Stock Market Trading and insider trading Daily trading volatility Mutual fund scandals late trading and market timing f

1. What do you read in WSJ? • Stock Market • Trading and insider trading • Daily trading volatility • Mutual fund scandals • late trading and market timing • fees • IPO allocations • Google • Frank Quattrone • Executive Compensations • Tyco • Corporate Governance and Earnings Management • Enron, Worldcom Introduction – MBA504

2. The Four Basic Areas of Finance • Investments • Financial Institutions • International Finance • Corporate Finance Introduction – MBA504

3. Investment • What kinds of investment tools we have? • How to issue new securities? • Security Markets • Listing and listing requirements • What do Investment banks do? • Goldman Sachs, Merrill Lynch, JPMorgan, Lehman Brother, Saloman Smith Barney, Morgan Stanley • Investment banking (underwriting): Underwrites IPOs, SEOs, places private equity ... • Brokage Service: execute security transaction, offers M&A advisory services ... • Asset management Introduction – MBA504

4. Financial Institutions • Commercial Banks • Savings institutions • credit unions • mutual funds • insurance companies • pension funds Introduction – MBA504

5. International Finance • Foreign Exchange Risk • Political Risk • Terms like LIBOR, EURO, Eurodollar • What would be the impact on Japanese products if Yen Strengthens against Dollar? Introduction – MBA504

6. Corporate Finance Introduction – MBA504

7. What is Corporate Finance? Corporate Finance addresses the following three questions: • What long-term investments should the firm engage in? • How can the firm raise the money for the required investments? • How much short-term cash flow does a company need to pay its bills? Introduction – MBA504

8. Total Value of Assets: Total Firm Value to Investors: Current Liabilities Current Assets Long-Term Debt Fixed Assets 1 Tangible 2 Intangible Shareholders’ Equity The Balance-Sheet Model of the Firm What long-term investments should the firm engage in? Introduction – MBA504

9. Total Value of Assets: Total Firm Value to Investors: Current Liabilities Current Assets Long-Term Debt Fixed Assets 1 Tangible 2 Intangible Shareholders’ Equity The Balance-Sheet Model of the Firm How can the firm raise the money for the required investments? Introduction – MBA504

10. Total Value of Assets: Total Firm Value to Investors: Current Liabilities Current Assets Long-Term Debt Fixed Assets 1 Tangible 2 Intangible Shareholders’ Equity The Balance-Sheet Model of the Firm Net working capital Introduction – MBA504

11. 25% Debt 70% Debt 30% Equity 75% Equity Capital Structure The value of the firm can be thought of as a pie. 50% Debt The goal of the manager is to increase the size of the pie. 50% Equity The Capital Structure decision can be viewed as how best to slice up a the pie. If how you slice the pie affects the size of the pie, then the capital structure decision matters. Introduction – MBA504

12. The Financial Manager To create value, the financial manager should: • Try to make smart investment decisions. • Try to make smart financing decisions. Introduction – MBA504

13. The Corporate Firm • The corporate form of business is the standard method for solving the problems encountered in raising large amounts of cash. • However, businesses can take other forms. Introduction – MBA504

14. Organization Chart Introduction – MBA504

15. Forms of Business Organization • The Sole Proprietorship • The Partnership • General Partnership • Limited Partnership • The Corporation • Advantages and Disadvantages • Liquidity and Marketability of Ownership • Control • Liability • Continuity of Existence • Tax Considerations Introduction – MBA504

16. Goals of the Corporate Firm • The traditional answer is that the managers of the corporation are obliged to make efforts to maximize shareholder wealth. Introduction – MBA504

17. Managerial Goals • Managerial goals may be different from shareholder goals • Expensive perquisites • Survival • Independence • Increased growth and size are not necessarily the same thing as increased shareholder wealth. Introduction – MBA504

18. Separation of Ownership and Control Board of Directors Management Debtholders Shareholders Debt Assets Equity Introduction – MBA504

19. Do Shareholders Control Managerial Behavior? • Shareholders vote for the board of directors, who in turn hire the management team. • Contracts can be carefully constructed to be incentive compatible. • There is a market for managerial talent—this may provide market discipline to the managers—they can be replaced. • If the managers fail to maximize share price, they may be replaced in a hostile takeover. Introduction – MBA504

20. Financial Markets • Primary Market • When a corporation issues securities, cash flows from investors to the firm. • Usually an underwriter is involved • Secondary Markets • Involve the sale of “used” securities from one investor to another. • Securities may be exchange traded or trade over-the-counter in a dealer market. Introduction – MBA504