Finance: A Quick Look

 Four Basic Areas

o Business Finance
o Investments
o Financial Institutions
o International Finance
ANS Investments:

=Investments refer to the allocation of money with the expectation of generating

income or profit. This can involve buying stocks, bonds, real estate, or other
assets.
Investors aim to grow their wealth over time by making smart investment decisions
based on factors like risk tolerance, financial goals, and market conditions.
Financial Institutions:

Financial institutions are organizations that provide financial services. This

includes banks, credit unions, insurance companies, and investment firms.
Banks, for example, offer services like savings and checking accounts, loans, and
investment products. They play a crucial role in facilitating economic activities
by managing money and providing financial services.
International Finance:

International finance deals with financial interactions between countries. It

includes aspects like foreign exchange markets, international trade, and cross-
border investments.
Exchange rates, trade balances, and global economic conditions are important
factors in international finance. Businesses and governments engage in
international finance to facilitate trade, manage currency risks, and attract
foreign investments.

What long-term investments should the firm engage in?

 How can the firm raise the money for the required investments?
 How much short-term cash flow does a company need to pay its bills?

ANSLong-Term Investments for the Firm:

Long-term investments for a firm typically involve assets that will provide value
over an extended period. This can include:
Capital Expenditures (CapEx): Investing in property, plant, equipment, or
technology that will benefit the company for many years.
Research and Development: Investing in innovation and product development.
Market Expansion: Expanding into new markets or launching new product lines.
The choice of long-term investments depends on the company's strategic goals,
industry trends, and risk tolerance.

Raising Money for Required Investments:

Firms can raise money through various means, including:

Equity Financing: Selling shares of the company to investors.
Debt Financing: Borrowing money through loans or issuing bonds.
Internal Financing: Using retained earnings or profits from the company's
operations.
Venture Capital: Obtaining funding from investors in exchange for equity, often
used by startups.
The choice of financing depends on factors such as the cost of capital, risk
appetite, and the financial health of the company.

Short-Term Cash Flow Needs:

Short-term cash flow needs involve managing the day-to-day expenses of the company.
Key considerations include:
Accounts Receivable: Collecting payments from customers in a timely manner.
Accounts Payable: Managing payments to suppliers and creditors.
Working Capital Management: Balancing current assets and liabilities to ensure
there's enough cash to cover short-term obligations.

Pricing Financial Assets

o Associated Risks and Rewards
o Determining best mixture of financial investment

ANS Pricing Financial Assets:

Pricing financial assets involves determining the value of various financial

instruments such as stocks, bonds, options, and other securities.
Market Value: Financial assets are often priced based on their market value, which
is influenced by supply and demand in the financial markets.
Discounted Cash Flow (DCF): Some assets, especially those generating future cash
flows, may be valued using DCF analysis. This method calculates the present value
of expected future cash flows.
Associated Risks and Rewards:

Every financial asset comes with its own set of risks and potential rewards.
Risk: This can include market risk, credit risk, liquidity risk, and operational
risk. Market risk relates to fluctuations in the overall market. Credit risk is the
risk of the issuer defaulting on payments. Liquidity risk pertains to the ease of
buying or selling an asset. Operational risk involves the risk of losses due to
internal processes or systems.
Rewards: Investors expect returns for taking on risks. Higher-risk investments
typically offer the potential for higher returns, while lower-risk investments may
provide more stable but lower returns.
Determining the Best Mixture of Financial Investment:

This concept is often referred to as portfolio management or asset allocation.

Diversification: Investors seek to build a diversified portfolio to spread risk.
Diversification involves investing in a mix of assets that don't move in perfect
correlation with each other, helping to reduce overall risk.
Risk Tolerance: The best mixture of financial investments depends on an individual
or institution's risk tolerance, financial goals, and investment horizon.
Balancing Asset Classes: A well-constructed portfolio may include a mix of stocks,
bonds, and other assets. The proportion of each depends on the investor's
objectives and risk appetite.

