Financial Management Lecture Notes

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Financial Management

Corporations: Create money

* board of directors
* 7-10 people
* corporate governance
* monitor the manager’s performance
* Sub committees
* auditor commitee
* compensation committee
* buffer between shareholders and the managers

* strategic financial decisions
* Spending money: how the money is spent
* financial investment projects
* capital budgeting
* Raising money: how to raise money
* Investments that increase the firm value
* How should the firm pay for those investments
* Debt vs Equity?
* Balance sheet
* Assets
* Current assets
* Long-term assets
* Debt
* Debt ratio: typically 40%
* Equity
* Equity ratio: 60%
* A=D+E
* CFO oversee the work of the:
* Treasurer
* cash management, raising capital (debt or equity), banking relationships * financial decisions
* Controller
* preparation of financial statements, accounting, taxes

Time Value of Money


Rule 1: Only values at the same point in time can be compared Rule 2: To move a cash flow forward in time, you must compound it
FVn= C x (1+r)x(1+r)…. = C x (1+r)n
Rule 3: To move a CF back in time you must discount it
PV= C/ (1+r)n

Valuing Streams of CF
NPV= ∑Cn/ (1+r)n

Stream of equal CF that last forever

PV= C/r


A stream of CF that occur at regular intervals for N periods

Growing Perpetuities

Stream of CF that occur at regular intervals and grow at a constant rate forever (growing dividend)

NPV= C/ r – g

g= growth rate

Growing Annuities

PV= C x (1/(r-g)) (1-((1+g)/(1+r))N

What if g>r?
* not possible for g to be greater than GDP growth rate – only...
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