Topic 01 Principles in Finance and Valuation
Topic 1: Principles in Finance and Valuation
Learning Outcomes what is finance? principles in finance application: valuation
Topic 1: Principles in Finance and Valuation
M K Lai
Page 2
What is Finance?
N = the date when you are called to answer to God face-to-face
now
1
N-1
2
N
N-1
… initial wealth
income
income
income income income
consumption consumption consumption consumption consumption consumption How to allocate your initial wealth and future income to consumption over time?
Topic 1: Principles in Finance and Valuation
M K Lai
Page 3
What is Finance? the allocation of total wealth (initial wealth plus present value of future income, measured through cash flows) over time under uncertainty tradeoff between current consumption and future consumption borrowing (liabilities) vs. lending (assets) assets: investment, uses of funds, future benefits liabilities: financing, sources of funds, future obligations equity: source of funds, residual claim
Topic 1: Principles in Finance and Valuation
M K Lai
Page 4
Financial Statements financial statements must be prepared by a company in accordance with the accounting standards set by professional accounting bodies/regulators, e.g. Hong Kong Institute of
Certified Public Accountants (HKICPA), Financial
Accounting Standards Board in US provide the primary source of information to finance practitioners a company must provide the audited financial statements through an annual report to the shareholders according to the Companies
Ordinance
see a company’s Annual Report for illustration
Topic 1: Principles in Finance and Valuation
M K Lai
Page 5
Statement of Financial Position statement of financial position (balance sheet): a snapshot of a company’s assets, liabilities and equity at the financial year end, i.e. financial position assets (uses of funds) = liabilities + equity
(sources of funds) (accounting equation) net assets = net worth = equity = total assets – total liabilities
Topic 1:
Learning Outcomes what is finance? principles in finance application: valuation
Topic 1: Principles in Finance and Valuation
M K Lai
Page 2
What is Finance?
N = the date when you are called to answer to God face-to-face
now
1
N-1
2
N
N-1
… initial wealth
income
income
income income income
consumption consumption consumption consumption consumption consumption How to allocate your initial wealth and future income to consumption over time?
Topic 1: Principles in Finance and Valuation
M K Lai
Page 3
What is Finance? the allocation of total wealth (initial wealth plus present value of future income, measured through cash flows) over time under uncertainty tradeoff between current consumption and future consumption borrowing (liabilities) vs. lending (assets) assets: investment, uses of funds, future benefits liabilities: financing, sources of funds, future obligations equity: source of funds, residual claim
Topic 1: Principles in Finance and Valuation
M K Lai
Page 4
Financial Statements financial statements must be prepared by a company in accordance with the accounting standards set by professional accounting bodies/regulators, e.g. Hong Kong Institute of
Certified Public Accountants (HKICPA), Financial
Accounting Standards Board in US provide the primary source of information to finance practitioners a company must provide the audited financial statements through an annual report to the shareholders according to the Companies
Ordinance
see a company’s Annual Report for illustration
Topic 1: Principles in Finance and Valuation
M K Lai
Page 5
Statement of Financial Position statement of financial position (balance sheet): a snapshot of a company’s assets, liabilities and equity at the financial year end, i.e. financial position assets (uses of funds) = liabilities + equity
(sources of funds) (accounting equation) net assets = net worth = equity = total assets – total liabilities
Topic 1: