Basic Principles of Finance

In: Business and Management

Submitted By thomasqueen
Words 1067
Pages 5
Understanding Financial Concepts – Assignment I
1. Explain why market prices are useful to a financial manager
Managers are interested in market prices for reasons better explain by market of economic theory. The classic market of economic theory is a call auction market where all market participants meet in one place at one time to arrive at a market clearing price through open outcry of bids and offers. In agricultural societies, these markets were often held annually, at harvest time, but the development of futures contracts has spread commodities trading over the year. Financial markets have traditionally been open each business day. As volume in many markets has grown, efficient continuous markets - some operating on a twenty-four-hour basis - have become the norm in currencies and in a few widely held securities.
In general, market forces have dealt effectively with the reallocation of price and rate risk and have provided liquidity through securitization and the allocation of capital to market making. Market forces have not yet dealt adequately with the risk of market discontinuities.
2. Discuss how the Valuation Principle helps a financial manager make decisions.
The concept of value is at the heart of financial management, yet the introductory case demonstrates that valuation of companies is by no means an exact science. Inability to make precisely accurate valuations complicates the task of financial managers.
The financial manager controls capital flows into, within and out of the enterprise attempting to achieve maximum value for shareholders. The test of his effectiveness is the extent to which these operations enhance shareholder wealth. He needs a thorough understanding of the determinants of value to anticipate the consequences of alternative financial decisions. If there is an active and efficient market in the company’s shares, it should…...

Similar Documents

Basic Finance

...Basic Finance The main purpose of studying finance is to gain an understanding of the financial performance of a company, corporation or industry. By looking at a company's financial performance, decisions can be made about many things by many different players. Corporations are rated by different agencies that examine financial records and potential for growth. Fitch ratings are a good example of this. My employer has an A++ Fitch rating. This high rating allows a non-profit company to borrow money at lower interest rates. In a publicly held company, which is one that has shareholders, the main concern is to keep the shareholders happy. Shareholders infuse corporations they believe in (usually based on financial performance) with capital. When a company is considered a poor financial risk, the public will not be in a hurry to buy its stock. So who is affected by finance? Shareholders, as mentioned previously, are the focus in publicly traded companies. They are not the only people who think about financials, however. The CEO, CFO and any other "C" position have accountability to report to the board about the financial performance of the company. Management is responsible for creating and maintaining both capital and operational budgets. Employees are required to maintain certain standards of productivity. Customers are affected by finances as well. Consider gas prices, and how increased costs in production are passed on to the consumer. When looking at a company's......

Words: 858 - Pages: 4

Basic Principles of Finance

...Basic Principles of Finance ------------------------------------------------- 10 Principles of Financial Management PRINCIPLE 1: The risk-return trade off – Investors won’t take additional risk unless they expect to be compensated with additional return. PRINCIPLE 2: Time Value of Money – A dollar received today is worth more than a dollar received a year from now. Because we can earn interest on money received today, it is better to receive money earlier rather than later. PRINCIPLE 3: CASH, not profits is KING – It is cash flows not profits that are actually received by the firm and can be reinvested. PRINCIPLE 4: Incremental Cash Flows – It's only what changes that counts. The incremental cash flow is the difference between the cash flows if the project is taken on versus what they will be if the project is not taken on. PRINCIPLE 5: The Curse of Competitive Markets – This is why it's hard to find exceptionally profitable projects. In competitive markets, extremely large profits cannot exist for very long because of competition moving in to exploit those large profits. As a result, profitable projects can only be found if the market is made less competitive, either through product differentiation or by achieving a cost advantage. PRINCIPLE 6: Efficient Capital Markets – The markets are quick and the prices are right. An efficient market is characterized by a large number of profit-driven individuals who act independently. PRINCIPLE 7: The Agency...

Words: 322 - Pages: 2

Basic Principles of Finance

...http://byy69.com/essay-on/Basic-Principles-Of-Finance/33518 PRINCIPLE 1: The risk-return trade off – Investors won’t take additional risk unless they expect to be compensated with additional return. PRINCIPLE 2: Time Value of Money – A dollar received today is worth more than a dollar received a year from now. Because we can earn interest on money received today, it is better to receive money earlier rather than later. PRINCIPLE 3: CASH, not profits is KING – It is cash flows not profits that are actually received by the firm and can be reinvested. PRINCIPLE 4: Incremental Cash Flows – It's only what changes that counts. The incremental cash flow is the difference between the cash flows if the project is taken on versus what they will be if the project is not taken on. PRINCIPLE 5: The Curse of Competitive Markets – This is why it's hard to find exceptionally profitable projects. In competitive markets, extremely large profits cannot exist for very long because of competition moving in to exploit those large profits. As a result, profitable projects can only be found if the market is made less competitive, either through product differentiation or by achieving a cost advantage. PRINCIPLE 6: Efficient Capital Markets – The markets are quick and the prices are right. An efficient market is characterized by a large number of profit-driven individuals who act independently. PRINCIPLE 7: The Agency Problem – A problem resulting from......

