Introduction-to-Finance Introduction-to-Finance Introduction-to-Finance

Introduction-to-Finance

1. Introduction to Finance

2. Definition of Finance Money management Allocation of assets and liabilities Pricing of assets UNDER RISK and UNCERTAINTY

3. Areas of Finance Personal Finance (individuals) Corporate Finance (businesses) Social Finance ( Social enterprises) Financial Markets Public Finance (Governments) International Finance Behavioral Finance

4. Personal Finance Deals with the financial position , net worth and cash flows of the household protection against the risks Tax management Investments and accumulation of wealth Retirement planning Estate planning ( after death assets disposition)

5. Corporate Finance Deals with corporations Sources of funding Capital structure Investment management Risk management Allocation of resources => To increase shareholders value

6. Social Finance Equity and Debt financing of Social enterprises Cooperatives Charitable organizations Microfinance ( funding to SB owners and entrepreneurs in less developed countries) investors seek a profit and a social gain : earn a return, improve living standards and benefit local society and economy

7. Financial Markets Capital markets Debt (Bond) markets Money markets Derivatives markets Commodity markets Crypto markets Market Intermediaries (banks,brokers etc)

8. Public Finance Required expenditure Sources of revenues Budgeting Debt issuance Central Banks : lenders of last resort that make /lead Monetary policy

9. International Finance Or International Macroeconomics : Monetary interactions between countries Foreign direct Investments Exchange rates Political risk Exchange rate risk Country risk / default risk / credit risk Theories : Purchasing Power Parity Optimun currency area Interest rate parity International Fisher Effect

10. Behavioral Finance The study of the influence of psychology on the behavior of investors, households, businesses and financial markets. Investors are Not always rational, have limits to their self control and are influenced by their own biases. 6 Nobel prizes have been awarded for behavioral research ( i.e.Shiller 2013 – Thaler 2017)

11. Financial Analysis Tools Investment Decisions criteria EMH Financial Statements analysis Ratio Analysis

12. Financial and Investment Decisions Methods used NPV IRR Payback Accounting rate of Return

13. Efficient Market Hypothesis In an efficient market, the prices fully reflect all the relevant information as it becomes available. Importance of information One of the basic building blocks of the theory of finance

14. EMH : 3 forms Weak form All the information contained in market trading data, such as the history of past prices, is reflected. Semi-strong form The prices reflect all the publicly available information Strong form The prices reflect all relevant information, both public and private.

15. Financial Statements Are central in financial analysis Assessment of the firm’s past, present and future financial conditions Done to find firm’s financial strengths and weaknesses Primary Tools: Financial Statements Comparison of financial ratios to past, industry, sector and all firms

16. Financial Statement analysis /Ratio analysis

17. Main Purpose : To identify aspects of a business’s performance to aid decision making Quantitative process – may need to be supplemented by qualitative factors to get a complete picture 5 main areas:

18. Financial Statements are: Balance Sheet Income Statement Cash flow Statement Statement of Retained Earnings

19. Sources of Data Annual reports Via mail, SEC or company websites Published collections of data e.g., Dun and Bradstreet or Robert Morris Investment sites on the web Examples http://moneycentral.msn.com/investor http://www.marketguide.com

20. Major Balance Sheet Assets Current assets: Cash & securities Receivables Inventories Fixed assets: Tangible assets Intangible assets Liabilities and Equity Current liabilities: Payables Short-term debt Long-term liabilities Shareholders

21. Major Income Statement (P&L) Gross Profit = Sales - Costs of Goods Sold EBITDA = Gross Profit - Cash Operating Expenses NI or EAT = EBT- Taxes Net Income is a primary determinant of the firm’s cashflows and, thus, the value of the firm’s shares

22. Ratio Analysis To identify aspects of a business’s performance to aid decision making Quantitative process – may need to be supplemented by qualitative factors to get a complete picture

23. Types of ratios Liquidity – the ability of the firm to pay its way Investment/shareholders – information to enable decisions to be made on the extent of the risk and the earning potential of a business investment Gearing – information on the relationship between the exposure of the business to loans as opposed to share capital Profitability – how effective the firm is at generating profits given sales and or its capital assets Financial – the rate at which the company sells its stock and the efficiency with which it uses its assets

24. 1. Liquidity Check how solvent is the company : Acid Test = (Current assets – stock) / liabilities Current ratio = Current Assets / Current Liabilities Cash ratio = Cash / Current Liabilities

25. 2. Investment Ratios P/E P/Book Value P/Cash Flow (operating ) PEG : (P/E) / EPS Growth P / Sales Dividend yield

26. 3. Gearing Ratios Gearing ratio LT loans / Capital employed x100 Debt / Equity ratio Total Debt / Total Equity Equity ratio Equity / Assets Debt ratio Total Debt / Total Assets

27. 4. Profitability Ratios Gross Profit Sales – cost of sales Net Profit Sales – Variable costs + Fixed costs ROCE (return on capital employed) Profit / capital employed x 100 ROA Net Income / Total Assets

28. 5. Financial Ratios Asset Turnover Sales turnover / assets employed Stock Turnover Cost of Goods Sold / stock expressed as times per year

29. Summary of Ratios Ratios help to: Evaluate performance Structure analysis Show the connection between activities and performance Benchmark with Past for the company Industry Ratios adjust for size differences

30. Limitations of Ratio Analysis A firm’s industry category is often difficult to identify Published industry averages are only guidelines Accounting practices differ across firms Sometimes difficult to interpret deviations in ratios Industry ratios may not be desirable targets Seasonality affects ratios

31. Ratios and Forecasting Common stock valuation based on Expected cashflows to stockholders ROE and r are major determinants of cashflows to stockholders Ratios influence expectations by: Showing where firm is now Providing context for current performance Current information influences expectations by: Showing developments that will alter future performance

32. How ratios can help Analysis Analysis of a company, and comparisons to other competitor companies can help to: Assess the (absolute and relative) financial state of the company Show each company’s strengths and weaknesses Predict sustainable growth rate Combined with current information, this can help to: Assess likely future performance Predict future valuation and earnings growth Predict returns