Introduction to Finance

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 Why Take This Course?

Learn something about finance

– Corporate finance
– Personal finance
Need it for your degree
– How to get a good grade?
• Comfortable with calculations – math intensive
• Read textbook before lecture (both version 9 & 10 are fine)
• Study the calculation questions in lecture slides
Other benefits
– Topics you can apply in future studies, and in your life

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 Special logistics during
COVID
Classes will be taught remotely
– Webex, every Monday and Wednesday, please mute your mics
– Recorded videos will be uploaded on Panopto
– Two 75 min sections: 7:00 – 8:15 pm, 8:25 – 9:40 pm
Discussion session: 9:40 – 10:00 pm, Mondays and Wednesdays
– By appointments on discussion board
– 15 students max. of each session
Discussion board
– You can post questions
– Students are encouraged to answer other students’ questions
Exams: Online on blackboard
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 My introduction

Ran Zheng
CFA – chartered financial analyst
BBA in finance, university of wisconsin – madison
MSc in financial economics, university of oxford

7 years in strategic investment, equity research in China

Previous CFO, current strategic consultant of a local firm
Summer term sessional lecturer at USASK
 Introduction to Finance

Finance includes:

Capital budgeting: What long term investments should you take on?
Capital structure: Where will you get the long-term financing to pay
for your investment?
Working capital management: How will you manage your everyday
financial activities?
Profitability: How much money will you make?
Risk: What risks are involved and are you being adequately
compensated?

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LO1
Financial Manager

Financial managers try to answer some or all of

these questions
The top financial manager within a firm is usually
the Chief Financial Officer (CFO)
– Treasurer – oversees cash management, capital
expenditures and financial planning
– Controller – oversees taxes, cost accounting, financial
accounting and data processing

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 Introduction to Finance

Career opportunities:
1. Financial services
– Design & delivery of advice and financial products
– Banking and related institutions, personal financial
planning, investments, real estate, and insurance.
2. Managerial finance
– Financial management within a company, or managing
the financial affairs of your own company

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 Introduction to Finance

Making investment decisions:

– Investment decisions determine the mix and the type of
assets on the left side of the firm’s balance sheet -
Capital Budgeting
– The financial manager attempts to maintain optimal
levels of each type of current asset, and decides which
fixed assets to acquire, modify, replace, or liquidate.
– These decisions are important because they affect the
firm’s success in achieving its goals and creating
shareholder wealth.

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 Introduction to Finance

Making financing decisions:

– Financing decisions deal with the right-hand side of the

firm’s balance sheet - Capital Structure
– The most appropriate mix of short-term and long-term
financing decisions and the sources of financing must be
established.
– Short Term Financing - Working Capital Management
– Many of these decisions are dictated by necessity, but
some require in-depth analysis

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 Legal Forms of Business Organizations

Sole Proprietorship – one owner / no separate legal

existence.
Partnership – two or more owners / no separate
legal existence.
Corporation – a separate legal entity in the eyes of
the law.
Income Trust

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 Income Trust

An investment trust that holds assets. These

assets produce income that is passed to
shareholders (unitholders)
Popular, historically, as the income to the trust
was not taxed
This tax advantage was essentially eliminated
in October of 2006

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 Co-operative

A legal form of business owned by its

members
Members share any benefits of their
cooperation
Examples include Consumer, Producer,
Worker, and Multi-Stakeholder Co-ops

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 Corporate Social Responsibility

Can investors “Do well by doing good?”

Companies are rated with respect to

community and society, customers, corporate
governance, employees, environment, and
human rights.
– Example: Sustainalytics

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Ross, Westerfield, Jordan, and Roberts, “Fundamentals of Corporate Finance”, McGraw-Hill, 2013
 Key Ideas in Finance

1. The Goal of the Firm is to Maximize Shareholder

Wealth / Firm Value
The value of a publicly traded firm is determined
by the financial markets
– requires an efficient market
A firm attempts to use assets effectively to create
value – the financial markets will recognize this
and the market value will increase.

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 Key Ideas in Finance

2. We assume financial markets are efficient

enough
When information is plentiful and there are
many informed investors, markets tend to be
efficient.
The financial markets in developed countries
have been found to be efficient.
Lesson #1: If the market is efficient, trust market prices.
Lesson #2: Start from the market price and look for
factors that could make the asset worth more or less.

