Introduction to Financial Management

1. Introduction to Financial Management Administrative Issues and Course Overview Financial management: Lecture 1

2. Today’s plan • administrative issues • syllabus • prerequisite • add, drop and withdraw • Mid-term exams • In-class work • final grade • course overview • basic probability concepts Financial management: Lecture 1

3. The instructor • My name is George Li • Office: DTC 582 • Website: http://online.sfsu.edu/~li123456 • Email: li123456@sfsu.edu • Office hours: • Monday 11:30 a.m. – 1:30 p.m. • Thursday 4:15 p.m. - 6:15 p.m. • Research interest: • Corporate finance: real options, technological innovations, and valuations • Asset pricing: information and stock prices Financial management: Lecture 1

4. Textbook • fundamentals of corporate finance, by Brealey, Myers and Marcas (6th edition) • sorry about the cost • this is a pretty popular textbook used in many major schools for the first course in corporate finance Financial management: Lecture 1

5. Prerequisite • You are required to finish Bus 780, Ds 510 and Ds 512. • It is the school’s policy that all the students in this course must satisfy this requirement and there is no exception Financial management: Lecture 1

6. Add, drop and withdrawal policy • The business school has the policy for add, drop and withdrawal • In the first four weeks, you have to get enrolled in the class, if you want. • Students can withdraw once • Please read the bulletin for detail information • Please refer to this semester bulletin for detailed information. Financial management: Lecture 1

7. Pass or no pass grade • BUS 785 is a letter graded course. • Please don’t change to pass or no-pass course unless you have talked to me to get my permission; otherwise you will get a no-pass grade, if you change it without permission. Financial management: Lecture 1

8. Homework • To help you understand the concepts taught in class, and prepare for the two mid-term exams and the final exam, there is a weekly homework set, which is not graded, but its solution will be posted in my website. Financial management: Lecture 1

9. Two mid-term exams • There are two mid-term exams, which are in the form of multiple choice questions and take about 120 minutes. • There are no makeup or in-advance mid-term exams. • The mid-term with a higher score will have a weight of 0.8; the lower mid-term will have a weight of 0.2. Financial management: Lecture 1

10. Case discussion • There are three in-class case discussion. The three cases are from the textbook. They are from chapters 5, 7 and 13. Financial management: Lecture 1

11. The final exam • The final exam will be in class (closed book), with the form of multiple choice questions. • There are no makeup or in-advance final exams. • The final exam is cumulative, based on the two mid-term exams, homework and in-class case discussion. • The final has the same time and classroom as regular lectures Financial management: Lecture 1

12. Final grade • Your overall course grade will be based on your performance in the class, the mid-term exams, and the final exam. • Class attendance: 5 pts • Two mid-term exams: 45 pts • Final exam: 50 pts • Total 100 pts Financial management: Lecture 1

13. Grading policy • Your grades are based on the distribution of the scores of the class. Specifically, your final grade is based on the following table. Ranking Grade 0%-10% A range 10%-50% B range 50%-85% C range 85%-95% D range 95%-100% F Financial management: Lecture 1

14. Why do you want to take this course • Why are you taking BUS 785? • nothing better to do today ? • become a millionaire overnight? • the instructor is a nice guy for a good grade? • get a “stamp of approval” to get a job ? • learn finance for fun ? • simply a required course ? • learn finance to be more successful? Financial management: Lecture 1

15. My objective in this course • I want everyone in the room to learn finance very well this semester • i want you to understand the concepts / issues • i want you to feel comfortable talking about finance and answering finance questions. • i want you to gain a set of tools that will help you look at the world in a slightly different way. • What is standing in the way of those objectives? • Over-confidence • Under-confidence Financial management: Lecture 1

16. Two ways of learning • Positive • Can be a fun, since it is an opportunity to improve your future career, open your mind and broaden your vision • Look at each difficult question as an opportunity to learn new things • Good performance • Negative • Can be boring, since it is regarded as a burden, a task • Look at each difficulty as a “torture” or pain • Bad performance Financial management: Lecture 1

17. My approach of teaching BUS 785 • Focus on several fundamental, important concepts, • Applications and economic intuitions • Avoid too many materials • Help understand finance better. Financial management: Lecture 1

18. Academic integrity • The instructor has zero tolerance for cheating in all exams. • During the exams, please don’t look over each other. • During the exams, computers, cell phones, books and previous exams are absolutely not allowed • During each exam, pencils, one cheat sheet (8.5*11) on both sides, a calculator (financial or non-financial) are permitted. • During each exam, you can use the exam as the scratchy paper. • In each exam, you have to use scantrons to put your solution. Financial management: Lecture 1

19. Corporate finance: what is it? • A set of concepts, theories and approaches that help the firm make financial decisions Financial management: Lecture 1

20. Financial decisions • Capital budgeting (use of the capital) • Real investments • Mergers; acquisitions • Financing (capital structure decision) • Equity • Debt • Risk management • Diversification • hedging Financial management: Lecture 1

21. BUS 785: course organization BUS 785 Module 1 Fundamentals of valuation Module 2 Valuing risky investments Risk and return Module 3 Corporate financial decisions Module 4 Market efficiency and options Fundamentals of PV Financial decision Interest rates Portfolio theory Diversification and covariance Types of securities Stocks, bonds and other Weak, semi-strong and strong form efficiency Information and stock prices Perpetuities and annuities calculation Tangency portfolio, CAPM risk and return Modigliani-Miller theorem 1 Pizza size is independent of how sliced Options and Black-Scholes Valuing stocks and bonds NPV and other criteria Effect of leverage WACC and discount rate Modigliani-Miller theorem 2 WACC Binomial model, replication Risk-neutral probabilities Financial management: Lecture 1

22. Course organization (2) • This course is broken-down into four modules • Module 1: time value of money • Module 2: risk and return • Module 3: capital structure • Module 4: financial markets Financial management: Lecture 1

23. Time value of money • This module is a “skill building” block in this course • We will soon have the necessary skills needed to value stocks and bonds • In this module, we don’t explicitly consider risk • Cash flows forecasts are given • The discount rate is given Financial management: Lecture 1

24. Risk and return • This part teaches us about uncertainty • How do we measure risk? • How much is a risky cash flow in the future worth (today)? • There are both: • skill building sections • conceptually more difficult sections Financial management: Lecture 1

25. Financing decisions • If you are the CEO of an industrial company • you can make your company more valuable by choosing “better” projects • we want to know if you (and the CFO) can make your company more valuable by changing the mixture of your financing (i.e. the ratio of debt to equity) Financial management: Lecture 1

26. The efficiency of financial markets • We will look at how information gets into security prices • We will learn three forms market efficiency • We will examine the implication of market efficiency on financing Financial management: Lecture 1