Tuesday, August 30, 2011 Key Slides from Class

1. Tuesday, August 30, 2011 Key Slides from Class

2. Those who need money Those who have money “Finance” – What It Is (2) (3) $$ (1) (4) A promise of something of value MONEY & SAVINGS USES OF MONEY (5) * Checking accts, savings accts, investment funds, insurance premiums, pension funds * For personal use: consumables, durables, cars, houses, etc. * For business use: buildings, equipment, inventory, etc. (1)Making money available and accumulating it … (2)… then getting that money from those who have it … (3)… to those who need it … (4)… so that they can put it to use. (5)In return, those who receive the money promise something of value to those who provided it.

3. Those who need money Those who have money “Finance” – What It Is (2) (3) $$ (1) (4) A promise of something of value MONEY & SAVINGS USES OF MONEY (5) * Checking accts, savings accts, investment funds, insurance premiums, pension funds * For personal use: consumables, durables, cars, houses, etc. * For business use: buildings, equipment, inventory, etc. (1)Making money available and accumulating it … (2)… then getting that money from those who have it … (3)… to those who need it … (4)… so that they can put it to use. (5)In return, those who receive the money promise something of value to those who provided it.

4. Financial System -- Components, Players, & Roles -- • Government Policy Makers • Laws & Policies • Federal Reserve • & Banks • Create & Transfer Money Monetary System Financial Institutions Financial Markets • Banks, Insurance Cos, • Stock Brokers, Mutual • Funds, etc. • Stock, Bond, • Currency, etc., • Markets • Accumulate & Lend / Invest Savings • Market & Xfer Financial Assets

5. Those who need money Those who have money “Finance” – What It Is (2) (3) $$ (1) (4) A promise of something of value MONEY & SAVINGS USES OF MONEY (5) * Checking accts, savings accts, investment funds, insurance premiums, pension funds * For personal use: consumables, durables, cars, houses, etc. * For business use: buildings, equipment, inventory, etc. (1)Making money available and accumulating it … (2)… then getting that money from those who have it … (3)… to those who need it … (4)… so that they can put it to use. (5)In return, those who receive the money promise something of value to those who provided it.

6. Savings-to-Investment Process Existingsec. Investors Investors • Stocks • Bonds • Govt Sec. • Finl institutions’ • securities & shares $ $ $ Other Financial Inst. (e.g., banks, credit unions, mutual funds, insurance & pension funds, etc.) Investment Banking Firm • Stocks • Bonds • Govt Sec. $ (1) (2) (3) Business Government

7. Those who need money Those who have money “Finance” – What It Is (2) (3) $$ (1) (4) A promise of something of value MONEY & SAVINGS USES OF MONEY (5) * Checking accts, savings accts, investment funds, insurance premiums, pension funds * For personal use: consumables, durables, cars, houses, etc. * For business use: buildings, equipment, inventory, etc. (1)Making money available and accumulating it … (2)… then getting that money from those who have it … (3)… to those who need it … (4)… so that they can put it to use. (5)In return, those who receive the money promise something of value to those who provided it.

8. Financial Management • 3 Forms of Bus. • Ownership Oprns ( Etc. ) Sales Finance Acctg • 3 Statements Financial Statements Capital Budgeting Ratio Analysis Long-Term Planning • 5 Categories • 2 Techniques • 5 Stages

9. Financial System -- Components, Players, & Roles -- Ch 1 (Entire Picture) Ch 5 • Government Policy Makers • Laws & Policies Ch 2 Ch 5 Ch 4 • Federal Reserve • & Banks • Create & Transfer Money Monetary System Ch 3 Ch 3 Ch 11 Financial Institutions Financial Markets • Banks, Insurance Cos, • Stock Brokers, Mutual • Funds, etc. • Stock, Bond, • Currency, etc., • Markets • Accumulate & Lend / Invest Savings • Market & Xfer Financial Assets

