Finance 370: Week 1 – Introduction to Financial Management

Week 1 of Finance 370 typically lays the foundational groundwork for understanding the core principles and concepts of financial management. It serves as an introduction to the field, setting the stage for more in-depth exploration of topics throughout the course.

Core Concepts Covered

The primary focus of the first week often revolves around defining financial management itself. It establishes the differences between accounting and finance, highlighting finance’s forward-looking nature and its emphasis on decision-making to maximize shareholder wealth. A key concept introduced is often the goal of the firm, generally understood to be maximizing shareholder wealth or firm value. This concept is crucial as it provides a guiding principle for all financial decisions.

Related to the goal of the firm, the concept of agency problems is frequently discussed. This arises from the separation of ownership (shareholders) and control (management) within a corporation. Week 1 explores the potential conflicts of interest that can arise and mechanisms, such as corporate governance structures and executive compensation packages, designed to mitigate these issues.

The week also typically introduces the basic principles of finance. These might include:

• Time Value of Money: The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This concept underpins many financial decisions, including investment analysis and capital budgeting.
• Risk and Return: A fundamental principle stating that higher potential returns are associated with higher levels of risk. Understanding the relationship between risk and return is critical for making informed investment choices.
• Market Efficiency: The degree to which prices reflect available information. Different levels of market efficiency (weak, semi-strong, and strong) impact investment strategies.

Financial Statements Overview

A review of the key financial statements – the balance sheet, the income statement, and the statement of cash flows – is often included. While a detailed analysis typically comes later in the course, Week 1 emphasizes the purpose and structure of each statement and how they relate to each other. Students learn to identify the key components of each statement and understand how they provide insights into a company’s financial health and performance.

The Financial Environment

An introduction to the broader financial environment is generally provided. This includes discussions of:

• Financial Markets: The forums where securities are traded. Understanding the difference between primary and secondary markets, as well as money and capital markets, is essential.
• Financial Institutions: The intermediaries that connect savers and borrowers. This might include banks, investment firms, and insurance companies.

Ethical Considerations

Finally, the importance of ethical behavior in finance is often emphasized. Maintaining integrity and adhering to ethical standards is crucial for building trust and ensuring the long-term stability of the financial system. Discussions might include examples of unethical behavior and the consequences of such actions.

Overall, Week 1 of Finance 370 serves as a critical foundation, providing students with the essential vocabulary and concepts needed to succeed in the course and ultimately in their careers in finance.