Stock Brokerage

ANS A stock brokerage is like a middleman in the stock market. It helps people buy
and sell stocks. There are different types—some give advice and lots of services
(full-service), while others just help with the trades (discount). Nowadays, many
work online, letting you trade stocks from your computer. Just be aware, they
usually charge fees for their services. Make sure to choose a reputable one that
keeps your information safe.

Marketing research
 Design of marketing and distributions channels
 Product pricing

ANS Marketing Research:

Explanation: Marketing research is like detective work for businesses. It helps

them understand their customers, competitors, and the market.
How it works: Companies ask questions, do surveys, and study data to learn what
people want. This helps them make better products and create ads that speak to
their customers.
Design of Marketing and Distribution Channels:

Explanation: Think of marketing channels like delivery routes for products. It's
how a product gets from the company to the customer.
How it works: Companies decide if they want to sell in stores, online, or both.
They choose the best way to get products to customers. It's like planning the roads
a product will travel on to reach its destination.
Product Pricing:

Explanation: Pricing is about deciding how much to charge for a product. It's like
setting the right balance between making a profit and making customers happy.
How it works: Companies look at how much it costs to make a product, what
competitors are charging, and what customers are willing to pay. Then, they pick a
price that fits in with all of these factors.

What is Business Finance

ANS Business finance is like managing money for a company. It's about figuring out
how to get money, where to spend it, and how to make more of it. Imagine it's like
playing a smart game with money to help a business grow and succeed. Whether it's
deciding to invest in new things, handling bills, or finding ways to earn more,
business finance is like the financial wizardry that keeps a company running
smoothly.

The Financial Manager'

The financial manager is like the money captain of a company. They make sure the
company's money is used wisely and helps the business grow. They decide where to
spend money, how to save it, and even how to make more of it. It's a bit like being
the smart leader in a money adventure, steering the company to success by making
clever choices with dollars and cents.

Financial Management Decisions

o Capital Budgeting
o Capital Structure
o Working Capital Management

ANS Capital Budgeting in Easy Terms:

Explanation: Capital budgeting is like choosing the best long-term projects for a
company.
Imagine This: It's a bit like deciding which games to play at an amusement park.
You want to pick the rides that give the most fun for the money. Capital budgeting
is about choosing projects that give the most value for the company's cash.
Capital Structure in Easy Terms:

Explanation: Capital structure is like building a strong financial foundation for a

company.
Imagine This: Think of it as building a house. You use a mix of materials like wood
and bricks. In business, it's about mixing different types of money, like loans and
stocks, to make sure the company is financially strong and stable.
Working Capital Management in Easy Terms:

Explanation: Working capital management is like keeping the everyday money flow in
balance.
Imagine This: Picture a lemonade stand. You need to buy lemons and sugar
(expenses), make lemonade (production), and then sell it (revenue). Working capital
management is about making sure you always have enough lemons and sugar without
buying too much, so your lemonade business runs smoothly.

fixed asets tangible intangible

Fixed Assets in Easy Terms:

Explanation: Fixed assets are like the tools and equipment that a company owns for
a long time to help it work.
Imagine This: Think of a pizza shop owning an oven. The oven is a fixed asset
because it's a tool the shop keeps to make pizzas over a long time.
Tangible Assets in Easy Terms:

Explanation: Tangible assets are things you can touch and feel, like physical
stuff.
Imagine This: Consider a car rental company. The cars they own are tangible assets
because you can see and touch them. They're real, physical things.
Intangible Assets in Easy Terms:

Explanation: Intangible assets are things a company owns that you can't touch—more
like ideas or rights.
Imagine This: Imagine a company has a super famous logo. The logo, even though you
can't touch it, is an intangible asset. It's valuable because people recognize and
trust it.

The Corporate Firm

Sole proprietorship
o Partnership
 General
 Limited
Corporation
 Limited Liability Company

ANS Sole Proprietorship in Easy Terms:

Explanation: A sole proprietorship is like having your own lemonade stand. You're
in charge, make all the decisions, and get all the money.
Imagine This: Picture yourself selling lemonade on the sidewalk. You own the stand,
the recipe, and everything—all the lemonade money is yours.
Partnership in Easy Terms:

Explanation: Partnerships are like running a business with a buddy. You and your
friend share the work, decisions, and profits.

Imagine This: If you and your friend decide to sell lemonade together, and you both
do different jobs, like one squeezes lemons and the other handles money—that's a
partnership.

General Partnership: It's like a lemonade stand where both partners share
responsibilities and profits equally.

Limited Partnership: Think of this as a special lemonade stand where one partner is
in charge of decisions, but the others just invest money and don't do the work.
They're limited in their involvement.

Corporation in Easy Terms:

Explanation: A corporation is like a big lemonade company. It's a separate thing
from the people who own it, and it can last a long time.

Imagine This: Instead of one stand, you and many people own shares in a big
lemonade company. The company makes decisions, and you get a piece of the profits
based on how many shares you own.

Limited Liability Company (LLC): This is like a mix between a partnership and a
corporation. You get the benefits of both, like protection from debts (limited
liability) and flexibility in how you run things.

Managerial goals may be different from shareholder goals

o Expensive perquisites
o Survival
o Independence

ANS Expensive Perquisites in Easy Terms:

Explanation: Expensive perquisites are like extra special treats or privileges that
managers sometimes get.
Imagine This: Think of a manager getting a really fancy office or a company car
just for them. It's like a special bonus to make their work experience more
enjoyable.
Survival in Easy Terms:

Explanation: Survival for a company is like making sure it doesn't go out of

business. It's about staying afloat and not closing down.
Imagine This: Picture a boat trying to stay on the water without sinking. For a
company, surviving means staying in business and not going under.
Independence in Easy Terms:

Explanation: Independence is like a company being free and not relying too much on
others.
Imagine This: Think of a bird flying on its own. It's free and doesn't need someone
else to carry it. For a company, independence means it can make its own decisions
without relying too much on others.

Primary Market:

Explanation: The primary market is like a store where new financial securities
(like stocks or bonds) are first sold.
Imagine This: It's akin to buying a brand-new product directly from the
manufacturer when it's first released.
Secondary Market:

Explanation: The secondary market is like a place where people buy and sell
previously owned financial securities.
Imagine This: It's similar to buying a used item from someone else rather than from
the original store.
Dealer vs. Auction Markets:

Explanation: Dealer markets involve a middleman (dealer) facilitating trades, while

auction markets involve buyers and sellers bidding directly.
Imagine This: A dealer market is like buying from a shopkeeper, and an auction
market is like bidding on items at an auction.
The Balance Sheet:

Explanation: The balance sheet is like a financial snapshot showing what a company
owns (assets) and owes (liabilities) at a specific time.
Imagine This: It's like a list of all your possessions (like a bike) and what you
owe (like a borrowed book) at the end of the day.
Net Working Capital:

Explanation: Net working capital is like the money a company has left after paying
its short-term bills.
Imagine This: It's similar to the money you have in your wallet after paying for
small expenses like snacks.
Debt versus Equity:

Explanation: Debt is like a loan a company owes, and equity is like ownership in
the company.
Imagine This: Debt is like borrowing money, and equity is like having a share in a
pizza—your ownership slice.
Value versus Cost:

Explanation: Value is what something is worth, while cost is what was spent to get
it.
Imagine This: Your phone's value might be high because it's useful, but its cost
was what you paid to buy it.
Generally Accepted Accounting Principles (GAAP):

Explanation: GAAP are like rules that companies follow to report their financial
information consistently.
Imagine This: It's akin to everyone playing by the same set of rules in a game, so
scores can be compared fairly.