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 Key Ideas in Finance

3. Individuals Act in Their Own Self-interest

The idea of self-interest comes up in many ways in
finance – these are referred to as “agency
problems” or “agency relationships.”
In widely held companies, management
effectively controls the firm, and management
(agent) goals may differ from shareholders’
(owner) goals.

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 Key Ideas in Finance
a. Excessive corporate expenditures
– Benefits management but costs the shareholder.
b. Monitoring costs
– Arise from the need to monitor management
actions.
c. Loss of wealth when agents pursue own interests
– Passed-up opportunities or wrongly-taken projects
– protect management’s position with minimal
concern for shareholders’ interests

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 Key Ideas in Finance
Does management act in the shareholders’ interests?
Two factors to consider:
a. Managerial Compensation
– Compensation is often tied to performance and share value.
– Managers successful in pursuing shareholder goals are in greater
demand in the labor market and command higher salaries.
b. Control of the Firm
– Shareholders have ultimate control
– Poorly managed firms are more prone to take-over attempts than
well-managed firms – job security in promoting shareholder
interests

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 Key Ideas in Finance

4. Firms Focus on Cash Flows and Incremental

Effects
Firm value is determined by the size of the future
cash flows, the timing of these cash flows, and the
risks involved.
Accountants look at earnings; financial managers
use cash flows.

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 Key Ideas in Finance

5. A Dollar Today is Worth More than a Dollar

Tomorrow
When in doubt, take the cash sooner than later.
In finance, when dealing with cash flows that occur
at different points in time, we use present value and
future value concepts in our analysis.

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 Key Ideas in Finance

6. Risk and Return Go Hand in Hand

Risk: the uncertainty of something happening or the
possibility of a less-than-desirable outcome.
Other things being equal, rational investors require a
higher return for exposing themselves to higher risk.
The other side is that in order to increase the return
expected from any kind of investment, we must
increase our exposure to risk.

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 Key Ideas in Finance

7. Options are Valuable

When we have the opportunity, but not the
requirement, to undertake some opportunity, an
option exists.
The flexibility provided by options to exercise them
or let them expire is what makes options valuable.

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 Financial Markets

Financial markets bring buyers (those looking for

money) and sellers (those looking to invest money)
together.
Financial markets are driven by the supply of and
demand for money.
Canadian financial institutions include: chartered
banks, trust companies, credit unions, investment
dealers, insurance companies, pension funds, and
mutual funds. (Discussed in text)

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Ross, Westerfield, Jordan, and Roberts, “Fundamentals of Corporate Finance”, McGraw-Hill, 2013
 Cash Flows to and from the Firm

A security is a type of transferable interest representing financial value

- (Wikipedia) 26
Ross, Westerfield, Jordan, and Roberts, “Fundamentals of Corporate Finance”, McGraw-Hill, 2013
 Types of Markets

Money Markets
Financial markets where short-term debt securities are bought
and sold
ST debt securities
– Essentially an IOU (IOU = I Owe You)
Trading facilities are connected electronically.
T-bills and commercial paper are examples of money market
securities.
Players include: chartered banks, investment dealers,
insurance companies, pension funds, and large corporations.

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 Types of Markets

Capital Markets
Markets where previously issued long-term debt
securities and shares of stock are bought and sold.
Two types: (i) Over-the-counter markets (dealers
connected electronically) and (ii) Auction markets
(has a physical location).
The Toronto Stock Exchange is an example of a
capital market.

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 Types of Markets

Primary markets
Markets where new issues are sold; most publicly
offered securities are “underwritten”
– involves the use of an investment dealer.
Two types:
– Public offerings (involves selling securities to the general
public).
– Private placements (a negotiated sell involving one or a
few buyers).

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 Types of Markets

Secondary markets

Markets where previously issued securities are

traded.

Both the money market and the capital market are

secondary markets.

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 The Value Manager

Has a focus on long-run cash flow returns, not quarter-by-

quarter changes in earnings per share.
Considers return on capital, regardless of emotional
attachment.
Takes an outsider’s view of the business with an eye for
incremental value creation
Attempts to develop and institutionalize a value philosophy
throughout the organization

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 Review Questions

End of chapter questions

– For most of the chapters we’ll cover, you
should complete all of the concepts review
questions, all of the basic & intermediate
questions & problems, and some of the challenge
questions.

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