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    The 10 Principles of Finance

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    Chiquilyn Galdo
    The document summarizes 10 principles of finance: 1. Risk and return are positively correlated - higher risk investments expect higher returns. 2. Time value of money - a dollar today is worth more than a dollar in the future due to interest earnings. 3. Cash flow, not accounting profits, are key as cash can be reinvested. The goal is maximizing shareholder wealth through share price appreciation. It then discusses management decisions, goals of the firm being shareholder wealth maximization, and efficient capital markets reflecting all available information in asset prices.

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    The 10 Principles of Finance

    Uploaded by

    Chiquilyn Galdo
    35 views18 pages
    The document summarizes 10 principles of finance: 1. Risk and return are positively correlated - higher risk investments expect higher returns. 2. Time value of money - a dollar today is worth more than a dollar in the future due to interest earnings. 3. Cash flow, not accounting profits, are key as cash can be reinvested. The goal is maximizing shareholder wealth through share price appreciation. It then discusses management decisions, goals of the firm being shareholder wealth maximization, and efficient capital markets reflecting all available information in asset prices.

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    A presentation on the basic principles in Finance

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    The document summarizes 10 principles of finance: 1. Risk and return are positively correlated - higher risk investments expect higher returns. 2. Time value of money - a dollar today is worth more than a dollar in the future due to interest earnings. 3. Cash flow, not accounting profits, are key as cash can be reinvested. The goal is maximizing shareholder wealth through share price appreciation. It then discusses management decisions, goals of the firm being shareholder wealth maximization, and efficient capital markets reflecting all available information in asset prices.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    35 views18 pages

    The 10 Principles of Finance

    Uploaded by

    Chiquilyn Galdo
    The document summarizes 10 principles of finance: 1. Risk and return are positively correlated - higher risk investments expect higher returns. 2. Time value of money - a dollar today is worth more than a dollar in the future due to interest earnings. 3. Cash flow, not accounting profits, are key as cash can be reinvested. The goal is maximizing shareholder wealth through share price appreciation. It then discusses management decisions, goals of the firm being shareholder wealth maximization, and efficient capital markets reflecting all available information in asset prices.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 18

    The 10 Principles of

    Finance
    Prepared by: Ms. Chiquilyn Galdo
    Agenda
    ● Principles of Finance
    ● Management Decisions
    ● Goals of the Firm
    1. The Risk-Return Trade Off
    ● We won’t take on additional risk unless we expect to
    be compensated with additional return.
    ● Investment choices have different amounts of risk
    and expected returns.
    ● The more risk an investment has, the higher its
    expected return will be.
    2. Time Value of Money
    ● A peso received today is worth more than a peso
    received in the future.
    ● Because we can earn interest on money received
    today, it is better to receive money earlier rather than
    later.

    ● If inflation = value of money decreases


    3. Cash-NOT Profit-Is King
    ● Cash Flow, not accounting profit, is used as our
    measurement tool.
    ● Cash flows, not profits, are actually can be
    reinvested.

    ● Goal: Maximization of Shareholders wealth


    ● How? Maximize share price
    4. Incremental Cash Flows
    The incremental cash flow is the difference between the
    projected cash flows if the project is selected, versus
    what they will be, if the project is not selected.

    “It's only what changed that counts.”


    5. The Curse of Competitive Markets
    ● It is hard to find exceptionally profitable projects
    ● If an industry is generating large profits, new entrants
    are usually attracted. The additional competition and
    added capacity can result in profits being driven
    down to the required rate of return.
    ● Product Differentiation, Service and Quality can
    separate products from competition
    6. Efficient Capital Markets
    ● The markets are quick and the prices are right.
    ● The values of all assets and securities at any instant in
    time fully reflect all available information.

    ● Efficient Market Hypothesis


    Strong: (All info: External and Internal)
    Semi-Strong: External + some Internal
    Weak: External
    7. The Agency Problem
    ● Managers won’t work for the owners unless it is in
    their best interest
    ● Management acts as an agent for the owners
    (shareholders) of the firm.
    ● A agency problem resulting from conflicts of interest
    between the manager/agent and the
    stockholder/owners. - Managers may make decisions
    that are not in line with the goal of maximization of
    shareholder wealth.
    8. Taxes are Biased in Business Decisions
    ● The cash flows we consider are the after-tax incremental cash
    flows to the firm as a whole.
    9. All Risk Is Not Equal
    ● Some risk can be diversified away, and some cannot
    ● The process of diversification can reduce risk, and as a
    result, measuring a project’s or an asset’s risk is very
    difficult.

    ● Systematic risk(can be diversified)


    ● Unsystematic risk(unavoidable/undiversifiable)
    10. Ethical Dilemmas Persist
    Each person has his or her own set of values, which forms
    the basis for personal judgments about what is the right
    thing

    ● How do we manage existing assets efficiently?


    ● Financial Manager has varying degrees of operating
    responsibility over assets.
    ● Greater emphasis on current asset management than fixed
    asset management.
    Decisions of Financial Managers
     Investment Decisions
    (Investment decisions revolve around how to best allocate
    money to maximize their value.)
     Financing Decisions
     (Financing decisions revolve around how to pay for
    investments and expenses)
     Asset Management Decisions
    What are the Goals of the Firm?
    ● Survival
    ● Avoid financial distress and bankruptcy
    ● Beat the competition
    ● Maximize sales or market share
    ● Minimize costs
    ● Maximize profits
    ● Maintain steady earnings growth.
    The Real Goal of the Firm
    Maximization of Shareholder Wealth!
    Shareholders’ wealth can be measured as the current value
    per share of existing shares.

     Wealth maximization does not stop the firm from


    being socially responsible.
     Then shareholder wealth maximization remains the
    appropriate goal in governing the firm.
    Written Activity

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