10. Savings-to-Investment Process Ch 7 (Entire Picture) Ch 12 (Portfolio Mgmt – Entire Picture) Ch 11 Existingsec. Investors Investors • Stocks • Bonds • Govt Sec. • Finl institutions’ • securities & shares Ch 10 $ $ $ Ch 11 Other Financial Inst. (e.g., banks, credit unions, mutual funds, insurance & pension funds, etc.) Investment Banking Firm Ch 8 Ch 9 Ch 12 (Risk) • Stocks • Bonds • Govt Sec. $ (1) (2) (3) Business Government

11. Financial Management Ch 13 • 3 Forms of Bus. • Ownership Oprns ( Etc. ) Sales Finance Acctg Ch 13 • 3 Statements Financial Statements Ch 14 Ch 14 Ch 17 Capital Budgeting Ratio Analysis Long-Term Planning • 5 Categories • 2 Techniques • 5 Stages

12. Business Framework (aka “Stakeholder Model”) Lenders Owners / Investors Government Environment Employees BUSINESS: * Production * Mgmt * Sales * IT * Logistics * R&D * Mktg * Facil. Mgmt * HR * Purchasing * Finance * Accounting Neighbors Customers Competitors Suppliers

13. The 3 Sections of the Textbook PART 1 Institutions & Markets PART 2 PART 3 Financial Management Investments PART 1: Institutions = organizations and intermediaries that: (1) help accumulate savings, and (2) get those funds to individuals, businesses, and governments that will spend or invest them. Markets = forums that facilitate the flow of funds among individuals, businesses, and government. PART 2: Investments = the analysis, valuation, and sale of securities, and the management of the associated risk. PART 3: Financial Management = financial planning, asset management, and fund-raising decisions for a business.

14. How the “Parts of the Text” Relate to the “Business Framework” Part 1 Lenders Owners / Investors Government Environment Employees Part 2 BUSINESS: * Production * Mgmt * Sales * IT * Logistics * R&D * Mktg * Facil. Mgmt * HR * Purchasing * Finance * Accounting Part 3 Neighbors Customers Competitors Suppliers Part 1 = “Institutions & Markets” Part 2 = “Investments” Part 3 = “Financial Management”

15. Key Concept: “Liquidity” * “Liquidity” = “how easily an asset can be exchanged for money” Cash Checks Securities Textbooks TV Couch Home Business Liquid Not Very Liquid * Something’s liquidity depends on: (1) How much demand there is (2) How much supply there is (3) How easy it is to transact or exchange

16. Key Concept: “Financial Institution” Vs. “Financial Market” An Analogy… (1) A Television = a “security” (2) Wholesale, Retail, Resale = “financial markets” * Enables the TV ( “security” ) to be bought and sold (3) WalMart, Best Buy, Ebay, Craigslist, Classified ads, Thrifty Nickel, … = “financial institutions” * The actual organizations that get the TV ( “security” ) to the people who want it

17. Key Concept: “Stock” Vs. “Bond” • SITUATION: You and your 3 roommates get a • $600 TV (the TV is like a “business”). • 2 ways to pay for it: • Each roomie puts in $150 = “stock” or ownership • (you each own ¼ of the TV). • You borrow $200 from each roomie, and promise • to pay them back at end of the semester = • “bond” or loan (you own the TV). • What happens if: • “STOCKS” “BONDS” • TV Breaks: * Each gets $0 * $200 / roomie • * Each loses $150 * You lose $600 • Sell for $400: * Each gets $100 * $200 / roomie • * Each loses $50 * You lose $200 • Sell for $600: * Each gets $150 * $200 / roomie • * Each breaks even * You break even • Sell for $800: * Each gets $200 * $200 / roomie • * Each makes $50 * You make $200

18. CHAPTER 1 The Financial Environment

19. The Six Principles of Finance (1) “There is a time value to money” (2) “More risk demands more reward” (3) “Risk can be reduced by diversifying” (4) “Financial markets are efficient at determining the value of securities” (5) “Managers’ objectives often differ from owners’ objectives” (6) “Reputation matters”