Summary Introduction to Finance

Chapter 1
Introduction to Finance
Road Map

Part A Introduction to finance.

• Financial decisions and financial markets.
• Present value.

Part B Valuation of assets, given discount rates.

Part C Determination of risk-adjusted discount rates.

Part D Introduction to derivatives.




Main Issues
• What Is Finance

• Valuation of Assets
– Opportunity Cost of Capital
– Present Value (PV)

• Role of Financial Markets

• Objectives of Financial Manager

,Chapter 1 Introduction to Finance 1-1


1 What is Finance?

• Finance is about the bottom line of business activities.

• Every business is a process of acquiring and disposing assets:

– Real assets (tangible and intangible).
– Financial assets.

• Two objectives of business:

– Grow wealth.
– Use wealth (assets) to best meet economic needs.

• Financially, a business decision reduces to valuation of assets.

• Valuation is the central issue of finance.




Fall 2006 
c J. Wang 15.401 Lecture Notes

, 1-2 Introduction to Finance Chapter 1


Questions we would like to answer in this course:


1. How financial markets determine asset prices?


2. How corporations make financial decisions?

• Investments:
- What projects to invest in?

• Financing:
- How to finance a project?

• Payout:
- What to pay back to shareholders?

• Risk management:
- What risk to take or to avoid and how?




15.401 Lecture Notes 
c J. Wang Fall 2006