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    Finance. Lecture 03

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    Leire Garcia Zabala
    This document provides an overview of key finance concepts including: 1. It discusses cash flows between firms and financial markets, and how investment and financing decisions are assessed based on payment amounts, timing, and risk. 2. It covers the monetary concept of capital flows within organizations and the interrelation between balance sheets, income statements, and cash flow statements. 3. It addresses the goals of firm value maximization and how the right mix of debt and equity can optimize value through investment returns exceeding hurdle rates.

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    Finance. Lecture 03

    Uploaded by

    Leire Garcia Zabala
    8 views4 pages
    This document provides an overview of key finance concepts including: 1. It discusses cash flows between firms and financial markets, and how investment and financing decisions are assessed based on payment amounts, timing, and risk. 2. It covers the monetary concept of capital flows within organizations and the interrelation between balance sheets, income statements, and cash flow statements. 3. It addresses the goals of firm value maximization and how the right mix of debt and equity can optimize value through investment returns exceeding hurdle rates.

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    This document provides an overview of key finance concepts including: 1. It discusses cash flows between firms and financial markets, and how investment and financing decisions are assessed based on payment amounts, timing, and risk. 2. It covers the monetary concept of capital flows within organizations and the interrelation between balance sheets, income statements, and cash flow statements. 3. It addresses the goals of firm value maximization and how the right mix of debt and equity can optimize value through investment returns exceeding hurdle rates.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    8 views4 pages

    Finance. Lecture 03

    Uploaded by

    Leire Garcia Zabala
    This document provides an overview of key finance concepts including: 1. It discusses cash flows between firms and financial markets, and how investment and financing decisions are assessed based on payment amounts, timing, and risk. 2. It covers the monetary concept of capital flows within organizations and the interrelation between balance sheets, income statements, and cash flow statements. 3. It addresses the goals of firm value maximization and how the right mix of debt and equity can optimize value through investment returns exceeding hurdle rates.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 4

    Finance WISE 2023

    INDEX
    Cash Flows Between the firm and the financial markets .............................................................. 2
    Monetary concept of capital flows within the organizational context........................................... 2
    Interrelation Balance Sheet, Income Statement and Cash Flow Statement................................... 3
    Firm value maximization .............................................................................................................. 3
    Interest Rate .................................................................................................................................. 3
    Opportunity Cost ........................................................................................................................... 4
    Perfect capital market vs Imperfect capital market ....................................................................... 4

    1
    Finance WISE 2023

    3.1 Cash Flows Between the Firm and the Financial Markets

    • Economic entities operate on markets. Medium of exchange is money.


    • Of financial interest is the financial sector of a company (cash flows).
    • Investment and financing measures are presented with payment streams.
    • A payment has three dimensions: Amount, time, risk.
    • Assessment of investments/financing decisions based on:
    o Perspective: Owner (shareholder),
    o Check if financially beneficial.

    3.2 Monetary concept of capital flows within the organizational context

    2
    Finance WISE 2023

    3.3 Interrelation Balance Sheet, Income Statement and Cash Flow


    Statement

    3.4 Firm value maximization


    It is underlying assumption for decision making in finance
    THE INVESTMENT DECISION THE FINANCIAL DECISION
    Invest in assets that earn a return greater return Find the right kind of debt for your firm and
    than the minimum acceptable hurdle rate the right mix of debt and equity to fund your
    operations and investments
    The hurdle rate should reflect the riskiness of The optimal mix of debt and equity maximizes
    the investment and the mix of debt and equity firm value
    used to fund it
    The return should reflect the magnitude and The right kind of debt matches the nature of
    the timing of the cashflows as well as all side your assets
    effects

    3.5 Interest Rate


    • The interest rate is the price for the provision of a monetary unit for a certain period of
    time.
    • The period to which the interest refers is usually one year (interest rate is indicated with
    the addition “p.a.” = “per annum”).
    • The interest rate is an expression of:
    o Time preference
    o Liquidity preference
    o Opportunity cost (therefore, “the capital market interest rate i reflects the
    opportunity costs of the investors”)
    o Risk assessment.
    • The interest rate (i) is written in decimal form, e.g. i = 0.06 (6%).

    3
    Finance WISE 2023

    3.6 Opportunity Cost


    Missed revenues of the best, unrealized alternative action.
    I. Opportunity costs of the shareholders / owners for the use of equity
    The lost interest income for the alternative investment and the further “loss of benefit”.
    II. Opportunity costs as part of the investment calculation
    Missed interest income for the alternative investment of the funds.
    Assumption: Financial resources can be invested at any time in the capital market at the capital
    market interest rate.

    3.7 Perfect capital market vs Imperfect capital market


    PERFECT COMPETITION IMPERFECT
    COMPETITION
    ASSUMPTIONS Perfect competition, all At least one of the
    market participants have assumptions of the perfect
    unrestricted access to the capital market is not fulfilled.
    market.

    All market participants have


    equal and perfect information

    Products are comparable

    No transaction cost & taxes

    No market participant has


    influence on the “market
    price”, i.e. the capital interest
    rate i
    CONSEQUENCE The investment interest rate iI The investment interest rate
    is equal to the interest rate of iI is not equal to the interest
    debts iD rate of debts iD

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