1 Finance School of Management FINANCE Zvi Bodie Robert C. Merton

1

FinanceFinance School of Management School of Management

FINANCEFINANCE

Zvi Bodie

Robert C. Merton

2


About the instructors About the TA About the course About the requirements

– 20% assignment & class performance– 15% mid-term test– 65% final test

About the book and authors

3

UESTCUESTC四川省精品课程

金融学基础课程概况

课程性质：学科基础课学时与学分： 64 学时， 4 学分上课时间：周二、周四上午 3-4 节作业要求：个人作业（英文）与小组作业

4


金融学基础考核方式

期末考试（ 65% ）

一页纸开卷

期中考试（ 15% ）

一页纸开卷课堂表现习题完成及答疑情况小组作业情况课程讲座表现出勤表现

平时成绩（ 20% ）

5


金融学基础教材与作者

Zvi Bodie

Robert C. Merton

6


Chapter 1: Chapter 1: What is Finance? What is Finance?

Objective• To Define Finance

• The Value of Finance

• Introduction to

the Players

7


Chapter 1 ContentsChapter 1 Contents

Defining Finance Why Study Finance Household Finance Financial Decisions-Firms Forms of Business

Organization Separation of Ownership

and Management

The Goal of management Market Discipline-

Takeovers Role of the Financial

Specialists in a Corporation

8


Defining FinanceDefining Finance

What do you know about ‘Finance’?

?

9


Finance, as a scientific discipline, is the study of how to allocate scarce resources over time under conditions of uncertainty.

Present

Future

Future

Defining FinanceDefining Finance

10


Analytical “Pillars” to FinanceAnalytical “Pillars” to Finance

Optimization over time Asset valuation Risk management

11


Finance TheoryFinance Theory

consists of – a set of concepts that help to organize one’s

thinking about how to allocate resources over time,

– a set of quantitative models to help one evaluate alternatives, make decisions, and implement them.

12


Financial SystemFinancial System

The financial system is defined as the set of markets and other institutions used for financial contracting and the exchange of assets and risks.

The ultimate function of the system is to satisfy people’s consumption preferences.

13


Why Study Finance?Why Study Finance?

14



15



16



To manage your personal resources To deal with the world of business To pursue interesting and rewarding career

opportunities To make informed public choices as a citizen To expand your mind

17


Harry M. Markowitz (1927~)

Awarded to the 1990 Nobel Prize

Main Contribution:– The father of modern

portfolio theory

18


William F. Sharpe (1934~)


Main Contribution:– Developing the Capital

Asset Pricing Model (CAPM) theory

19


Merton H. Miller (1923~2000)


Main Contribution: – The M&M

(Modigliani-Miller) Theorem

20


Robert C. Merton (1944~)


Main Contribution:– The pricing of options

and other derivatives

21


Myron S. Scholes (1941~)


Main Contribution:– The pricing of options

and other derivatives

22


Financial Decisions of HouseholdsFinancial Decisions of Households

Consumption and saving decisions Investment decisions Financing decisions Risk-management decisions

23


Assets Personal investing & Asset allocation Liability, Debt Net Worth = Assets – Liabilities Consumption preferences, exogenous

and endogenous elements

Important TermsImportant Terms

24


Financial Decisions of FirmsFinancial Decisions of Firms

Strategic planning & Capital budget decisions– What businesses to be in

– Identifying ideas for new investment projects

– Evaluating the projects, and deciding which ones to undertake

– Implementing them, a plan for acquiring assets and for training the personnel

25


Financial Decisions of FirmsFinancial Decisions of Firms Financing (Capital structure) decision

– A feasible financing plan

– The decisions about how much debt and equity to have

– Wide range of financial instruments and claims

– A corporation’s capital structure determines who gets what shares of its cash flows, and partially determines who gets to control the company.

Working capital management decision– The day-to-day prosaic financial affairs of the business.

26


Dividend decision– How much cash to distribute to shareholders

Risk-management Decision– How and on what terms should the firm seek to

reduce the financial uncertainties it faces?

Financial Decisions of FirmsFinancial Decisions of Firms

27


Forms of Business OrganizationForms of Business Organization

A sole proprietorship （个体业主制）（个体业主制）– unlimited liability

A partnership （合伙制）（合伙制）– unlimited liability

– general partner & limited partner

A corporation （现代公司制）（现代公司制）– a legal entity distinct from its owners

– ownership, board of directors and limited liability

– public corporations & private corporations

28


Quick CheckQuick Check

Is a corporation owned by a single person a sole proprietorship? Why?

