FIN 3400 — Finance for Non-Financial Managers · MDC Kendall · Fall 2026
Module 1 — Exam: Sept 27 (250 pts)
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What Is Finance?
Finance is the study of applying specific value to things we own, services we use, and decisions we make. It's not just about money — it's about quantifying tradeoffs so we can make better choices.
Corporate Finance Focus
Financial management concentrates on valuing things from the perspective of a company or firm. Every business decision — launching a product, hiring staff, buying equipment — has a financial dimension that determines whether it creates or destroys value.
Three Forces That Shape Every Financial Decision
Size of cash flows — How much money will this decision generate or cost?
Timing of cash flows — When does the money arrive or leave? A dollar today is worth more than a dollar tomorrow.
Risk — What's the probability that actual outcomes differ from expectations?
These three factors — size, timing, and risk — are the lens through which every financial decision in this course will be evaluated. Master them, and you can evaluate any business opportunity.
Discussion starter: Would you rather have $100 today or $100 in one year? The answer is always "today." But why? Because you could invest that $100 and have more than $100 in a year. That gap — the time value of money — is the foundation of all finance.
How Money Moves Through the Economy
Think of the economy as a circular flow of capital. Money doesn't sit still — it moves from those who have surplus to those who can use it productively, then returns with growth.
Four Types of Economic Participants
Type
Has Capital?
Has Business Ideas?
Role in Financial Markets
Type 1
No
No
Indirect — provides labor, consumes products
Type 2
Yes
No
Lends capital through markets/institutions
Type 3
No
Yes
Borrows capital to fund business ideas
Type 4
Yes
Yes
Self-funded — no need for external markets
Most economic activity happens between Types 2 and 3: individual investors (Type 2) lend their surplus capital to entrepreneurs and firms (Type 3) who have viable business ideas but need funding. Financial markets and institutions facilitate this exchange.
Where Does the Cash Go?
Investors lend capital → firms fund expansion projects → successful projects generate revenue → revenue flows back to investors as profit. But not all cash returns — there's friction:
Retained earnings — firms keep some profit for reinvestment
Taxes — government takes a cut of profits
Interest — paid to debt holders before equity holders
Failed projects — not every investment succeeds
Where each dollar of firm revenue ultimately goes
The Four Pillars of Finance
Finance as a discipline breaks down into four major subareas. Each one is a potential career path — and all four are interconnected.
1. Investments
Methods and techniques for deciding what securities to buy. This is the investor's side: Which stocks? Which bonds? How do you build a portfolio that balances risk and return? Investment professionals work at mutual funds, hedge funds, pension funds, and as individual advisors.
2. Financial Management (Corporate Finance)
How a firm acquires and uses cash from investors or retained earnings. This is our focus in FIN 3400. Decisions include: How to organize the firm to attract capital, how to raise it (debt vs equity), what projects to invest in, how much cash to keep on hand, and how to return profits to shareholders.
3. Financial Markets & Institutions
The infrastructure that channels capital between investors and firms. Banks, stock exchanges, insurance companies, mutual funds — they all serve as intermediaries, each adding value through specialization (e.g., risk pooling, liquidity, information processing).
4. International Finance
Applying finance theory across borders. Decisions get complicated by exchange rate uncertainty, political risk, and differing regulatory environments. A US firm investing in Europe must consider currency risk, local labor laws, and tax treaties — factors absent from purely domestic decisions.
Why this matters for non-finance majors: Every manager — operations, marketing, HR — makes decisions with financial consequences. A marketing campaign is an investment with expected returns. A production line upgrade is a capital budgeting decision. Hiring is an investment in human capital. Finance gives you the tools to evaluate whether those decisions create value.
Applying Finance Theory in Practice
Real Assets vs Financial Assets
Real assets are physical property — machinery, equipment, real estate, gold. Financial assets are claims on real assets — stocks, bonds, derivatives. Firms are more likely to find "bargains" in real asset markets than investors are to find underpriced stocks, because real asset markets are less efficient and less closely watched.
Risk and Return
Every financial decision involves comparing expected rewards against potential risks. Risk is the potential for a negative impact on value or cash flows. The key question: Is the expected return sufficient to justify the risk taken?
The Time Value of Money (TVM)
TVM is the principle that a dollar today is worth more than a dollar in the future because of its earning capacity. This is the most important concept in finance — Chapters 4 and 5 are dedicated to it. Every valuation method we'll study (bonds, stocks, projects) builds on TVM.
Remember: The price of any financial asset (stock, bond, project) should depend on the cash flows you expect to receive from it, adjusted for timing and risk. If you internalize this, you understand the core of all valuation.
