The Ten Axioms The Foundations of Financial Decision Making Aug 27, 2012.

Slides:



Advertisements
Similar presentations
FINANCIAL MANAGEMENT I and II
Advertisements

Lecture-1 Financial Decision Making and the Law of one Price
FINANCIAL MANAGEMENT I AND II
Bennie D Waller, Longwood University Personal Finance Bennie Waller Longwood University 201 High Street Farmville, VA.
Chapter 4 Return and Risk. Copyright ©2014 Pearson Education, Inc. All rights reserved.4-2 The Concept of Return Return –The level of profit from an investment,
PART 1: FINANCIAL PLANNING Chapter 1 Financial Planning: The Ties That Bind.
Chapter 1 - An Introduction to Financial Management Chapter 1 - An Introduction to Financial Management  2005, Pearson Prentice Hall.
Ch. 1 - An Introduction to Financial Management  2002, Prentice Hall, Inc.
Risk and Return, Business Structures By R. S. Miolla.
CORPORATE FINANCIAL THEORY Lecture 6. Review Goal: M aximize Value of the Firm Past Topics Investment Decision (spending money) Financing Decision (raising.
McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. May 31 Capital Budgeting Decisions.
1 Chapter 1: Goal and Functions of Finance Objective of the Firm – the primary goal of the firm is to maximize stockholder wealth Wealth Maximization versus.
PART 4: MANAGING YOUR INVESTMENTS Chapter 11 Investment Basics.
Chapter 11 Investment Basics.
Chapter 1. An Introduction to the Foundations of Financial Management—The Ties That Bind.
1 Chapter 13 - Stock Purchase stock = buy part of company Returns from dividends and capital appreciation –Dividends – distribution of profits –Neither.
© 2003 The McGraw-Hill Companies, Inc. All rights reserved. Some Lessons From Capital Market History Chapter Twelve.
Chapter 1. Goal of the Firm 1) Profit Maximization? this goal ignores: a) TIMING of Returns (Time Value of Money - Ch.5) b) UNCERTAINTY of Returns (Risk.
Chapter 1.
1 Chapter 1 Introduction to Financial Management Key sections: –What is financial management? –Legal forms of business –Principles of taxation –Shareholder.
Chapter 1 THE INVESTMENT SETTING Chapter 1 Questions What is an investment ? What are the components of the required rate of return on an investment?
Ch. 1 - Introduction to Financial Management  2000, Prentice Hall, Inc.
Investment Basics Clench Fraud Trust Investment Workshop October 24, 2011 Jeff Frketich, CFA.
Copyright © 2011 Pearson Prentice Hall. All rights reserved. Getting Started: Principles of Finance Chapter 1.
Finance and Accounts Analysing Accounts Pr. Zoubida SAMLAL.
SOURCES OF FUNDS: 1- retained earnings used from the company to the shareholders as dividends or for reinvestment 2- Borrowing, this tool has tax advantages.
 Saving is income not spent.  Saving also includes reducing spending, such as recurring costs.  Savings can include a relatively low-risk investment.
Chapter 1 Getting Started— Principles of Finance
Savings & Investments REVIEW How to Make a Million Dollars.
Ch. 11: Financial Markets. What to do with money: Make a list of as many places you can think of that you could invest money...
THE CORPORATION n Legal entity created to sell goods and/or services. n Owned by shareholders who purchase its stock. n Possible returns to shareholders:
Slide 1 Introduction to Financial Management Definitions of Finance Financial Management Decisions and The Goal Forms of Business Organizations The Corporation.
Risk: The Volatility of Returns The uncertainty of an investment. The actual cash flows that we receive from a stock or bond investment may be different.
An Overview of Financial Management Class Objectives Read, interpret, and analyze financial reports Manage working capital and profits Understand the.
Chapter 4 --Value-driven Management -- Arbitrage u Explain how arbitrage works to ensure that the prices of financial claims are equal to the present value.
Chapter 1 An Overview of Managerial Finance © 2005 Thomson/South-Western.
Building Bucks Savings and Investment Basics. Basics Saving – provides funds for emergencies and for making specific purchases in the near future Investing.
 Goals:  Explain the relationship between risk and return when investing.  Describe how to evaluate the level of risk you should accept when investing.
Foundations of Finance Arthur Keown John D. Martin J. William Petty.
Exam 1 Review 09/23/2008. Goal of the Firm Shareholder Wealth Maximization? this is the same as: a) Maximizing Firm Value b) Maximizing Stock Price.
Ch. 1 - An Introduction to Financial Management  2002, Prentice Hall, Inc.
Chapter 3 Arbitrage and Financial Decision Making
Introduction to Corporate Finance
How can I make a profit and still run out of cash? Review Financial Statements Cash Flow and Working Capital.
AGEC 407 Investment Analysis Time value of money –$1 received today is worth more than $1 received in the future Why? –Earning potential –Risk –Inflation.
Chapter 1 - An Introduction to Financial Management 08/28/08.
Nature and scope of strategic financial management
Chapter 1 AN INTRODUCTION TO FINANCIAL MANAGEMENT – THE TIES THAT BIND “…although it is not necessary to understand finance in order to understand these.
Financial Markets & Institutions
Chapter 1 - An Introduction to Financial Management Chapter 1 - An Introduction to Financial Management  2005, Pearson Prentice Hall.
Intro and Chapter 1 Questions
Learning Objectives Identify the goal of the firm.
Nature of Financial Management
Chapter 1 Finance and Business. Areas of Finance Business Finance – Decision making within a business setting Investments – Allocation of money to earn.
Announcements It’s LSAT week! I take the test on Saturday. If you are sick, stay AWAY from me Most of IA material will be covered this week Summatives.
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.
1-1 Introduction to Finance Lecture Goals and Governance of the Corporation This chapter introduces the corporation, its goals, and the roles of.
Financial Management Decisions n Investment: What assets to own? n Financing: How to pay for those assets? n Dividend: What to do with Net Income?
1 Introduction to Financial Management. 2 What is Finance? The study of money and other assets The financial management and control of assets Profiling.
Ratio Analysis. Use of Ratio Analysis To analyse Performance Liquidity Shareholder Investment.
Chapter 32 Saving and Investing Introduction to Business Spring 2005.
RATE OF RETURN CONCEPTS èExpected: Return an investor can expect, given initial outlay and cash flow forecasts èExamples: IRR, bond yield èRequired: The.
INVESTMENTS – RISK TOLERANCE QUIZ Stocks Bonds Real Estate Collectibles Mutual Funds.
Strategic Financial Management An Overview. Introduction Finance is the middle ground between theoretical economics and the accounting world of numbers.
Nature and scope of strategic financial management
Nature and scope of strategic financial management
Chapter 1 - An Introduction to Financial Management
BUSN 379 Competitive Success/snaptutorial.com
Chapter 1 - An Introduction to Financial Management
Introduction & Terminology
Presentation transcript:

