor$in capital decision+ we concern oursel!es with short#termo)li ations such as accounts paya)le to !endors+ and other de)t that ise0pected to )e paid off within one year.

5et wor$in capital is a meanin ful outcome of the wor$in capital decision#ma$in matri0. 5et wor$in capital is merely the difference )etweencurrent assets and current lia)ilities.



II. &'idence of the (esults of Financial ecision)ma%in!: The Financial #tatement and (atio

Analysis

Pro!idin !alid and timely information to the !ariedsta$eholders in the firm is $ey. These sta$eholders+ )othwithin and outside the firm+ include the owners+ theemployees+ nei h)ors+ the community#at lar e+ suppliers+lenders+ )an$ers+ and the competition.

This information is typically pro!ided within financialstatements+ and notes to those statements. Threestatements attract our attention%

' The ncome !tatement ' The !tatement of Cash "lows' The #alance !heet



(atio Analysis

Fi!e types of ratios support our discussion+ and underscoreimportant features of the information we are pro!idin our!aried sta$eholders%

' Short term sol!ency' *on term sol!ency' &sset mana ement' Profita)ility' Mar$et !alue

/e )riefly discuss each of these in turn+ with e0amples ofeach type of ratio drawn from your earlier wor$ inaccountin + and illustrated )y the e0ample in class.



The &*ample in Class+ Inc."alance #heet at ,ear-s &nd

&ssets *ia)ilities 6 7wner,s E1uityCurrent &ssets Current *ia)ilitiesCash 89+999 Paya)les 89+999"ecei!a)les :9+999In!entory ;9+999

Total Current &ssets



The &*ample in Class+ Inc .

' #hort Term #ol'ency (atios

2 Current Ratio % current assets=current lia)ilities @



The &*ample in Class+ Inc .' &ssume our firm had sales in the most recent year of :99+999 and 5et Income of

:9+999.

' EIC+ Inc. has



The &*ample in Class+ Inc .' Profita0ility (atios

2 #rofit Mar"in : net income=sales @ :9+999=:99+999 @ .< 2 Return on Assets $R%A&! net income=total assets

A @ :9+999=:89+999 @ .9 2 Return on Equity $R%E&! net income=owner,s e1uity

A @ :9+999=


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The &*ample in Class+ Inc .

'The uPont Identity

:

(O& 5 PM * T6A T6O * &Mor

(O& 5 7I6#ales * #ales6Total Assets * Total Assets6&8uity

5/9 + 69 + * /9 + 69; + * /9; + 61 +

7I6#ales reflects the impact of operations #ales6Total Assets reflects the impact of the capital

bu("etin" (ecision

Total Assets6&8uity reflects the impact of the capital structure (ecision

For &IC: (O& 5 /.1 * /.< * /9.; 5 .9 + as 0efore.

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