Day 6 – Finance (BUS-600)

1. Finance is the quantitative description on the business operation in terms of money. It uses the numbers from accounting and QA chapters to provide financial analysis to guide two major business actions: buying and selling.
2. Investment decision relies on the accurate assessment for the risk and return.  The risks ca nbe evaluated with technical term and parameters such as BETA, the efficient frontier, and the Capital Asset Pricing Model etc.
3. Beta is a measure of risk inherent in a security or a portfolio of securities as it reacts to general market movements.  The efficient frontier is a graph that depict the highest portfolio returns for a give risk level.  In the capital asset pricing model we have K_e=R_f+(K_m-R_f)Beta
4. The efficient market hypothesis assumes that the market can reflect all the current market information in varying degree.  In such a market no one can take advantages of market aberrations to “best the market”. The efficiency of the market can be categorized into three levels: weak, semi-strong, and strong efficiency. 
5.   There are various types of investments such as bonds, stocks and options. Bond is evaluated with interest rate (coupon rate), Maturity cycle, and the risk of default of the issuer.  Company ‘s stock is evaluated with many parameters, such as dividend growth model, price-Earnings ratio, multiple of book value per share, price to sale ratio, asset value per share, and multiple of cash flow per share. Option valuation is determined by five factors: (i) Time until expiration; (ii) the difference between the current stock price and the strike price; (iii) the price volatility of the stock; (iv) the market rate of interest on short-term government securities; and (v) dividend payments on the stock.
6. Financial management performs two major functions: business investment decisions and financial decisions. The investment decisions can be categorized into three areas: (i) accept or reject a single investment proposal; (ii) choose one competing investment over another; and (iii) capital rationing.  The financial management decisions are usually made with payback period method and net present value method.  Companies are usually financed in the following five basic ways: (i) receive credit from suppliers; (ii) obtain lease financing; (iii) obtain bank loans; (iv) issue bonds; and (v) issue stocks.
7. Mergers and acquisitions is one of the most exciting areas of finance. The purposes of the merger and acquisition are (a) diversify the company; (b) improve sales and earnings; (c) purchase an undervalued company; and (d) lower operation cost. The acquisitions also have four different types: friendly acquisition, hostile takeover, nasty purchasing, and leveraged buyout.
8. The valuation process for merger and acquisition normally go through following five steps: (i) Analyze operating activities; (ii) Analyze the investments necessary to replace and to buy new property, plant and equipment; (iii) Determine the working capital requirements of the business; (iv) project the annual operating cash flows and terminal value of the firm; (v) calculate the NPV of those cash flows to evaluate the firm’s value.