Finance vs. Accounting
Accounting (Past)
Records what happened — transactions, revenues, expenses
Focuses on accuracy, compliance, GAAP rules
Produces financial statements (balance sheet, income statement, cash flow statement)
Answers: "What did we earn? What do we own? What do we owe?"
Finance (Future)
Decides what should happen next — investments, financing, dividends
Focuses on value creation, risk management, optimal timing
Uses accounting data as input for decision-making
Answers: "What should we invest in? How should we fund it? What's it worth?"
Analogy: Accounting is the rearview mirror — it shows where you've been. Finance is the windshield — it shows where you're going. You need both to drive safely, but you can't drive forward looking only in the rearview mirror.
The Financial Manager: The CFO
The Chief Financial Officer (CFO) is the firm's highest-level financial manager, reporting directly to the CEO. The CFO oversees two critical functions:
Controller (Accounting)
Manages the accounting function
Ensures financial statements are accurate and GAAP-compliant
Oversees tax filing and regulatory reporting
Manages internal controls and audits
Treasurer (Finance)
Manages cash and credit
Issues and repurchases financial securities (debt, equity)
Makes capital investment decisions
Manages relationships with banks and investors
Finance in Other Business Functions
Finance isn't just the CFO's job — it permeates the entire organization:
Operations managers decide how much overtime labor to use and perform cost/benefit analysis on new production methods
Marketing managers assess the cost-effectiveness of ad campaigns and customer surveys
HR managers evaluate the cost of various employee benefit packages and compensation structures
IT managers justify technology investments by comparing costs against productivity gains
Finance in Your Personal Life
The same principles that govern corporate finance apply to your personal decisions:
Borrowing — Should you take out a loan to buy a car? Refinance your mortgage at a lower rate?
Saving — How much should you save for retirement? What accounts should you use?
Investing — How should you allocate your 401(k)? Should you buy individual stocks or index funds?
Debt management — Should you pay off student loans early or invest that money instead?
Why this matters now: Most companies have shifted from defined benefit plans (pensions, where the company manages your retirement) to defined contribution plans (401(k)s, IRAs, where YOU manage your retirement). This means financial literacy isn't optional anymore — your retirement depends on it. The decisions you make in your 20s and 30s compound dramatically by your 60s.
Forms of Business Organization
The way a business is legally structured affects control, liability, taxation, and the ability to raise capital. Number of owners is the key classifier.
Sole Proprietorship
Owned by a single individual; the most common business form in the US
Advantages: Easy to start, minimal regulation, complete owner control
Disadvantages: Unlimited personal liability (your personal assets are at risk), hard to raise capital, business dies with owner
General Partnership
Multiple owners; each partner can own a different percentage
Profits split according to a prearranged agreement
Advantages: More capital than sole prop, shared expertise
Disadvantages: Unlimited personal liability for all general partners — one partner's debts can seize another's personal assets
Public Corporation
A legally independent entity, separate from its owners (shareholders)
Holds rights of a person: can own property, sign contracts, pay taxes, be sued
Advantages: Limited liability (owners can only lose their investment), easy to raise large amounts of capital, transferable shares, perpetual life
Disadvantages: Double taxation (corporate profits taxed, then dividends taxed again), more regulation and disclosure, separation of ownership and control
Hybrid Organizations (LLC, S-Corp, LLP, LP)
Combine single taxation (pass-through) with limited liability
S-Corporations, LLCs, LLPs, and Limited Partnerships
US government restricts hybrid status to relatively small firms to promote small business growth
Best of both worlds for most small-to-medium businesses
Business forms compared across five key dimensions
Think about it: If you started a consulting business tomorrow, which form would you choose? Most choose an LLC — liability protection without double taxation. But if you plan to go public (IPO), you'll eventually need C-Corp status for share transferability and capital access.
What Should a Firm Maximize?
The Shareholder Wealth Maximization Principle
The accepted primary goal in finance is to maximize shareholder wealth — measured by the current stock price. But why stock price and not just "profit"?
Why Not "Maximize Profit"?
Timing: Profit doesn't distinguish between $1M earned today vs. $1M earned in 10 years. Stock price does — it's the present value of ALL future cash flows.
Risk: Profit doesn't account for the uncertainty of achieving those earnings. Stock price reflects risk through the discount rate investors apply.
Cash flow vs. accounting profit: Profit includes non-cash items (depreciation, accruals). Stock price is driven by actual cash flows.
Stock price = the market's real-time, collective assessment of future cash flows, their timing, and their risk. It's the most comprehensive single measure of firm value.