Average vs. Marginal Tax Rates:

Explanation: Average tax rate is like the overall percentage of your income you pay
in taxes, while marginal tax rate is the tax on the next dollar you earn.
Imagine This: Average tax rate is like the average speed of your whole journey, and
marginal tax rate is the speed you're going right now.
Flat Tax Rate:

Explanation: A flat tax rate is like everyone paying the same percentage of their
income in taxes, regardless of how much they earn.
Imagine This: It's like everyone getting the same slice of pizza, no matter how big
or small their appetite.
Depreciation as a Tax Shield:

Explanation: Depreciation is like a tax break. It lets companies deduct the cost of
their assets over time, reducing the amount they're taxed on.
Imagine This: It's like getting a discount on your taxes because your phone or
computer loses value over the years.
Financial Cash Flow:

Explanation: Financial cash flow is like the money coming in and going out of a
company related to its financing activities.
Imagine This: It's similar to a company figuring out how much money it's getting
from loans and how much it's paying back.
Cash Flow from Assets:

Explanation: Cash flow from assets is like the overall money a company makes or
spends in its regular operations and investments.
Imagine This: It's like tracking all the cash coming in and going out, whether from
selling products or buying new equipment.
Operating Cash Flow:
Explanation: Operating cash flow is like the money a company makes or spends in its
day-to-day business activities.
Imagine This: It's similar to counting the cash a lemonade stand makes from selling
drinks and subtracting the costs of lemons and cups.
Capital Spending:

Explanation: Capital spending is like the money a company invests in long-term

assets, such as equipment or buildings.
Imagine This: It's like using money to buy things that will help the business for a
long time, like a pizza oven for a pizza shop.
Cash Flow to Creditors and Cash Flow to Stockholders:

Explanation: These are like the portions of the company's cash flow that go to
paying back loans (creditors) or rewarding shareholders (stockholders).
Imagine This: It's similar to paying back a friend you borrowed money from
(creditor) or sharing profits with your business partners (stockholders).
Common Size Statements:

Explanation: Common size statements are like financial reports that show each item
as a percentage of a base number, making it easier to compare.
Imagine This: It's like looking at a pizza menu where each topping is shown as a
percentage of the total pizza.
Standardized Financial Statements:

Explanation: Standardized financial statements are like reports presented in a

consistent format, making it easier to understand and compare between companies.
Imagine This: It's like comparing the scores of different games when the rules and
scoring system are the same.
Current Ratio:

Explanation: The current ratio is like a quick measure of a company's ability to

pay its short-term debts.
Imagine This: It's similar to checking if you have enough cash in your wallet to
cover your immediate expenses.

Current Events:

Explanation: Current events are like the latest happenings or news in the world,
which might impact businesses or financial markets.
Imagine This: It's similar to talking about what's going on in the neighborhood or
your favorite game.
Interest Coverage Ratio:

Explanation: The interest coverage ratio is like checking if a company is making

enough money to easily pay its interest on loans.
Imagine This: It's similar to making sure you have enough allowance to pay back the
money you borrowed from a friend without any trouble.
Cash Coverage Ratio:

Explanation: The cash coverage ratio is like looking at whether a company has
enough cash to cover its interest payments.
Imagine This: It's akin to making sure you have actual cash in your pocket to cover
what you owe, not just promises to pay.
Inventory Turnover Ratio:

Explanation: Inventory turnover ratio is like seeing how quickly a store sells its
products.
Imagine This: It's like checking how fast a lemonade stand sells all its cups of
lemonade.
Days’ Sales in Inventory:

Explanation: Days' sales in inventory is like figuring out how many days it takes
for a company to sell its entire inventory.
Imagine This: It's similar to counting how many days it takes for a store to sell
all its toys.
Receivables Turnover:

Explanation: Receivables turnover is like looking at how fast a company gets paid
by its customers.
Imagine This: It's akin to checking how quickly your friends pay you back when you
lend them some money.
Capital Intensity Ratio:

Explanation: Capital intensity ratio is like measuring how much investment in

assets a company needs to generate sales.
Imagine This: It's similar to comparing how much money a lemonade stand invested in
its equipment compared to the money it makes from selling lemonade.
Profitability Measures:

