Introduction To Finance
Welcome! Don't worry, there is no shilling, mlm or anything ^^.
All Content is based on my interpretation of Fundamentals of Corporate Finance, 2/e
textbook.
I don't know what exactly we will learn yet (taking this module!), but
I'm sure everyone has pondered about finance in their life at least once. So buckle
up, and lets enjoy learning together!
Read through the lecture and answer walkthrough. Dont memorise. Try to understand, then do the question yourself. I have put in a lot of effort to make this as detailed as possible so hopefully its easy to understand, any suggestions can let me know!
Why study corporate finance?
Say you want to buy hdb rooms and rent/sell them out. There will be some questions you need to ask:
How can I get the money needed to start the business? Do I lend from ahlong, bank or do you want to bring in other investors to pool the money needed?
Should I accept cash or maybe add Stripe for the rent? If you accept cash, you can get the money immediately. If you use Stripe, it will take business days before the money goes to your wallet, but it will make it more convenient for customers.
Is your business sustainable? Will you end up bankrupt from being unable to pay the person renovating the room, etc? Is there enough cash flow?
Financial manager/ agent ideally working in owner interests
Normally, the owner is usually not involved in making business decisions, they hire a financial manager to make decisions for them. We refer to the manager as an agent. The agent is concerned with 3 types of questions:
Capital Budgeting: How should the business invest its money in the long term? The agent decides which projects or assets the business should invest in to generate profits. For example, should the company buy new machinery to produce goods faster, or should it open a new store in a different location?
Capital Budgeting is a core concept of finance from my understanding so far. With that said, here are some more examples!
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Interest rate → what influences the fed’s decision to sway interest rate (dual mandate) → (1) amount of employment and (2) stable prices. Capital budgeting decision → should you hold cash or should you invest??
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presidential debate in the US → significant because last time that happened someone went to jail. This debate might tell you which candidate will become the president. If Harris becomes president at 2025, market may expect that there will be several rate cuts. If donald trump comes in, there may only be one rate cut.
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Apple just released iphone16; but there was little price movement. capital budgeting decision → should you buy an iphone or buy the stock in expectation of a stock appreciation?
All this is speculation. you take corporate finance to learn how to use the numbers to back up your decision making process.
Capital Structure: How to get the money needed for your business? The agent chooses the best mix of debt (like loans) and equity (like selling shares) to fund the business. For instance, should the company take a loan from the bank to expand, or should it raise money by selling some of its shares to investors?
Working Capital Management: How should the business manage its daily operations? The agent ensures the company has enough cash to cover short-term expenses like paying suppliers, employees, and utility bills. An example is deciding whether to keep more money in the bank for emergencies or to use it to buy more inventory to meet customer demand.
Now ideally, the agent would be working in the best interests of the owner - often profit/ stock prices. However, there might be agency problem - where the agent's interest dont align with the owner.
An agent might decide to retain more employees than necessary (maybe friends?) to ensure job security and maintain a good relationship with the workforce, even if it reduces profitability. This decision might conflict with the owner's interest in maximizing profits by reducing costs.
To prevent agency problem:
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Aligning Interests: Ensure managerial interests align with those of owners through performance-based incentives like bonuses, stock options, or profit-sharing.
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Firm Control: Implement mechanisms allowing shareholders to remove directors who are not acting in the best interest of the owners, ensuring accountability and alignment with shareholder goals.
What type of business should I be?
| Business Type | Advantages | Disadvantages |
|---|---|---|
| Sole Proprietorship | Easiest to start, Least regulated, Single owner keeps all the profits, Taxed once as personal income | Limited to life of owner, Equity capital limited to owner's personal wealth, Unlimited liability, Difficult to sell ownership interest |
| Partnership | Two or more owners, More capital available, Relatively easy to start, Income taxed once as personal income | Unlimited liability (General partnership, Limited partnership), Partnership dissolves when one partner dies or wishes to sell, Difficult to transfer ownership |
| Corporation | Limited liability, Unlimited life, Separation of ownership and management, Transfer of ownership is easy, Easier to raise capital | Double taxation (income taxed at the corporate rate and then dividends taxed at the personal rate) |
I think maybe proprietorship/ partnership would be great for just starting out, since you keep more profit and less barrier to entry. When you want to sell the company or prevent your main business from being impacted by a risky venture, maybe try corporation?
The financial market has two types of markets:
Primary Market: Original sale of securities. For example, government selling off bonds. This is where new securities are first issued and sold to investors.
Secondary Market: Further exchange of securities after their initial issuance. Examples include: - Stockholder-to-stockholder transactions - Trading at stock exchanges The main function of the secondary market is to provide a means of transferring ownership of securities.