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Agribusiness Finance AAEC 3302

Agribusiness Finance AAEC 3302

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Agribusiness Finance AAEC 3302

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  1. Agribusiness FinanceAAEC 3302

  2. Required Text and Calculator TI Business BA II Plus

  3. What is Agribusiness? • THE ACTIVITY OF SUPPLYING GOODS AND SERVICES TO AGRICULTURAL PRODUCERS. • THIS TERM MAY ALSO BE APPLIED TO ENCOMPASSES ALL BUSINESSES ENGAGED IN AGRICULTURE WHICH WOULD INCLUDE AGRICULTURAL PRODUCERS, INPUT SUPPLIERS, PROCESSING, MARKETING, AND RETAILING FIRMS.

  4. What is Finance? THE STUDY OF THE FLOW OF FUNDS IN AN ECONOMY OR FIRM.   THE ECONOMIC STUDY OF THE ACQUISITION AND USE OF CAPITAL.

  5. Agribusiness Finance • THE ECONOMIC STUDY OF THE ACQUISITION AND USE OF CAPITAL IN AGRIBUSINESS FIRMS • INCLUDES INPUT, PRODUCTION, AND PROCESSING-MANUFACTURING SECTORS OF THE AGRICULTURAL INDUSTRY

  6. Financial Capital • Financial capital or capital refers to money used by entrepreneurs and businesses to buy what they need to make products or provide services.

  7. TWO TYPES OF CAPITAL • EQUITY - THE OWNERS INVESTMENT IN THE BUSINESS • BORROWED - DEBT CAPITAL

  8. Balance Sheet

  9. INVESTMENT ANALYSIS • DETERMINATION OF HOW MUCH CAPITAL TO ALLOCATE TO ALTERNATIVE USES.

  10. FINANCIAL ANALYSIS • RELATING TO INCOME, REPAYMENT CAPACITY, AND RISK MANAGEMENT • INDICATES THE TOTAL AMOUNT OF CAPITAL THAT CAN BE PROFITABLY AND SAFELY USED IN THE FARM BUSINESS.

  11. THEORY OF FINANCIAL MANAGEMENT ECONOMIC ACTIVITIES • PRODUCTION • MARKETING • FINANCE

  12. FINANCING ACTIVITIES REQUIRE MANAGEMENT DECISIONS ON CAPITAL • ACQUISITION • USE

  13. WORDLY WISDOM

  14. ONE OF THE GREATEST PIECES OF ECONOMIC WISDOM IS TO KNOW WHAT YOU DO NOT KNOW.

  15. IT’S GOOD TO HAVE MONEY AND THE THINGS THAT MONEY CAN BUY, BUT IT’S GOOD TO CHECK UP ONCE IN A WHILE AND MAKE SURE YOU HAVEN’T LOST THE THINGS MONEY CAN’T BUY.

  16. IT IS NATURAL TO DWELL ON THINGS THAT HAVE GONE WRONG. THE KEY THOUGH IS TO FOCUS ON REMEDIES AND SOLUTIONS. THE TOP MANAGERS ARE OBSTACLE MOVERS. REMOVE OBSTACLES, DON’T JUST KEEP WALKING AROUND THEM INDEFINITELY.

  17. MANAGERIAL PROCESS DECISION MAKING • FORMULATING GOALS • RECOGNIZING AND ANALYZING PROBLEMS • MAKING DECISIONS • TAKING ACTION • ACCEPTING RESPONSIBILITY

  18. PROFIT MAXIMIZATION MR = MC MVP = MIC • DOES NOT ACCOUNT FOR TIME • DOES NOT ACCOUNT FOR RISK AND UNCERTAINTY

  19. BUSINESS RISK • VARIATION IN NET EARNINGS ARISING FROM THE NATURE OF THE BUSINESS • SOURCES OF BUSINESS: • YIELD • PRODUCT PRICE • INPUT PRICES

  20. FINANCIAL RISK • THE RISK ASSOCIATED WITH BORROWED CAPITAL • THE RISK OF NOT BEING ABLE TO MEET FINANCIAL OBLIGATIONS • RISK OF BANKRUPTCY OR LIQUIDATION OF ASSETS TO MEET DEBT OBLIGATIONS

  21. WHAT IS RISK? • RISK RELATES TO THE POSSIBILITY THAT AN OUTCOME WILL BE DIFFERENT FROM EXPECTED. • RISK REFERS TO CASES WHERE THE PROBABILITIES OF DIFFERENT OUTCOMES ARE KNOWN.

  22. UNCERTAINTY • UNCERTAINTY RELATES TO CASES WHERE THE PROBABILITIES OF DIFFERENT OUTCOMES ARE NOT KNOWN.

  23. MEAN OR EXPECTED VALUE • THE MEAN OR EXPECTED VALUE IS THE AVERAGE OF THE OBSERVATIONS.

  24. VARIANCE AND STANDARD DEVIATION • THE DISPERSION OF ACTUAL OBSERVATIONS AROUND THE MEAN VALUE.

  25. VARIANCE: • STANDARD DEVIATION:

  26. COEFFICIENTOF VARIATION • A MEASURE OF RISK THAT GIVES THE AMOUNT OF RISK PER UNIT OF RETURN. CV = V/E

  27. LOWER BOUND L = E - 2V

  28. COEFFICIENT OF CORRELATION • A STATISTICAL MEASURE OF THE DEGREE OF INDEPENDENCE BETWEEN TWO RANDOM VARIABLES.

  29. BUSINESS RISK • THE VARIATION IN NET EARNINGS ARISING FROM THE NATURE OF THE BUSINESS. • SOURCES: • YIELD • OUTPUT PRICE • INPUT PRICES

  30. FINANCIAL RISK • RISK ASSOCIATED WITH FIXED FINANCIAL OBLIGATIONS. • REFERS TO THE RELATIVELY GREATER LOSSES THAT OCCUR UNDER UNFAVORABLE BUSINESS CONDITIONS WHEN FINANCIAL LEVERAGE IS USED.

  31. PRINCIPLE OF INCREASING RISK • THE RISK OF LOSING EQUITY CAPITAL INCREASES AS THE USE OF BORROWED CAPITAL (DEBT) INCREASES • INCREASED LEVERAGE INCREASES THE RISK

  32. PORTFOLIO THEORYAND DIVERSIFICATION • EXPECTED RETURN: • PORTFOLIO VARIANCE

  33. MEASURES OF RISK • VARIANCE • STANDARD DEVIATION • COEFFICIENT OF VARIATION

  34. PORTFOLIO THEORY • EFFICIENT FRONTIER (EFFICIENT SET) • RISK - RETURN TRADE-OFF • EXPECTED RETURN • PORTFOLIO VARIANCE • CORRELATION COEFFICIENT

  35. PRINCIPLE OF INCREASING RISK • FINANCIAL RISK BECOMES GREATER AS THE PROPORTION OF DEBT USED IN THE BUSINESS INCREASES • INCREASED CHANCE OF LOSING EQUITY CAPITAL