Explanation: Profitability measures are like gauging how well a company is making
money.
Imagine This: It's like checking if the lemonade stand is making a good profit
after considering all the costs.
Profit Margin:

Explanation: Profit margin is like finding out the percentage of profit a company
makes from its sales.
Imagine This: It's similar to figuring out the percentage of profit you make from
selling each cup of lemonade.
Return on Assets (ROA):

Explanation: ROA is like seeing how much profit a company makes for every dollar of
assets it has.
Imagine This: It's akin to checking how efficiently a lemonade stand is using its
lemon squeezer to make money.
Return on Equity (ROE):

Explanation: ROE is like measuring how much profit a company generates based on the
money invested by its owners.
Imagine This: It's similar to seeing how much return you get from the money you
invested in a lemonade stand.
Book Value per Share:

Explanation: Book value per share is like finding out the value of each share in a
company based on its accounting records.
Imagine This: It's akin to figuring out the value of each slice in a pizza based on
the total ingredients used.
Market-to-Book Ratio:

Explanation: Market-to-Book ratio is like comparing the market value of a company's

shares to its book value.
Imagine This: It's similar to checking if people are willing to pay more for a
slice of pizza than what it cost to make it.
Dividend Payout:

Explanation: Dividend payout is like the percentage of a company's earnings paid

out to shareholders as dividends.
Imagine This: It's akin to deciding how much of the lemonade stand's profit you
want to share with your friends who helped you.
Retention Ratio:

Explanation: Retention ratio is like the portion of a company's earnings that it

keeps (retains) rather than distributing as dividends.
Imagine This: It's similar to deciding how much of the lemonade stand's profit you
want to keep to buy more lemons for the next day.
Internal Growth Rate:

Explanation: Internal growth rate is like figuring out how fast a company can grow
using its own resources without borrowing or issuing new stock.
Imagine This: It's akin to understanding how much the lemonade stand can grow
without getting more help or supplies.

Sustainable Growth Rate:

Explanation: Sustainable growth rate is like understanding how fast a company can
grow over the long term without straining its resources.
Imagine This: It's akin to figuring out how much a lemonade stand can expand
without running out of lemons, cups, or helpers.
Determinants of Growth:

Explanation: Determinants of growth are like the factors that influence how much a
company can grow, such as its profitability and ability to reinvest earnings.
Imagine This: It's similar to thinking about what things help or limit a lemonade
stand's growth, like the quality of its lemonade recipe or the availability of
customers.
Total Assets Turnover:

Explanation: Total assets turnover is like measuring how efficiently a company uses
its assets to generate sales.
Imagine This: It's akin to checking how well a lemonade stand uses its lemon
squeezer and cups to sell as much lemonade as possible.
Financial Policy:

Explanation: Financial policy is like deciding how a company manages its money,
including how much to borrow and how to use its profits.
Imagine This: It's similar to a lemonade stand deciding if it wants to save all its
money for future expansions or borrow to grow faster.
Dividend Policy:

Explanation: Dividend policy is like deciding how much of a company's earnings to

share with its shareholders as dividends.
Imagine This: It's akin to deciding how much of the lemonade stand's profit you
want to give to your friends who helped you.
Internal Uses:

Explanation: Internal uses are like how a company uses its funds for things like
buying equipment or paying off debts.
Imagine This: It's similar to a lemonade stand deciding if it wants to use its
money to buy a new juicer or pay back the friend it borrowed lemons from.
External Uses:

Explanation: External uses are like how a company might raise money from external
sources, such as borrowing or issuing stock.
Imagine This: It's akin to a lemonade stand getting more lemons from a neighbor
(external source) instead of using only its own lemons.
Time-Trend Analysis:
Explanation: Time-trend analysis is like looking at how things change over time to
identify patterns or trends.
Imagine This: It's similar to checking if the number of customers at the lemonade
stand increases or decreases over different days.
Peer Group Analysis:

