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Introduction lecturer
Head of Operations @ Free Zone Aruba NV Part-time lecturer @ the University of Aruba (FEF, FAS) Lecturer, speaker and facilitator Professional areas: accounting & control, public finance, strategy, marketing, financial management, operations management, financial analysis.
Introduction lecturer
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1. Capital Budgeting
Process of planning and managing a firms long-term investments. Financial manager identifies investment opportunities that are worth more to the firm than they cost to acquire. Example: A chocolate firm deciding whether or not to open a new factory is a capital budgeting decision.
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Key Questions
How much cash does the firm expect to receive? - size of cash inflows and outflows When does the firm expect to receive it? - timing of cash flows How likely is the firm to receive it? - riskiness of cash flows
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2. Capital Structure
How should the firm obtain and manage the long-term financing it needs to support its long term investments? Capital Structure is the specific mix of short-term debt, long-term debt and equity. Raising long-term financing can be expensive, so the different possibilities must considered carefully.
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Key Questions
How should the firm pay for its assets? Debt or equity? How much should the firm borrow? What is the least expensive source of funds? How, when and where to raise the money?
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Key Questions
How should the firm manage the receipt and disbursement of cash - current assets and current liabilities? What is the best way to manage day-today, short term assets such as inventory? How should the firm obtain short-term financing? Should the firm sell or purchase on credit? On what terms?
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Once Again...
Capital Budgeting: The process of planning and managing a firms investment in long-term assets. Capital Structure: The mix of debt and equity maintained by a firm. Working Capital Management: Planning and managing the firms current assets and liabilities.
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The Firm
Capital Budgeting
Stockholders
Cash flow
Financial Manager
Investments
Projects
Bondholders
Interest
Personal Taxes
Corporate Taxes
Government
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The Firm
Capital Budgeting
Stockholders
Cash flow
Financial Manager
Investments
Projects
Bondholders
Interest
Ethical Pressures
Government
Society
Politics
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Agency Problems
Agency relationship Shareholders (principals) hire managers (agents) to run the company Agency problem Conflict of interest between the shareholders (principals) and management of a firm (agents)
Agency costs are defined as the costs from these conflicts of interest.
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FINANCIAL MARKETS
Financial Markets
Money markets versus capital markets Primary markets versus secondary markets
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Capital Markets - long-term debt securities: govt and corporate bonds - shares of stocks
Dealer markets are OTC (over-the-counter) markets, e.g., NASDAQ Auction Markets, e.g., Toronto Stock Exchange, NYSE
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Corporate finance
Dividend principle
Financing principle
Corporate finance
Financing principle
Dividend principle
SOME FUNDAMENTALS
Financial statements
Financial statements are records that give an overview of an entitys financial status. Key financial statements:
Balance Sheet Income Statement Statement of Cash Flow Notes to the financial statements
Financial statements
Providing managers and decision makers answers to two key questions: What is the financial picture of the organization on a given day?
How well did the organization do during a given period?
Balance sheet.
o A document designed to show the state of affairs of an entity at a particular date. o Reduced to its simplest.a balance sheet consists of two lists: list of resources and list of sources.
An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.
The claims from third parties (outsiders other than the owner), can be called liabilities.
Liabilities
Liabilities
o In this example: Loan and Payable account. o English word derived from the word liable, meaning tied or bound or obliged by law. o A liability is a negative version of an asset.
Equity
o Claims by the owner are not called liabilities, but owners equity (or various similar expressions). o Equity in the accounting context means the owners stake in the entity. o In the simple balance sheet example the equity of the entity is 116,000 (capital + profit).
Income statement
The balance sheet shows resources and claims at a particular moment in time. o However it is not practical to provide insights in the business operations. o Information about the results of operating activities of an entity can be best presented in an income statement. o Operating activities result in revenues (making sales) or in expenses (consumption of business resources).
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Income statement
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The income statement uses the following definitions: Revenues incoming receipts in return for sold goods or services Expenses sacrificed resources to support the business operations
Income statement
Important note!
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The income statement (also called profit and loss account) reports on the flows of revenues and expenses of a period. The balance sheet reports on the financial position at the balance sheet date.
Adapted layout:
Applications = Sources Assets + Expenses = Capital + Liabilities + Revenues Assets = Capital + Liabilities + Revenues Expenses Assets = Capital + Liabilities + Profit
Rearranged:
Owners Equity = Assets Liabilities = Net Assets
QUESTIONS???