Chapter One

FISCAL AND MONETARY POLICY

Finance grew out of
economics and
accounting.

EUGENE BRIGHAM
& JOEL HOUSTON
 What is Finance

Business activities that aim

to create value to firm, maximize
limited resources and manage
risks for greater return.

Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

 What is Finance

Economic Perspective:
Asset is based on the future cash flows the asset
will provide

Accounting Perspective:
Asset refers to resources owned, managed and
controlled by an enterprise

Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

 Nature of Finance

Three Areas:
 Financial Management
 Capital Market
 Investments

Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

 Nature of Finance

 Financial Management
(Corporate Finance)
Focuses on decisions relating to how much and
what types of assets to acquire, how to raise the
capital needed and how to maximize its value

Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

 Nature of Finance

 Capital Market
Refers to markets where interest rates, along with
stock and bond prices, are determined.
Banks, investment banks, stockholders, mutual
funds, insurance companies and the like bring
together ‘savers’ who have money to invest and
businesses that need capital for various purposes.

Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

 Nature of Finance

 Investments
Relates to decisions concerning stocks and
bonds and include a number of activities:
1. Security analysis (finding proper values of
individual securities)
2. Portfolio theory (best way to structure
portfolios or “baskets” of stocks and bonds)

Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

 Nature of Finance

 Investments
3. Market analysis (deals with the issue of
whether stock and bond markets at any
given time are “too high”, “too low”, or
“about right”

Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

Importance of Finance

Collaborative
Learning

Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

Thank you.

Copyright© 2006 South-Western/Thomson Learning. All rights reserved.