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L1V1 - Auto-Get Transcripts from Youtube

welcome and thank you for enrolling in moss 2310 finance the purpose of this video is to introduce the big questions that we ask in this course and to consider a framework that we can use to think about these questions so what is moss 2310 all about and why should a student take it i want to start by acknowledging that i fully understand that a subset of students are enrolled in this course because they want to be enrolled there's certainly a subset of students that are enrolled because they have to be it's a required component of their module but perhaps it wouldn't be their first choice of course to take and there's always a number of students who aren't entirely sure why they're here and what i can tell you now is no matter what category you fall into right now i can promise you there's something for you in this course no matter no no matter what course we're looking at it's always true that there's some things that need to be done so you might say well i'm here to you know read and learn the textbook write some exams get a grade and then get out of here and fine i will say yes it's true we are going to use a textbook here as a roadmap yes you're going to write a couple of exams there's some other stuff that you're going to do for sure but i consider these well first of all

L1V1 - Auto-Get Transcripts from Youtube

boring but also somewhat dismal reasons to take any course and certainly this doesn't answer the fundamental question of what you're trying to learn or achieve in this course so what i'm going to try to convince you of now is that the overarching goal in moss 2310 is to learn to think like a financial manager and notice the word think is in all capitals i truly believe that one of the most important advantages of gaining a university education is to learn to think this is what sets us apart so we're going to be wondering what questions do financial managers have to ask what are their decisions that they have to make and how do they go about making those decisions now why are these useful things to think about well hopefully for anyone who is thinking about actually working in finance or financial analysis the benefits of understanding these ideas will be very very clear as it's directly applicable this is also true for anyone who wants to be a business manager or financial manager or for that matter any sort of entrepreneur okay but the good news is that even though we'll be examining these ideas through the lens of a corporate financial manager you'll find that the concepts learned in this course apply to anyone who will make any sort of financial decision

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and this of course includes all of us we're all faced with decisions throughout our life that will require strategic thinking and this could be anything from whether or not to go to grad school whether to buy or lease a car whether to embark on a job or career change real estate decisions or many other investment i you know problems that will come up so many of the concepts discussed in this course will be directly applicable to any of these types of decisions so we want to develop a framework for thinking like a financial manager and of course financial managers are concerned with all sorts of different questions but in this course we focus on three major questions the first is what long-term investments should a firm take on the second is once we've decided on what assets to invest in we need to know how we're going to pay for those assets so where will we get the long-term financing and thirdly we're worried about how we will manage the everyday financial activities of the firm now the approach in this course is to look at these problems using a balance sheet so for instance with question number one what long-term investment should the firm take on this is really a question about opportunities to add value to the asset side of the balance sheet so if we look at a very simple balance

L1V1 - Auto-Get Transcripts from Youtube

sheet here question number one really focuses on long-term fixed assets and this is so important because the ultimate goal of any firm is to generate some sort of a return on the assets that they've invested in so this is what we call the capital budgeting question and you'll find that we spend a lot of time in this course chapters 5 to 13 in many respects look at various aspects that are associated with this capital budgeting question so really really important of the three questions the second question where will we get the long-term financing to pay for this in these investments so looking again at our balance sheet this is really looking at our debt and equity structure here okay so are we going to just rely on equity to finance our investments or are we going to borrow money and what we'll find is that there's an important risk reward trade-off here so this question number two we call this the capital structure question and in many respects it comes up throughout the course but we really focus in on it in chapters 14 to 17. finally the third question how do we manage the everyday financial activities of the firm we're now really thinking about our short-term assets and liabilities our working capital so question number three is about those remaining components on the balance sheet here so we do call this the

L1V1 - Auto-Get Transcripts from Youtube

working capital management question and we focus in on this question with the remaining last three chapters of the course so now that we know the three main questions that a financial manager is concerned with it's worthwhile to ask who is this financial manager so here is a chart directly from your textbook on page three which shows uh in the organization of a somewhat complicated company and so you might notice here that the top financial manager is probably the vice president of finance or perhaps the chief financial officer cfo but if you look at all the roles that fall below that individual on the right side we have these roles associated with the controller and you notice that many of these tasks involve accounting reporting data processing taxes these are not the main types of things that we think about in this course instead we're going to be thinking about aspects that are associated with the treasurer so if you notice here capital expenditures that that's all about long-term assets purchasing or investing in long-term assets and how we finance them so that's directly related to the capital budgeting question the cash manager and the credit manager they're constantly tasked with thinking about working capital management in financial planning whether it's long term or short term that's looking at all three aspects of

