musings of a budding social entrepeneur

Friday, September 04, 2009

Finance Basics

Managerial Finance Chapters 1,2,3
Financial management at the highest level is all about making good finance related decisions.
It can be broken down to two main types of decisions:
- Investment decisions: what projects to spend money on. what capital investments to allocate funds to and how much to invest in each project.
- Financing decisions: how to raise capital for that a company needs for its investments. There are two ways to finance, via equity or debt.  In equity financing the company asks investors to put up cash for future profits. In debt financing the company gets a loan. The choice between this two is called the "capital structure" decision.

Def: Cost of capital -  minimum acceptable rate of return on capital investment.  The rates of return on investments outside the corp set the minimum return for investment projects inside. [If you get a higher return on the outside, why invest inside?] The cost of capital for corp investment is set by the rates of return on investment opps in financial markets. That is why financial managers talk about the 'opportunity cost' of capital.  When shareholders invest in the corp, they lose the opportunity to invest that case in financial markets where returns could be better.

Important distinction for Financial Reports.
They show book value of assets, not real market value. Book value is original cost - depreciation.



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