Principles of Financial Management

In: Business and Management

Submitted By emz18
Words 398
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* Risk-Return Tradeoff * Save and invest for future consumption * Investments should provide appropriate compensation for forgone consumption * WE DON'T TAKE ON ADDITIONAL RISK UNLESS WE EXPECT TO COMPENSATED WITH ADDITIONAL RETURN * The Time Value of Money * A dollar received today is more valuable than a dollar received in the future because of opportunity cost * Costs and future benefits of investments should be measured in present values * If present value of future benefits exceed costs, then investment should be made (Net Present Value (NPV)>0) * Cash is King * Cash flows not accounting profits are important * Cash flows received can be reinvested by the firm * Accounting problems-depreciation and matching of costs and expenses * In Measuring wealth or value, we will use cash flows, not accounting, as our measurement tools.
It is cash flows, not profits that are actually received by the firm and can be reinvested. * Incremental Cash Flows that Matter * Incremental cash flows are direct consequence of taking a specific course of action * IT'S ONLY WHAT CHANGES THAT COUNTS * Competitive Markets * Project evaluation vs. value creation-investing for returns above same risk alternatives * It is not easy to find projects that create wealth-competition * Perfect market conditions: No entry and exit restrictions, No one producer or buyer large enough to affect prices, Identical products are manufactured, Production costs are identical, Everyone is informed about everything * Efficient Markets * Price adjustments to new information is quick and correct * Many profit driven investors * Information arrival is random * THE MARKETS ARE QUICK AND PRICES ARE RIGHT. * Agency Problem * Separation…...

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