Part 1 Finance and the financial system
Chapter 1 Finance
1.1
1. Define finance
1. Finance
Finance is the general term for currency circulation, credit activities and related economic behaviors.
In short, it is the financing of monetary funds . Generally refers to currency circulation and credit adjustment activities centered on banks and securities markets, including currency issuance and circulation, deposit absorption and withdrawal, loan issuance and recovery, domestic foreign exchange transactions, securities issuance and circulation, insurance, trusts, mortgages, pawns, and various financial derivative transactions.
Finance can be divided into direct finance and indirect finance according to whether financial intermediaries act as a medium for fund transfer .
2. Finance
Finance is the study of how people allocate scarce resources across time .
Two features that distinguish financial decisions from other resource allocation decisions are:
①The costs and benefits of financial decisions are apportioned across periods; ②The costs and benefits of financial decisions are usually not known in advance, either by the decision maker or by others.
Finance is an economic discipline that mainly studies the theory of currency field, the allocation and selection of currency resources, the relationship between currency and economy and the impact of currency on economy, the theory of modern banking system and business activities. It is a relatively independent and extremely important branch of contemporary economics.
Finance covers a wealth of content, such as monetary principles, monetary credit and interest principles, financial markets and banking systems, savings and investment, insurance, trust, securities trading, monetary theory, monetary policy, exchange rates, and international finance.
3. Financial system
The financial system is the collection of financial markets and financial institutions that are used to enter into financial contracts and exchange assets and risks.
The financial system is an organism composed of a series of financial intermediaries and financial markets connecting those with surplus funds and those with capital deficits, including markets for stocks, bonds, and other financial instruments, financial intermediaries (such as banks and insurance companies), financial service companies (such as financial consulting companies), and regulatory agencies that monitor and manage all these units.
Studying how the financial system develops and evolves is an important aspect of the discipline of finance.
4. Financial theory
Financial theory consists of a series of concepts and quantitative models.
Concepts help people think about how resources are allocated over time; quantitative models are used to evaluate alternatives, make decisions, and execute decisions.
Decisions at all levels use the same basic concepts and quantitative models.
2. Financial decision-making of households
Households deal with four basic financial decisions :
(1) Consumption and savings decisions
(2) Investment decision
(3) Financing decision
(4) Risk management decisions
The financial decisions of the business
The branch of finance that studies the financial decisions of businesses is known as corporate finance or corporate finance .
Financial capital refers to stocks, bonds, and loans used to finance the acquisition of physical capital.
There are four main areas of financial decision-making in a business :
(1) Strategic plan.
(2) Capital budgeting.
(3) Capital structure decision.
(4) Working capital management.
4. The form of business organization
There are three basic forms of business organization: sole proprietorship, partnership, and corporation .
The basic characteristics of a sole proprietorship are:
① Sole proprietorship is the lowest cost form of business organization, does not require formal articles of association , and in most industries, there are very few government regulations that need to be met.
②The sole proprietorship does not need to pay corporate income tax , and all profits of the enterprise are taxed according to the provisions of the Personal Income Tax Law .
③ The owner of a sole proprietorship has unlimited liability for the debts of the business , and there is no difference between personal assets and business assets.
④ The duration of a sole proprietorship is subject to the lifetime of the owner .
⑤Because the investment in a sole proprietorship belongs to the owner's personal money, the equity capital raised by an individual owner is limited to the owner's own wealth .
There are two types of partnerships: general partnerships and limited partnerships .
In a general partnership enterprise , all partners assume unlimited joint and several liability for the debts of the enterprise with all their property , and share the profits or bear losses of the enterprise according to the statutory or agreed ratio.
The distribution method of the profits, losses or debts of the partnership among the partners is generally reflected in the partnership agreement, which can be an oral agreement or a written agreement.
A limited partnership allows the liability of certain partners to be limited to the amount of the individual's capital contribution in the partnership. That is, at least one partner has unlimited liability and the other partners have limited liability . A limited partnership usually requires at least one person to be a general partner, and the limited partners do not participate in the management of the business.
Typical forms are limited liability companies and companies limited by shares.
The basic connotations of the company include:
① In terms of legal status, the company is an enterprise legal person , enjoying all the legal person property rights formed by shareholders' investment, enjoying civil rights in accordance with the law, independently bearing civil responsibilities, operating independently according to market demand with all its legal person property, and being responsible for its own profits and losses.
② In terms of legal liability, shareholders and companies have different responsibilities. Shareholders are liable to the company within the limit of their capital contributions or shares they hold, and the company is liable for the company's debts with all its assets .
③ In the internal management system, the company implements the corporate governance structure . The corporate governance structure refers to the company's internal organizational management system composed of shareholders' meeting (or general meeting of shareholders), board of directors, managers and board of supervisors.
5. Separation of ownership and management
1. Reasons for separation of ownership and property rights
There are mainly the following five points:
①Professional managers may have a higher ability to run the company. ② In order to obtain efficiency
in terms of enterprise scale , it is necessary to gather the resources of many investors . ③In an uncertain economic environment, the owner hopes to diversify risks by investing in multiple enterprises . Without the separation of management rights and ownership, it is difficult to achieve efficient diversified investment. ④ Reduce the cost of obtaining information . Managers and business owners can focus on what they need to know, not on everything else. ⑤The "learning curve" or "focus" effect makes the separation structure more appropriate. "Learning curve" or "attention" effect: Assuming that the owner wishes to sell all or part of its technology now or later, if the owner is also a manager, in order to manage effectively, the new owner must learn about the business from the old owner. However, if the owner is not the manager, the managers stay on and work for the new owner when the business is sold.
2. Impact of Separation of Ownership and Management
① Positive impact: The company form is very suitable for the structure of separation of owners and managers, because this can make the ownership change more frequently without affecting the operation of the enterprise.
② Negative effects: The separated structure creates conflicts of interests between owners and managers , that is, the principal-agent problem. Due to the asymmetry of information and the defects of the corresponding incentive mechanism, in the case of the separation of the two rights, there is inevitably an agency cost : on the one hand, managers may suffer losses in the interests of shareholders in pursuit of self-interest, that is, "residual rights loss"; on the other hand, shareholders have to spend corresponding time and resources in order to supervise and motivate management more effectively .
6. Management objectives
The goal of management : to maximize the wealth of shareholders
The principle of shareholder wealth maximization depends on the firm's production technology, market interest rate, market risk premium, and security price, independent of the owner's risk aversion attitude and wealth, and can be made without any specific information about the owner.
The principle of shareholder wealth maximization : the "proper" principle that managers should follow in the process of running a business.
7. Market regulation: acquisition
The threat of takeovers and the resulting replacement of managers incentivizes managers to work in the interest of shareholders by increasing market value
8. The role of financial experts in the company
The CFO is responsible for all of the company's finance functions and is a senior vice president who reports directly to the CEO.
The chief financial officer has three departments reporting to him: planning, treasury, and audit , each headed by a vice president.
(1) The vice president of financial planning is responsible for analyzing major capital expenditures, such as proposals to enter new industries or exit existing industries. This work includes analysis of proposed mergers, acquisitions and divestments.
(2) The financial manager is responsible for managing the financial activities of the company and is also responsible for the management of working capital . A financial manager's job includes handling relationships with external stakeholders, managing the company's cash position and interest rate risk, and managing the tax department.
(3) The audit manager oversees the company's accounting and auditing activities , which include the preparation of internal reports that compare the planned and actual costs, revenues, and profits of the company's various business units, as well as the preparation of financial statements for use by shareholders, creditors, and regulators.