Fiches financial managemement

FINANCE – 3A

Lecture 1

Finance is the application of economic principles in decision-making that involves the allocation of money under uncertainty. The study of how to manage money. Finance provides the framework for making decisions as to how those funds should be obtained and then invested.

Key concept: Time value of money => translation of future cash flow in present value, vice and versa.

CORPORATE FINANCE

The investment decision: What investments should the business take on?

The finance decision: How can finance be obtained to pay for the required investments?

The dividend decision: Should dividends be paid? If so, how much?

The operation system: How to manage day-by-day activities?

Tools: interpretation of pertinent financial data.

Operating performance: how well the company has used its resources to produce a return on its investments.

Financial conditions: the ability to satisfy its obligations such as interest payment on its debt in a timely manner.

Accounting: dealing with data. Recording, classifying, summarizing in terms of money.

Main differences between debt and equity:

Debt is not an ownership interest in the firm, creditors do not have voting power, at the opposite equity security provides it.

Financial statements allow investor to assess the financial health of companies.

Income statement =

+ Sales Revenues – cost of sales

 = Gross Margin

- Operating Expenses (lease expense administrative expense; depreciation)

= Earnings before interest and taxes (EBIT)

- Interests

= Earnings before taxes

- Taxes

= Net Income (or net loss)

- Preferred dividends

= Earnings available to common shareholders

- Common dividends

= Retained earnings 

The link between Balance Sheet and Income Statement is the account ”Retained earnings”

Financial ratio analysis aims to select the relevant financial information, to evaluate and interpret it.

e.g.:

Basic earning power: earnings before interest and taxes/ total assets

Return on Assets: Net income/ total assets

Return on equity: Net income/ book value of shareholders’ equity

Return on investment: Net income/ investment  Could also be [pic 1]

Gross profit margin: Sales – cost of goods sold/ sales

Net profit margin: Net income/sales

Inventory turnover: cost of good sold/ inventory

Total assets turnover: sales/total assets

Current ratio: current assets/ current liabilities [pic 2]

Debt analysis: what proportion of debt a company has relative to its assets.

[pic 3]

[pic 4]

MARKET FINANCE

Financial system

Consists of 3 components: financial markets, financial intermediaries, and financial regulators.

Financial system brings together economic agents with surplus of resources (households) and those with net financial needs (companies or governments), as a broker.

The issue of how rapidly the asset prices reflect all available information in a financial market is referred to as market efficiency (weak, semi-strong, strong)

Financial markets: a market where financial instruments are exchanged or “traded”. Financial instrument or asset is defined as any resource that is expected to provide future benefits and has economic value.

Primary/secondary markets

Financial intermediaries

They include depositary institutions, insurance companies, regulated investment companies and investment banks. They transform financial assets that are less desirable into other financial assets that are more widely preferred by the public (maturity intermediation, risk deduction via diversification, cost reduction)

Intermediary: clearing house

Is the central counterparty of all operators in organized markets. It guarantees that all contracts will be honored. Clearing houses act as third parties to all futures and option contracts – as a buyer to every clearing member seller and a seller to every clearing member buyer.

Financial regulators

Disclosure (revelation) regulation: providing to investors financial and nonfinancial information that would affect the value of securities.

Financial activity regulation: rules about traders of securities and trading on financial markets such insider trading prohibiting rules.

Regulation of financial institutions: a form of governmental monitoring restricting institutions’ financial activities.

Regulation of foreign participants: imposition of restrictions on the roles that foreign firms can play in a country’s internal market and the ownership or control of financial institutions.

AMF: “Autorité des marchés financiers”

Its remit is to:

• Safeguard investments in financial instruments and in all other savings and investment vehicles
• Ensure that investors receive material information
• Maintain orderly financial markets
• Regulation, Authorization, Supervision, Enforcement.

Also lends its support to financial market regulation at the European and international levels.

Also empowered to conduct inspections and investigations.

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