Words: 317 - Pages: 2

Basic Principles of the Tort of Negligence

... Basic principles of the Tort of Negligence 1. What are the differences between Contract and Tort? 1) Requirement for the contact: offer acceptance and consideration between the parties to form a legally binding agreement. (whereas in tort, there is no agreement between the parties) The parties are known to each other, and they are consensus parties. The compensation for breach of contract is to put the eviction in a position as if the obligations were fulfilled. 2) Tort is a wrongful act or omission for which damages can be obtained in a civil court by the person wronged. Wrongful act or omission which caused personal injury or property damage. The wrongful act or omission can be intentional or negligent. There is no agreement between the parties for an action in tort. 2. What are the 3 elements for a negligent action? 1) The defendant owes a duty of care to the plaintiff. Means-a person has a legal obligation to take care when he can foresee a loss occurring if he acts carelessly. The duty of care is owed to one’s neighbour (neighbour principle in Donohue --v- Stevenson case) – ie those person that are or should be in the contemplation of the defendant as likely to be affected by the defendant’s act or omissions. 2) The defendant was in breach of the duty of care. In determining whether the defendant has breached the duty of care, there are 2 stage processes, ie: a. The court has to establish the standard of care......

Words: 568 - Pages: 3

Finance Principles

...are reported solely for account purpose include, accrued liabilities, accrued income taxes, long term debt and deferred income taxes and many more. Accumulated other comprehensive income is like accumulated depreciation. It's an accounting convention so there is no cash exchanged. Transactions that could lead to AOCI can go into the cash flow statement, such as the purchase of marketable securities. Those items can eventually be sold and then go to the cash flow statement. Unearned compensation on restricted stock represents the cost yet to be preformed and is reported on Wal-Mart’s balance sheet under stockholders equity as a loss for 2012. Wal-Mart annual report was very easy to understand and provided the details on following the principles and standards under GAAP....

Words: 276 - Pages: 2

The Basic Tools of Finance

...27 THE BASIC TOOLS OF FINANCE WHAT’S NEW IN THE SIXTH EDITION: There are two new In the News boxes on “A Cartoonist’s Guide to Stock Picking” and “Is the Efficient Markets Hypothesis Kaput?” LEARNING OBJECTIVES: By the end of this chapter, students should understand: the relationship between present value and future value. the effects of compound growth. how risk-averse people reduce the risk they face. how asset prices are determined. CONTEXT AND PURPOSE: Chapter 27 is the third chapter in a four-chapter sequence on the level and growth of output in the long run. In Chapter 25, we discuss how capital and labor are among the primary determinants of output and growth. In Chapter 26, we addressed how saving and investment in capital goods affect the production of output. In Chapter 28, we will show some of the tools people and firms use when choosing capital projects in which to invest. Because both capital and labor are among the primary determinants of output, Chapter 28 will address the market for labor. The purpose of Chapter 27 is to introduce the students to some tools that people use when they participate in financial markets. We will show how people compare different sums of money at different points in time, how they manage risk, and how these concepts combine to help determine the value of a financial asset, such as a share of stock. KEY POINTS:  Because savings can earn interest, a sum of money today is more valuable than the same sum of......

Words: 4409 - Pages: 18

Principles of Finance

...fiscal 2012 quarter (Citi Trends, 2012). They benefited a pretax gain of $1.5 million and it had a positive impact on loss per diluted share of $0.06 for the fiscal 2013 year. For the first three quarters, they decreased from 2.9% to $465.0 million in comparison with $479.0 million in the same period in 2012. The comparable stores saw sales decrease of 1.0% of weeks basis with a net loss of $0.07 per diluted share ($1.0 million) in the first three quarters compared to $0.10 per diluted share ($1.5 million) in last year’s first three quarters (Citi Trends, 2012). Reference: Citi Trends (2012) retrieved from http://www.cititrends.com/about_us.html Citi Trend Inc. (2014) retrieved from http://www.reuters.com/finance/stocks/companyOfficers?symbol=CTRN.OQ#top...