The Stakeholder Perspective
An alternative view argues managers should maximize the satisfaction of all stakeholders — not just shareholders, but also customers, employees, suppliers, and local communities. This is the ESG (Environmental, Social, Governance) debate.
Friedman doctrine: "The social responsibility of business is to increase profits." Modern view: ESG factors can affect long-term value (climate risk, labor relations, governance failures), so the two perspectives are converging. Shareholder wealth is still the scorecard, but stakeholder concerns are increasingly built into the valuation.
The Agency Problem
In a corporation, owners (shareholders) hire managers to run the company. But managers are human — they may pursue their own interests: perks, job security, empire-building, excessive compensation. This divergence is the agency problem.
Definition
The agency problem refers to the difficulties that arise when a principal (shareholder) hires an agent (manager) and cannot perfectly monitor the agent's actions. The agent's interests may not align with the principal's.
Three Approaches to Managing the Conflict
Ignore it — Research suggests allowing managers some perks (nice office, corporate jet) may actually enhance owner value by boosting productivity and reducing burnout
Monitor — Use internal and external monitors (board, auditors, analysts, SEC) to watch management actions and catch problems early
Align incentives — Make managers into owners through stock options, performance bonuses, and equity grants. When managers own shares, their interests naturally converge with shareholders'
Classic case study: Enron (2001). Managers enriched themselves through accounting fraud while shareholders lost everything. The monitors — board, auditors (Arthur Andersen), analysts — were all compromised or negligent. This catastrophe led directly to the Sarbanes-Oxley Act of 2002, which strengthened corporate governance requirements.
Corporate Governance: Monitors & Incentives
Corporate governance is the system of laws, policies, incentives, and monitors designed to handle the separation of ownership and control. It's how we ensure managers act in shareholders' interests.
Inside Monitors
Board of Directors — elected by shareholders; hires/fires CEO, sets compensation, approves major strategy, reviews performance
Investment banks — help firms access capital markets; provide advisory services
Recent failures: Wells Fargo (fake accounts, 2016), Theranos (fraud, 2018), FTX (collapse, 2022). In each case, ask: Which monitors failed? Why? What governance changes could have prevented it?
The Role of Ethics in Finance
Financial professionals commonly manage other people's money, creating a fiduciary relationship — a legal and ethical obligation to act in the client's best interest.
Examples of Fiduciary Relationships
Corporate managers control shareholders' firm
Bank employees manage depositors' money
Investment advisors manage clients' portfolios
Pension fund managers manage workers' retirement savings
Ethical dilemmas arise from the agency relationship: when someone controls assets that belong to someone else, temptation exists. Ethics isn't just about legality — it's about trust. Financial markets depend on trust to function. When trust erodes (2008 financial crisis, FTX collapse), the entire system suffers.
Why financial institutions earn "impressive profits": If markets are competitive, how do investment banks earn billions? Because their services require unique expertise and specialized assets — risk assessment, information networks, regulatory knowledge, deal-making relationships. These are hard to replicate, creating sustainable competitive advantages.
The Tax Environment & Big Picture
Tax Cuts and Jobs Act (TCJA) of 2017
The TCJA dramatically reshaped the tax landscape for both individuals and corporations:
Flat 21% corporate tax rate (down from graduated 15%-35%)
Income tax brackets broadened (lower rates applied to more income)
Standard deductions increased significantly
Personal exemption amount temporarily reduced to $0
Child tax credit increased to $2,000 per child
What Happens If TCJA Expires?
If the TCJA provisions are allowed to expire, tax rates revert upward → less free cash for consumers → less savings from investors → higher corporate tax burden → reduced business investment. This is a major policy debate.
Inflation surge — highest in 40 years; Federal Reserve raised interest rates aggressively in response
Preview for this course: Why do taxes matter for valuation? Interest payments are tax-deductible (reduce taxable income), but dividend payments are NOT. This creates a structural bias toward debt financing. We'll explore this in Chapter 11 (WACC) and Chapter 16 (Capital Structure). Remember: the tax shield of debt is a central concept.
Key Takeaways
Finance = valuing cash flows across size, timing, and risk
The economy is a circular flow of capital between savers (Type 2) and entrepreneurs (Type 3)
Four pillars: Investments, Financial Management, Markets & Institutions, International Finance
Next up: Chapter 2 — Reviewing Financial Statements. We'll learn the language of business: the balance sheet, income statement, and cash flow statement. These are the accounting outputs that finance uses as inputs for every decision.
Further Learning Resources
Explore these to deepen your understanding of this chapter's topics: