Financial Management - Lecture 01

finance, financial management, Brigham, CFO, financial decision, corporate finance, business finance, financial economics, financial markets, financial institutions, financial institutions, financial instruments, securities, financial assets, financial system, money markets, capital markets, money-market instruments, capital-market instruments, banking, investments, portfolio management, portfolio theory, security analysis, behavioral finance, personal finance, public finance, proprietorship, partnership, corporation, retained earnings, dividends, profit maximization, wealth, shareholder wealth, market price, share price, value, fundamental value, intrinsic value, true value, discounted value, fundamental value, risk, true risk, perceived risk,

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Closed Caption:

zoom in quite well this is financial
management book is by eugene bring them
and system dragons book is actually a
legendary in financing financial
management the real book the real book
is called financial management .
practice that was the book which i
started when he years ago when i was in
college when i was your age when I was
second and third year student and the
book was 1100 and that's where we
studied real find
now this is known as the baby Brigham
which is you know not the real one this
is tiny little one it's the shark quick
easy version of it and that's what we're
going to be doing is going to be a quick
overview quick survey maybe for a few
feet with four five six weeks
we're going to begin with chapter one to
five and then we see how we go from
there
and we move on chapter 111
so with a chapter one
and now over half section 1
finance what is the finest again
difficult tricky but the short quick
easy answer is money management
the science the subject of managing
money that's what
finance is all about finance is about
money
how to get it defended how to manage
that's it that's finance now 11 a page
for what's the difference between
finance and economics and accounting
accounting is about recording
transactions in terms of money in
accounting
you just recorded you say what happens
in economics
you are focused on resources on real
resources on tables in books and markers
and cameras in economics you're focused
on real assets on production
you're focused also on households you
focused also on the government
you're focused on businesses in finance
is in between you want to deal with the
real and the production side of things
but they also want to deal with the
money side of things so money is
those are financed is a very very recent
field develop and separated only in the
last 20 or 30 years which has separated
recently actually problem
economics and separated recently from
financial economic so modern finance is
an outgrowth separated from financial
economics
so what do we have in an organization in
organization you have see
oh let me see which is this one this is
11 be 11 and CFO simply chief financial
officer
now we're talking about businesses
we're talking about operation and
usually number two or number three in
the corporation is the chief financial
officer
she is responsible for financial
decisions
so now we need to see what is a
financial decision
yeah i got a great new red color so
right
find in show
position
and financial decision is a decision
about money to buy or not to buy to buy
a house is a financial decision to buy
this little sony camera with which we
report is a financial decision
ok and financial decision is a decision
whether to spend money or not to spend
money
how to get it in helpful invested and so
on
basically financial decisions require
the most elementary economic decision of
benefits versus cost in a financial
decision
you want to make sure that the benefits
will be bigger higher or more than the
cost and that's what financial decisions
are all about now
11 c is about finance is a subject
so let's write out here
yeah
finance and see what is financed in the
subject in the first major deal or area
finance is called financial management
that's right it out and read on short
and finance as financial management
now financial management is actually
managing the finances of business
sometimes the business can be small
sometimes the business can be large
large businesses they usually referred
to as operations and often financial
management is known simply as corporate
finance so i put in a good a cosine is
the same as your parents
fine yes
and the good old days of fifty or
hundred years ago
I'm putting in a new side of you that's
the meaning of simply business finance
business
so
all three financial management corporate
finance essentially mean business
finance and business finances associated
pre dominantly with managing the assets
in managing the liability of
corporations
that's why finance requires
understanding of all assets and
understanding all my images and
understanding in general accounting and
that's why the next chapter chapter two
is about accounting and financial
statements
number two I will be explaining actually
a lot more is the next book says capital
markets
that's not really good now it's becoming
obvious that the textbook authors were
sharp and good enough understanding the
difference i'll be explaining now for
you to understand the second field is
financial economics please
ok
and one of those important fields is the
one which you studied in the one you
start it's called financial markets so a
subfield of financial economics is
financial markets
ok so Rachel market is an important
field of financial economics a separate
very important field of financial
economics is financial institutions
ok
and the third important field is a
financial instrument
all right
continues the explanation now the three
together
financial market and institutions and
financial instruments is called jointly
the financial system financial system
we call this
yeah
the financial system
and now we define financial economics is
simply the subject which studies the
financials
alright so far good now we continue with
the explanation of what's wrong with
capital markets financial markets are
themselves divided so i put in here a
little blue arrow and what type of an
inch and a school capital Larkins
capital
markets
and number two is money markets
so capital markets is an important part
of financial markets
the other important parts of the
financial markets is money market
so all financial markets are divided
into capital markets in money market
capital market is a market for long-term
instant long term meaning mature award
of the year in money market is financial
market again
financial market for short-term mr.
those mature within one year
so what he tried to tell you that the
second field was basically capital
markets and then he kinda like says out
but also studies financial institutions
didn't mention the election these
studies stocks bonds and other financial
instruments like your relatives
so the correct answer is the second
important field is financial economics
which studies the financial system whose
elements of markets institutions and
instruments and markets themselves are
divided into capital markets and and
that's number two the third one
is in essence
and investments is simply the decision
or the purchase the financial influence
the purchase of assets for the purpose
of return the key to investment is
returned in investments that positive
profit does not exist there is no such
concept in investment concept of profit
is not
is this where investments the only thing
you get from investment is returned
now the returns got the part of capital
gain and interest and rent and so one
that's a separate subject but to
understand is that in investments you
get return in business when you have
economic operation
you get prod so profit is an economic
closet return is the financial and so
these three are the primary in finest
now we then investments requires
understanding of financial management
and requires understanding of any
economics and you need to understand
well that's like investments is
considered to be a much higher level
course much more difficult
you need to know complete advantage but
you need to know we can always it all be
then you can handle investment now let's
move on to investments and see some
fields with investments
that's right 3a in 38 that security
announced
and security analysis is simply trying
to determine the fundamental value also
called intrinsic man trying to returning
the Battle of security
ok and here is now another key let's
write out here are over there in the
corner that security
is exactly the same as financial
instrument
and
and financial instrument is exactly the
same as financial assets
and financial asset is an asset which is
someone else's liability
we've covered this long time ago
stocks bonds and use the financial
derivatives will be the primary
financial assets will swing through here
Curren 'as like daughter again you on
the old days eh mark which is no longer
existing Europe and so on
so all of these are financial F so
security analysis attempts to determine
the Battle of financial instruments or
calling security
the next one is called portfolio theory
so
we need to say what its portfolio and
four for you is simply a collection of
investment group of investors a group of
assets
taken together so we're all your theory
is basically how to join
how to use collectively different
investments how to combine them for
proper return the proper risk and proper
so for quality of theory is the set the
subject of how to construct an
investment for security analysis is
associated with ever lighting one
particular security one stock
one ball one current portfolio is about
how a number of stocks bonds and
different securities
he will be ok so this is see
significantly more complicated because
it involves many usually you will need
security analysis for each security and
then you analyze them jointly when you
combine what else you have
oh yeah market analysis when we say
market would also mean to say sometimes
financial market analysis
ok
basic analyzing financial markets is the
stock market now good or it up so good
are the prospects really good
or maybe not ok so when you do I a
market analysis
you need to do economic analysis when
you analyze financial market you need to
understand the macro economy so market
analysis requires complete understanding
of macro economy and the overall
economic environment and only then you
can understand financial markets and
their big again
you may buy a particular stock and you
think that the stock is really good but
it the whole economy is going down and
the stock market is going down with the
economy
your stock is also likely to go down
with the stock market ok
and that's what happened during the
global financial crisis everything
wedding down no matter how perfect your
stock was ok
real estate went down no matter how safe
your real estate was you can have it in
dialed down
I a or worse in downtown to buy a new
property would crash
ok so it's important
I understand the market and then you can
understand the behavior security this
appearances stocks about right now you
need market analysis for yet to
determine is Greece going to the fall
sure that's the easy answer the
questions are invested in the last forty
percent or sixty percent of their bonds
well what about spain is being gonna
fall
well it's going to be down out okay well
what about it
so you need to understand markets and
before you can do any kind of meaningful
announced and for markets you need
financial economics there's no way
around it
next the day 0 finance three
yeah
yeah
in the air of is is the subject the
finest which that is human nature in how
Sheila's make financial decisions
because humans are sometimes affected by
emotion and they make the wrong decision
sometimes they are affected by love and
make the wrong decisions based on love
sometimes it's based on passion most
commonly finance it is based on
ignorance and on stupidity
they think they know when they actually
don't know like the real estate
investors learn the hard way
these thoughts that real estate never