Words: 726 - Pages: 3

Basic Finance

...Finance has a close relationship to a number of other business disciplines. It is important that we understand why a finance major needs these other skills and abilities.  Let's take them one at a time: 1. Economics provides the theory that finance uses.  The field of finance is a very new discipline, beginning formally around 1920.  Before that, financial problems were referred to as "economic problems" or (even earlier) "problems in political economy."  During the 1920s, finance broke away from economics and became a discipline of its own.   Think of finance today as being applied economics.  In other words, economics provides the theory; finance takes that theory and applies it to real world situations. 2. Accounting is sometimes called "the language of business" and it is certainly true that it is a language that finance practitioners need to be familiar with.  Finance majors work with numbers generated by the accounting profession:  income statements, balance sheets, cash flow statements, etc.  Although  finance practitioners don't need to know the intricate details of how these numbers were determined, they do need to know enough accounting to properly use these numbers in an analysis of financial problems. 3. Management provides the communication and organizational skills that all finance personnel need.   Finance practitioners spend most of their day interacting with other people, so the ability to work effectively with others is crucial. 4.......

Words: 2026 - Pages: 9

Basic Principles of Finance

...------------------------------------------------- 10 Principles of Financial Management PRINCIPLE 1: The risk-return trade off – Investors won’t take additional risk unless they expect to be compensated with additional return. PRINCIPLE 2: Time Value of Money – A dollar received today is worth more than a dollar received a year from now. Because we can earn interest on money received today, it is better to receive money earlier rather than later. PRINCIPLE 3: CASH, not profits is KING – It is cash flows not profits that are actually received by the firm and can be reinvested. PRINCIPLE 4: Incremental Cash Flows – It's only what changes that counts. The incremental cash flow is the difference between the cash flows if the project is taken on versus what they will be if the project is not taken on. PRINCIPLE 5: The Curse of Competitive Markets – This is why it's hard to find exceptionally profitable projects. In competitive markets, extremely large profits cannot exist for very long because of competition moving in to exploit those large profits. As a result, profitable projects can only be found if the market is made less competitive, either through product differentiation or by achieving a cost advantage. PRINCIPLE 6: Efficient Capital Markets – The markets are quick and the prices are right. An efficient market is characterized by a large number of profit-driven individuals who act independently. PRINCIPLE 7: The Agency Problem – A problem......

Words: 420 - Pages: 2

Basic Finance

...main purpose of studying finance is to gain an understanding of the financial performance of a company, corporation or industry. By looking at a company's financial performance, decisions can be made about many things by many different players. Corporations are rated by different agencies that examine financial records and potential for growth. Fitch ratings are a good example of this. My employer has an A++ Fitch rating. This high rating allows a non-profit company to borrow money at lower interest rates. In a publicly held company, which is one that has shareholders, the main concern is to keep the shareholders happy. Shareholders infuse corporations they believe in (usually based on financial performance) with capital. When a company is considered a poor financial risk, the public will not be in a hurry to buy its stock. So who is affected by finance? Shareholders, as mentioned previously, are the focus in publicly traded companies. They are not the only people who think about financials, however. The CEO, CFO and any other "C" position have accountability to report to the board about the financial performance of the company. Management is responsible for creating and maintaining both capital and operational budgets. Employees are required to maintain certain standards of productivity. Customers are affected by finances as well. Consider gas prices, and how increased costs in production are passed on to the consumer. When looking at a company's finances, there are......

Words: 856 - Pages: 4

Principle of Finance

... Principles of Managerial Finance The Prentice Hall Series in Finance Adelman/Marks Entrepreneurial Finance Andersen Global Derivatives: A Strategic Risk Management Perspective Bekaert/Hodrick International Financial Management Berk/DeMarzo Corporate Finance* Berk/DeMarzo Corporate Finance: The Core* Berk/DeMarzo/Harford Fundamentals of Corporate Finance* Boakes Reading and Understanding the Financial Times Brooks Financial Management: Core Concepts* Copeland/Weston/Shastri Financial Theory and Corporate Policy Dorfman/Cather Introduction to Risk Management and Insurance Eiteman/Stonehill/Moffett Multinational Business Finance Fabozzi Bond Markets: Analysis and Strategies Fabozzi/Modigliani Capital Markets: Institutions and Instruments Fabozzi/Modigliani/Jones/Ferri Foundations of Financial Markets and Institutions Finkler Financial Management for Public, Health, and Not-for-Profit Organizations Frasca Personal Finance Gitman/Joehnk/Smart Fundamentals of Investing* Gitman/Zutter Principles of Managerial Finance* * denotes Gitman/Zutter Principles of Managerial Finance— Brief Edition* Goldsmith Consumer Economics: Issues and Behaviors Haugen The Inefficient Stock Market: What Pays Off and Why Haugen The New Finance: Overreaction, Complexity, and Uniqueness Holden Excel Modeling and Estimation in Corporate Finance Holden Excel Modeling and Estimation in Investments Hughes/MacDonald International......

