Day 6- Finance - The Ten Day MBA

Finance plays a much of a role in marketing as marketing does in finance.

A basic tenet of finance dictates that the return should be commensurate with the risk- low risk, low return. For example, I am conservative; I invest on CDs (certificates of deposit) which are insured by FDIC so I only expect low rates of return.

In making any investment, you are exposed to the systematic risk of the market – movements in the economy, interest rates, and inflation.

By holding a broad portfolio of investments, investors can offset losses on some investments with gains on others. Diversification moderates the overall fluctuations of a portfolio. That is why the audiences to Mad Money always ask Cremer if they are diversified.

NPV methods- the same method used for valuing the cash flows of bonds and stocks is also used to value projects. It is the most accurate and most theoretically correct method.

NPV=Cash to be received x (1+discounted rate) ^{–Number of Periods}

Projects that have NPVs of $0 are also acceptable because they return the required rate. Those below zero are flatly rejected.

PI (profitability index) =NPV of Future Cash Flows/Initial Investment

5 basic ways of financing a company’s needs:

1.      Receive credit from suppliers – the easiest way

2.      Obtain lease financing: operating lease (short term, 2 years’ car leases) & capital lease (LT, bargain purchase like $1, leased assets and financing liability are recorded as though a purchase.)

3.      Obtain bank loans

4.      Issue bonds: fixed interest rate contractual payment & a principal maturity; the after-tax cost of borrowing = borrowing rate x (1- Tax rate) means interest payment for borrowing is tax-deductible, dividends to shareholders are not.

5.      Issue stocks: non-contractual, non-tax deductible dividend payments. The new shares dilute the interest of existing shareholders.

NASDAQ=National Association of Securities Dealers Automated Quotations System

OTC=over the counter: not listed on an exchange but is publicly traded

Privately held: shares are not publicly traded, the company is said to be privately held.

Mergers and Acquisitions (M&A):

The legitimate financial reasons for M&A

- diversify the company: lower risk

- improve sales and earnings: P&G bought Noxell, Hawaiian Punch, etc.

- purchase an undervalued company:

-lower operating costs: CALfee bought the next door ice cream so one mgr will work.