goes down but it went down
ok so these are the problems where
people are all over
they think they know too much
when in reality they don't know very
much it is amazing
I seen it so many years now I talked to
so many people and never ever had
accounting class never had economic
class
never let's say even finance class
these are sometimes and i don't mean to
offend any pretty good intention
doctors mathematics professors extremely
well-educated people
somehow I think they know about it
it's amazing what I talked to let's say
doctors how they talk confidently about
the economy they don't know much
when I start talking to them about
health issues
your shop is it how do you know your
finest forget you can't know much about
him
so when you start talking with doctors
about health
this in turn it off you don't know you
know you know you have never said in
medicine so I didn't study medicine and
I'm not supposed to go to know anything
but they never studied finance but this
somehow think they know finance
ok so that's extremely common the most
common group which I've discovered think
they understand - best engineers they
think they know how the world works and
therefore they can quickly figure out
how he works and how investment works
and they believe that it's just the
mechanical system but it's not
and the reason is that it's based on
humans
not long and humans are not perfect
progression
ok we started this in the other plans
like politicians they don't you leave
the problems are too
well it was smart enough to evaluate the
problems
all right well there's that weird thing
somewhere called in the next paragraph
of the textbook called banking
well banking is leaving part of
financial economics
it's clearly a part of financial
institutions and financial institutions
are divided into an institutional
banking institution
so the separation of banking is not
really billion the textbook and the last
one which the textbook completely missed
or forgotten or didn't consider and how
right for you which is the relative when
you feel now to begin there's more
important which is still on the books we
still have it in the curriculum around
of personal findings personal
is the subject of Finance which spanish
the finances
the money masters of one particular
individual or of a family that would
finance for that household remember this
is financial management is financed for
businesses studying how businesses
manage their money
well the subject studying how families
manage their money
now let's now discuss another Little
Miss in the textbook is the origin of
finance in the origin of the finest was
you begin to examine hundreds of years
ago because the people with money needed
to manage them into people with money
back in the old days worthy came and the
countries and the government so the
origin of Finance was about managing the
money of the government and the subject
is called up
number five
in the very first many hundreds of years
ago this was a this design and started
this
the subject of how to manage the money
of the king then it grew as the subject
how to manage the money of the kingdom
ok and later on grow into complements
the subject of the country in general
and now today in modern days the subject
of the managing money of the government
so it focuses on government
this focuses on households this focuses
on businesses and corporations and over
here you got a subject which focuses on
commercial banks because commercial
banks in many ways are special
all right let's see what else we got
jobs in is plenty of jobs if you know it
if you understand it and if you study
not from the skin texture study from the
fat one
ok to study from the fat one play book
says banking investments Insurance
corporation's government plenty of jobs
the world is hungry for people to do and
understand
section 3 is forms of business
organization i'm going to spend a bunch
already in taiwan it
the first one is provide their ship
business run by one single no more
second partnership business run like two
or more partners
that's it next one the more important
for today's corporation separate legal
entity with all the natural rights to
all by yourself to contract and
everything else
a separate legal entity register and
recognized by the state with all its own
separate rights and we then there
the key is limited liability
the owners of a corporation can lose as
a maximum their investment in know the
liability is limited to their initiation
stock prices vs older than well the
meaning of business
the purpose of businesses to make money
what it means to make money that's the
most common phrase used for hundreds of
years
it simply means we call the finest to
generate profits
ok now that would true generate more
revenue then expenses and whatever is
left is left for the owner of the
business for him the key when he
generates a profit
you can make two things you can use the
profit in two ways one is reinvested and
we call this retained earnings in the
other one
take it and use it for himself which we
call did it
ok so what's the purpose of corporation
but the purpose of a corporation is
actually a little tricky
usually they say to maximize profits but
the reality is actually to maximize its
owners wealth in welfare
so the purpose is maximizing shareholder
wealth and how do you maximize
shareholder wealth answer is simple
maximizing the share price
the share price the return on share
ok so the goal of financial man
management is maximized here
that's it ah we have concepts like that
we write some over here
which I have marked for you
the first place
shareholder wealth so let me just say in
economics
what as well and well is simply is all
the assets owned by an entity
so my world is all assets which I oh ok
the King's world is all passes than he
so share all the world is basically
whatever the share folder
that's the shareholder well okay this is
the value of the assets owned by the
share folder next one is
shares
I'll stand
incorporation issues shares a share
represents a part ownership shares
outstanding is the number of shares
which are sold to the public in a hole
like that's a number of shares owned by
the Obama
ok that's it that's chairs house them
next one is market price
actually we like to call it share
yeah
and share prices the price for which you
can sell a share on the market on the
stock market in the financial market
that's fairly straightforward
now this is turns out to be the most
difficult concept in - because value is
the most fundamental positive both in
economics and finance and actually for
humans and for different people
dan has different meanings very
difficult very tricky so we like to use
what's called on the mental
ok and again it's very tricky to define
because you know how we define
fundamental value is exactly the same in
our name is got in
trinsic
and one way to work around is this is
the fan of assets with stocks bonds real
estate gold
ok currency if all information is known
to all market participants about it if
everybody understand that this house
the foundation is craft then they will
put in a particular value on it if
everybody understood two or three years
ago the true debts which Greece is a
country had that they were way too much
ended that will be basically the war in
transit grant and the fundamental or
intrinsic value in finance is based or
calculated as a discounted
which is the present discounted value of
all future cash flows so under mental
valuable intrinsic value all are
associated with all future cash fault
an acid is as good as its future
it's dad is the tournament by all of its
future cash flows and then we say a
proprietary Lee
discount or discounted the appropriate
interest rate or rate of return
ok these are all tricky but basic and
fundamental
all right in the next or after the last
concept in finals
of course there's a whole chapter is
risk and risk is simply the probability
of a favorable outcome of an outcome
which is not favorable know what is the
risk or the probability of things going
wrong
ok remember for one person
risk is a loss but on gathering it might
be a prophet
ok the risk of oil
crashing down from ninety dollars fifty
dollars
is it really a risk but not for the time
of nice economy not Taiwanese economy is
consuming oil tie one will love to see
the price of all going down 50 because
you always have been paying a lot
cheaper than that
that's the risk for arabia which is
exporting while
ok so for them it's a terrible risk for
you
it's a benefit ok the opposite is also
true of one of the biggest risks to the
chinese economy today will be oil going
down to 200 or 300 and China not being
able to pay for it all
oil okay well is that risk for sorry
no that will be great for them
so sometimes you have to part is in
baseball which side you're on our side
of the consumer or our side or are cited
them that's their or the borrower so
risk is associated with always with the
side particular side investor or ensure
a risk for one losses in mean
density is in time five more minutes
risk ok yeah ok here's another one is
freaky
true risk is the risk associated with a
particular asset will also call it a
slip it is this
if all information is known
all information is known about and then
you have the opposite is Percy
it has had a simple people are not
perfect
there are always give the perfect answer
on the exam
they don't make the perfect day away
investments
sometimes perceived risks associated
with communications expectations of
politicians
I'm going to bail out spain or they will
not bail out
I'm going to bail out into the one you
don't have the money to bail
I'm gonna bail out portugal yeah
probably so for a/c risk associated will
go to investors think but it may have
particular biases based on their age
based on their ex perience based on
their job based on their interests
ok so different people have different
perceptions of risk different background
different knowledge different
information
some people who are extremely are
inexperienced investing real estate have
a very low perceived risk
real estate is extremely risky
investment of people don't perceive
their general understand the regiment
hundreds of risk of talk about real
estate
not good time now
ok that's good time to finish and with
perceived risk I am are intrinsic value
ok here is the definition
let's finish with the definition of
intrinsic value and here's what they say
say is an estimate of a stock true man
can say of an investment that page
well based on accurate risk that was
based on true risk and on and currants
evaluation of returns returns are
associated with the cash flow so it is
based on complete information of future
cash flows correct information of cash
flows and proper risk also called true
risk so under mental battle is
associated with correctly
estimating both the cash flows and
the risks ok that was both the return
and the wrist and that's pretty much it
and we continue next time with 16 and
make their own account