In a corporation the liability of the single shareholder would be limited to the assets of the corporation.

29


Separation of Ownership and ManagementSeparation of Ownership and Management

The owners of a firm delegate the responsibility of running the business to professional managers who may not own any shares.

Why? What? How?

30


Reasons for Separation of Ownership and Reasons for Separation of Ownership and ManagementManagement

The owner need not have both the talents of a manager and the financial resources.

The need to pool resources to achieve an efficient scale of production.

The need of owners to diversify their risk in an uncertain economic environment.

Allowing for savings in the costs of information gathering.

The “learning curve” or “going concern” effect favors the separated structure.

31


Separation of Ownership and ManagementSeparation of Ownership and Management

The corporate form is especially well suited to the separation of owners and managers because it allows relatively frequent changes in owners by share transfer without affecting the operations of the firm.

32


Conflicts of InterestConflicts of Interest The separated structure creates the potential for a

conflict of interest between the owners and the managers.

An agency problem exists where the principal has to entrust their interests to an agent who acts on their behalf.

Contractual arrangements, incentive schemes, and monitoring are used to control principal‒agency conflicts.

The social cost for resolving the conflict.

33


The Goal of ManagementThe Goal of Management

The difficulties of the goal of corporate management to serve the best interests of the shareholders.

To be feasible and effective, the right rule for the goal of management should be independent of who the owners are.

34


Shareholder-Shareholder-Wealth-Maximization RuleWealth-Maximization Rule

An illustration: the decision between a risky investment and a safe one

The role of well-functioning capital markets The rule depends only upon

– the firm’s production technology– market interest rates– market risk premiums– security prices

The rule does not depend upon the risk aversion or wealth of the owners.

35


Ambiguities of Profit-Maximization RuleAmbiguities of Profit-Maximization Rule Multi-periodic profits Uncertain future revenues or expenses An illustration

– Each of project A, B, and C require an initial outlay of $1 million.

– Project A will return $1.05 million one year from now and then over.

– Project B will last for two years, return nothing in the first year, and then $1.1 million two years from now.

– Project C will either pay $1.2 million or $0.9 million one year from now and then over.

36


A Well-Functioning Stock MarketA Well-Functioning Stock Market

Implementation of the management goal and market-price information

The existence of an efficient stock market allows the manager to substitute one set of external information which is relatively easy to obtain‒ namely stock prices‒for another set which is virtually impossible to obtain‒information about the shareholders’ wealth, preferences, and other investment opportunities.

37


Market Discipline: TakeoversMarket Discipline: Takeovers

The value of voting rights as a means of enforcement The mechanism of takeover （接管） for aligning

the incentives of managers with those of shareholders– The threat of a takeover and the subsequent

replacement of management provides a strong incentive for current managers (acting in their self-interest) to act in the interests of the firm’s current shareholders by maximizing market value.

38


The Roles of Corporate Financial The Roles of Corporate Financial SpecialistsSpecialists

Financial executive‒a person with authority in the following functions:

VP Operations

Treasurer VP Financial Planning Controller

Chief Financial Officer VP Marketing

Chief Executive Officer

Board of Directors

39


Role of the Financial ManagerRole of the Financial Manager

Financial

managerFirm's

operations

Financial

markets

(1) Cash raised from investors

(1)

40


Financial

managerFirm's

operations

Financial

markets


(2) Cash invested in firm

(1)(2)


41


Financial

managerFirm's

operations

Financial

markets



(3) Cash generated by operations

(1)(2)

(3)


42


Financial

managerFirm's

operations

Financial

markets




(4a) Cash reinvested

(1)(2)

(3)

(4a)


43


Financial

managerFirm's

operations

Financial

markets




(4a) Cash reinvested (4b) Cash returned to investors

(1)(2)

(3)

(4a)

(4b)

Tax paid to Government

(5)

(5) Tax leakage


44


Financial Functions in a CorporationFinancial Functions in a Corporation

Planning Provision of Capital Administration of Funds Accounting and Control Protection of Assets Tax Administration Investor Relations Evaluation and Consulting Management Information Systems

45


Assignments

1, 3, 4, 6, 7 Team Work: 8

Documents

1 Finance School of Management FINANCE Zvi Bodie Robert C. Merton