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EFB210 (11)
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Lecture

Topic 1 - 5 Theory.docx

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Department
Business
Course
EFB210
Professor
J.H.
Semester
Spring

Description
Topic 1 Theory 1) Time value money – a dollar today worth more than a dollar in the future. Because once the dollar is mine, can invest in asset which gives max wealth increase – max wealth asset gives you the best return – best return is the most cost effective alternative – time delay in receiving dollar is equal to a lost opportunity to get the best return – best return can be quantified, allowing for TVM, risk & inflation 2) arbitrage – 2 assets with the same risk which produce the same cash flows should have the same value – financial markets are highly competitive – if 2 assets with same cash flows are valued differently, then an opportunity to profit at zero risk would arise – trading on this type of opportunity is arbitrage – after that will bring asset values to balance 3) diversification – reduces risk without decreasing returns 4) investment, finance the investment, dividends 5) financial manager – maximise the current value per share of existing shareholders; increase value of firm through the effective & efficient utilization of funds which comes from investment, financing & giving dividends 6) corporate finance – understanding optimally approach to addressing investment, finance & dividend decisions 7) elements are assumptions, deductive logic, conclusions 8) assumptions are reduce interaction of variables, makes model more manageable 9) financial system: consists of individuals, companies, markets & governments that are involved in the process of exchanging financial assets 10) financial markets: arrangement whereby participants buy and sell; ways to classify financial markets (listing, product, issue, maturity) 11) financial intermediaries: bring together those with an excess supply of financial capital & those demanding capital 12) short term: overdraft, short term loans, bills, notes, letter of credit, eurocurreny funding 13) long-term: debentures, notes, mortgages, leasing, shares (ordinary/preferences) 14) public vs private issue 15) private issue – rights issue (to existing shareholders, has rights to buy a specified num of shares at a specified price, within a specified time, may have the ability to sell), private placement (to selected investors that have the financial ability), bonus issue 16) types of controls – direct controls via capital adequacy (basel accord); open market transactions (buy & sell); control over financial institution (disclosure); control over overseas finance (FIRB) 17) regulators: RBA (monetary policies, financial system & currency issue); ASIC (financial system & its entities); APRA (financial services industry); ACCC (compliance with Commonwealth’s competition, fair trading & consumer protection laws); ASX Topic 2
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