Explanation: Peer group analysis is like comparing a company's performance with

similar companies in the same industry.
Imagine This: It's akin to the lemonade stand checking how well it's doing compared
to other lemonade stands in the neighborhood.
Time Value of Money:

Explanation: Time value of money is like understanding that a dollar today is worth
more than a dollar in the future due to its earning potential.
Imagine This: It's similar to realizing that getting paid for your lemonade today
is better than getting paid the same amount next week.
Simple Interest vs. Compound Interest:

Explanation: Simple interest is like earning interest only on the original amount,
while compound interest is like earning interest on both the original amount and
the accumulated interest.
Imagine This: It's akin to deciding if you want interest on your lemonade money
only once or if you want interest on the interest you've already earned.
Future Value:

Explanation: Future value is like calculating the value of an investment at a

future date, considering interest or growth.
Imagine This: It's similar to figuring out how much money your lemonade stand will
have in a month if it keeps growing.
Future Value for a Lump Sum:

Explanation: Future value for a lump sum is like finding out how much a single
investment will be worth in the future with interest.
Imagine This: It's akin to calculating how many lemons your lemonade stand will
have in a week if you plant a whole tree today.
Present Value:

Explanation: Present value is like determining the current value of future cash
flows, considering the time value of money.
Imagine This: It's similar to figuring out how much money you need today to buy the
lemons you plan to use in your lemonade stand next month.
Annuities and Perpetuities:

Explanation: Annuities are like a series of equal payments over time, and
perpetuities are like a never-ending series of equal payments.
Imagine This: Annuities are akin to paying a friend the same amount every month,
and perpetuities are like paying your friend forever.

Present Value for Annuity Cash Flows:

Explanation: Present value for annuity cash flows is like figuring out the current
value of a series of equal payments to be received or paid in the future.
Imagine This: It's similar to calculating how much money you need today to cover
your monthly allowance for the next year.
Annuities Due:

Explanation: Annuities due are like annuities, but the payments are made at the
beginning of each period instead of the end.
Imagine This: It's akin to receiving your monthly allowance at the beginning of the
month instead of the end.
Annual Percentage Rates (APR):

Explanation: APR is like the total cost of borrowing money for a year, including
interest and fees.
Imagine This: It's similar to knowing the total cost of using a friend's money for
a year, considering any extra payment you agreed upon.
Loans:

Explanation: Loans are like borrowing money with an agreement to pay it back over
time, often with interest.
Imagine This: It's akin to asking a friend for money and promising to pay them back
in installments.
Interest-Only Loans:

Explanation: Interest-only loans are like repaying only the interest for a certain
period, without reducing the loan amount.
Imagine This: It's similar to paying your friend only the interest they earned on
the money they lent you, without repaying the principal amount.
Amortized Loans:

Explanation: Amortized loans are like repaying both the principal and interest over
time through regular installments.
Imagine This: It's akin to paying back your friend a little of the borrowed money
and some interest every month until the entire amount is repaid.
Bond Values and Yields:

Explanation: Bond values are like the price of a bond, and yields are like the
return an investor gets from holding a bond.
Imagine This: It's similar to understanding the cost and benefits of buying a
special ticket for a concert (bond) that promises future payments.
Valuing a Bond: A Discount Bond:

Explanation: A discount bond is like a bond that is sold for less than its face
value.
Imagine This: It's akin to buying a concert ticket at a discounted price because
it's for a show happening later.
Valuing a Bond: A Premium Bond:

Explanation: A premium bond is like a bond that is sold for more than its face
value.
Imagine This: It's similar to buying a concert ticket at a higher price because
it's for a very popular show.
Semiannual Coupons:

Explanation: Semiannual coupons are like interest payments on a bond that occur
every six months.
Imagine This: It's akin to receiving part of the concert ticket benefits every
half-year instead of just once a year.
Interest Rate Risk:

Explanation: Interest rate risk is like the possibility that changes in interest
rates can affect the value of bonds.
Imagine This: It's similar to how the popularity of concerts (interest rates) can
impact the value of your special concert ticket (bond).