Finance is study of how people and business evaluate investment and raise capital to fund then.

Welcome to the World of Finance

What is finance? 

Finance is study of how people and business evaluate investment and raise capital to fund then.

What is long-term investments should the firm understand? 

The area of finance is regally referred to as budgeting.

How should the firm raise money to fund these investment?

The firm’s funding choices are generally referred to as capital structure decisions. 

How can firm best manage its cash flow as they arise in its day-to-day operations?

The area of finance is generally referred to as working capital management. We’ll be looking each of these thee areas of business finance – capital budgeting, capital structure, and working management

Why study finance?

Even if you are not planning career in finance, a working knowledge of finance will take you far in both personal and professional life. Those interested in management will need to study topic such as strategic planning, personnel, organizational behavior, and human relation, all of which involve spending money today in the hopes of generating more money in the future.

For a student with entrepreneurial aspiration, for understand finance is essential after all, if you can’t manage your finance, you won’t be in business very long. Finally and understand to finance is important to you as an individual. The fact that you are reading this book indicate that you understand the important of investing in yourself.

Three type of business organization:  

The sole property is a business owned by a single individual who is entitled to all the firm’s profits and also responsible for all the debt, that is, what the firm owes.

Partnership a general partnership is an association of two or more persons who come together as co-owners for the purpose of operation business for profit. Just as with as the sole proprietorship there is no separation between the general partnership and its owners with respect to debt or being sued. An important advance of the partnership is that provide access to equity, or ownership, as well as financing multiple owner return for partnership shares, or units of owners.

Corporation if very large sums money at needed to build business, then typical organizational form chosen is the corporation. The Corporation is legally owner by its current of stockholders or owner who elects a board of directors.

How does Finance Fit into the Firm’s Organizational Structure?

Finance is intimately woven into any aspect of the business that involves the payment or receipt of money in the future for this reason is important that everyone in a business have a good working knowledge of the basic principles of Finance. However, within a large business organization, the responsibility for managing the firm’s financial affairs falls to the firm Chief Financial Officer (CFO)

 Ethical and Agency Considerations in Corporate Finance

Ethic or rather lack of ethic, is a recurring theme in the news. Recently, has been home to an almost continuous series of ethical lapses. Financial scandals at companies like Enron and Worldcom, Bernie Madoff Ponzi scheme that cost investors billions of dollars and mishandling of the depositor of money by the financial institutions such as Standford Financial, show that the business world that does not forgive ethical lapses. Not only is acting in an ethical manner morally correct, it is also a necessary ingredient to long-term business and personal success. We acknowledge that ethical decision are not always clear-cut. Nonetheless, throughout this book we will point out some of the ethical pitfalls that have tripped up managers.

The Four Basic Principles of Finance:

• Principle 1: Money Has a Time Value.

A dollar received today is worth more than a dollar received in the near future, if we invest that dollar the interest at the end of the year will be have more value.

• Principle 2: There is a Risk-Return Tradeoff.

Individuals are more certain to have a return of the investment than a uncertain return, but they are aware of the risk on any investment.

• Principle 3: Cash Flows are the source of Value.

Profit is an accounting concept to measure a business performance over an interval of time. Cash flow is the amount of cash that can actually be taken out of the business over this same interval.

• Principle 4: Market Prices Reflect Information

Investors respond to new information by buying and selling the investment. The speed with which investors act and the way that prices respond to the information determine the efficiency on the market.

Chapter 2:

Basic Structure of the U.S. Financial Markets

• Borrowers: Those who need money to finance the purchase.
• Savers (Investors): Those who have money to invest.
• Financial Institution Are those that helps bring borrowers ad savers together.

The Financial Marketplace: Finacial Institutions

Are those that facilitate the movement of money from the savers. In return for the use of the saver’s money, borrowers provide the savers with a return on their investment.

Commercial Banks

Is the first financial intermediary with the financial marketplace. They provide many firms with their initial funding, also tends to be the one of the first financial intermediaries that business deal with

Insurance Companies

 The definition is the business of selling insurance to individuals and business to protect their investments. They collect premiums hold the premiums in the reserves until there is an insured loss and then pay out claims to the holders of the insurance contracts.

Investment Banks

Are specialized financial intermediaries that help companies and governments raise money and provide advisory service to client firms when they enter into major transactions such as buying or merging with others firms

Investment Companies

Is a financial institutions that pool the savings of individual savers and invest the money, purely for investment purposes, in the securities issued by other companies.

Hedge Funds

Is like a mutual funds, but hedge funds are less regulated and tend to take mopre risk. Hedge funds are open to a limited range of investors because the higher risk

Private Equity Firms

They’re a financial intermediary tht invest in equities that are not traded on the public capital market. There are 2 groups:

...