L1V1 - Auto-Get Transcripts from Youtube

the questions that the financial managers concern themselves with so in thinking about who is the financial manager we're really thinking about this left side of the organizational structure here associated with the treasurer so what is the primary goal of the financial manager if you've got any sort of background in economics you might start by saying well financial manager obviously wants to maximize profit that's what any rational firm wants to do i'm an economist economist myself so i love this answer of course but we need to be a little bit careful here so first let's recognize that profit is an accounting construct which is equal to revenue minus expenses which are both also accounting constructs so there's a few issues that we have to concern ourselves in accounting so for instance with revenue we can ask well how is it recorded when is it recorded is it when a product or service is sold or contracted is it when it's delivered what about these expenses are we talking about cash expenses or accounting expenses and there's timing issues there as well there's lots of ways to get slightly creative with our accounting to make revenues and expenses and therefore profits look a certain way profits are also

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very much associated with overall timing issues so if we want to maximize profit are we talking about maximizing profit this month or this year and you might imagine there's things that we can do to boost revenue in the short run or cut costs in the short run that can have an immediate potentially positive impact on our current profit but could have a negative impact on our long-term profitability so profit might not be an ideal ultimate goal what about maximizing growth or maximizing market share so growth is a very important goal for most companies and certainly this is something that we very much care about but focusing on growth alone can also cause problems there's all sorts of examples of companies who've grown too fast and even grown themselves into bankruptcy but to think of a very simple example you can imagine that starbucks could if they wanted to put a coffee store on every single corner or at least major corner of a city and this would be a way to maximize at least revenue and to grow market share if there's a starbucks on every single corner it's likely that more and more people will choose starbucks over competitors like tim hortons or mcdonald's just because of sheer convenience but i don't think any of us would necessarily suggest that this would be a good approach for starbucks to take

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and obviously it could be very problematic for their profitability so growth is a good thing but growth in and of itself is never our primary goal so finally what about risk again risk is an extremely important factor of financial management and one that we very much care about but minimizing risk rarely makes sense we all have to take some level of risk in order to receive associated benefits and this is true of all companies so the easiest way to minimize risk is to take no risk at all in which case you wouldn't be in business at all so the key with risk is to understand and plan for it and to make sure that the firm is adequately compensated for the risk that they expect to take so these are all really important goals but we're going to suggest that they're not the primary goal of a financial manager instead we're going to try to convince you that the primary goal of a financial manager is to maximize value and there's different ways of saying this when we say maximize value we're really talking about maximizing shareholder value if we're talking about a corporation or just generally owner's equity so we can say that we want to maximize shareholder wealth which is the same as saying that we want to maximize share price for a given number of shares or more generally that we just want to maximize the value of the firm now i would love it if you're now asking

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yourself how do we maximize value what does that even mean and to answer that question you're gonna have to stay tuned so we're teasing you a little bit but this is the question that we're really gonna try to unpackage as we continue through the course for now let's try to get an idea of why we think this goal is so important first off it turns out that by thinking about value we're going to be addressing cash flow which is something different than profit in this course we focus on cash flow much more than profit because cash flow is more transparent it's much more difficult to lie with cash flow or be creative with cash flow and we would suggest that most people ultimately are more interested in cash flow than they are anything else so it's really important that you understand this this idea and you'll learn about that and think about that in chapter two in chapter three the second reason is that our value maximization principles will include or address growth so we already said that growth is very important so we're not going to ignore it in fact we want to make sure that we're taking it into account we'll be talking about growth in chapter four really importantly our system for thinking about growth will address the timing of cash flows so timing

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matters we're not just worried about cash coming next month or next year we're looking at a way to consider all cash flows no matter when they're coming in the future and this is something that we really try to develop some fundamental ideas about in chapter five and chapter six finally our method for for thinking about value addresses the risk of cash flows we said before that risk very much matters and you see here that many chapters we look at in this course will talk in some way about risk although we really start to focus on the concept on chapter 12 and chapter 13. so where do we go from here the first couple of weeks of the course we'll look at chapters one to four so that'll give you your introduction a review of financial statements and analysis which are the fundamental language of finance and we'll look at long-term planning and growth starting in chapter five and all the way to 13 we really unpackage this first question of capital budgeting so you'll find that we spend the majority of the course looking at ways to address this particular question we said after that chapter 14 to chapter 17 looks at capital structure and finally we finish off the course of the last three chapters on working capital management so to recap we've considered who the financial manager is what the most important questions a financial

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manager asks and what the primary goal of a financial manager is as you proceed through the course i encourage you to keep these big picture ideas in mind to constantly remind yourself what it is that we're really trying to think and learn about during this semester...