Words: 4858 - Pages: 20

Basic Principles of Finance

...10 Principles of Financial Management PRINCIPLE 1: The risk-return trade off – Investors won’t take additional risk unless they expect to be compensated with additional return. PRINCIPLE 2: Time Value of Money – A dollar received today is worth more than a dollar received a year from now. Because we can earn interest on money received today, it is better to receive money earlier rather than later. PRINCIPLE 3: CASH, not profits is KING – It is cash flows not profits that are actually received by the firm and can be reinvested. PRINCIPLE 4: Incremental Cash Flows – It's only what changes that counts. The incremental cash flow is the difference between the cash flows if the project is taken on versus what they will be if the project is not taken on. PRINCIPLE 5: The Curse of Competitive Markets – This is why it's hard to find exceptionally profitable projects. In competitive markets, extremely large profits cannot exist for very long because of competition moving in to exploit those large profits. As a result, profitable projects can only be found if the market is made less competitive, either through product differentiation or by achieving a cost advantage. PRINCIPLE 6: Efficient Capital Markets – The markets are quick and the prices are right. An efficient market is characterized by a large number of profit-driven individuals who act independently. PRINCIPLE 7: The Agency Problem – A problem resulting from conflicts of interest between the......

Words: 318 - Pages: 2

Basic Principles of the Gestalt Psychology

...The Gestalt psychologists maintained that when people perceive sensory elements their tendency is to see things in terms of the entire form or pattern rather than as individual parts. Identify and describe these basic principles of perceptual organization from the Gestalt perspective: figure-ground, similarity, proximity, and closure. Gestalt psychology was based on the study of perception. Gestalt is a term that means whole. Gestalt physiologists argued that we perceive as a meaningful and complex object, not a series of independent parts. In other words, we perceive any stimulus field as a simplified, balanced, and organized whole. For example, in the perception of letters with missing parts consciousness seeks to fill in this gap, and we recognize the whole letter. The wholeness of perception and its orderliness is achieved through the following principles: figure-ground, similarity, proximity, and closure. Figure-ground is a lot illusions are based on this principle. In a picture we can see either faces or a vase, or either a young or old woman. The illusion is based on gestalt when we focus on the figure from the background. The figure is what comes forward and what make sense for us; the background is what we ignore and what does not come to our consciousness. Similarity is people’s visual perception always tends to classify similar objects the same; therefore, objects with similar characteristics whether size, color, shape, or brightness are perceived as...

Words: 415 - Pages: 2

Finance Basic

... Finance The study of money and how it is used. Finance considers the relationship of money to time and risk. One of the main subsets of finance is the study of credit and banking, as this involves money, time, and risk all together. Finance may deal with personal or corporate issues, such as how will an individual or company acquires the money needed to perform a certain act. Debt. A debt is an obligation to repay an amount you owe. Debt securities, such as bonds or commercial paper, are forms of debt that bind the issuer, such as a corporation, bank, or government, to repay the security holder. Debts are also known as liabilities. Bond. Bonds are debt securities issued by corporations and governments. Bonds are, in fact, loans that you and other investors make to the issuers in return for the promise of being paid interest, usually but not always at a fixed rate, over the loan term. The issuer also promises to repay the loan principal at maturity, on time and in full. Because most bonds pay interest on a regular basis, they are also described as fixed-income investments. While the term bond is used generically to describe all debt securities, bonds are specifically long-term investments, with maturities longer than ten years. Security 1. An instrument that, for a stock, shows ownership in a firm; for a bond, indicates a creditor relationship with a firm or with a federal, state, or local government; or signifies other rights to ownership. 2. Collateral used to guarantee......

Words: 1786 - Pages: 8

Basics of Finance

...Ch 1: BASIC CONCEPTS IN FINANCE • Finance is the study of how resources are valued and allocated in time. • Outcomes of financial decisions are spread out over time and not known with certainty in advance • Three key concepts in finance are : Time value of money Asset Valuation (stocks, bonds, derivatives,...) Risk management 1.1: Interest and return • Income almost never matches consumption desires exactly. Either one will need to borrow to purchase more than one can afford or save excess income. • Costs / benefits of financial decisions are spread over time. So one needs to compare values of cashflows which mature at different times. Time value of money: 1ZAR in the hand today is worth more than the expectation of 1ZAR in the future. Why? • Opportunity cost: To give up consumption of your 1ZAR today, you would expect to be rewarded with a greater amount in the future; the promise of consumption at a higher level in the future motivates one to save. The desire to receive surplus on savings leads to an interest rate called the pure time value of money. • Inflation: Prices of goods rarely stay the same over time. The purchasing power of 1ZAR now is (usually) greater than 1ZAR later. Investors expect a higher rate of return to compensate for inflation. • Uncertainty: One may not receive the expected sum - this is referred to as investment or credit risk. • Opportunity cost: Pure time value of money give rise to pure rate of interest. • Inflation: The rate......

Words: 3782 - Pages: 16