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.
Remember:
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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