The Ten Axioms The Foundations of Financial Decision Making Aug 27, 2012

1. The Risk-Return Trade-off  The more risk an investment has, the higher its expected return should be  If you bet on a horse, you want greater odds on the long shot  If you invest in a risky business (Semiconductor, oil wells, junk bonds), you should demand a greater return  Every decision you make should be evaluated for risk

2. The Time Value of Money  A dollar received today is worth more than a dollar received in the future  If you receive a dollar today, you can invest it and earn more  Because of inflation, a dollar you receive today will buy more than a dollar you receive in the future  So the sooner you get the money, the better  The sooner you invest your money, the better (i.e. retirement)

3. Cash is King  You can not spend “profit” or “net income”. These are paper figures only  Cash is what is received by the firm and can be reinvested or used to pay bills  Cash flow does not equal net income; there are timing differences in accrual accounting between when you record a transaction and when you receive or pay the cash

4. Incremental Cash Flows  It’s only the net increase or decrease in cash that really counts  It’s the difference between cash flows if the project is done versus if the project is not done  Consider all related cash flows, i.e., equip., inventory, etc.  “Brief case” example

5. Curse of Competitive Markets  It’s hard to find and maintain exceptionally profitable projects  High profits attract competition  How to keep very profitable projects –Product differentiation (Kleenex, Xerox) –Low cost (Costco, Honda) –Service and quality (Mercedes, Lexus) –Give examples for each of the above

6. Efficient Capital Markets  The markets are quick and the prices are right – right?  Information is incorporated into security prices at the speed of light!  Assuming the information is correct, then the prices will reflect all publicly available information regarding the value of the firm  Example: announcing a stock split

7. The Agency Problem  Managers are typically not the owners of a company  Managers may make decisions that are in their best interests and not in line with the long term best interests of the owners  Example, cutting Research and Development costs on new products to maximize current income  Pay for performance; stock options

8. Taxes Bias Business Decisions  Because cash is king, we must consider the after-tax cash flow on an investment  The tax consequences of a business decision will impact (reduce) cash flow  Companies are given tax incentives by the government to influence their decisions  Examples : investment tax credit and environmental credits reduce taxes; purchase of Prius’

9. All Risk is Not Equal  Some risk can be diversified away and some cannot  Don’t put all your eggs in one basket  Diversification creates offsets between good results and bad results  Example: drilling for oil wells

10. Ethical Behavior Means Doing the Right Thing  Ethical Dilemmas are everywhere in finance; just read the news (Enron, Madoff, etc.)  Unethical behavior eliminates trust, results in loss of public confidence  Shareholder value suffers and it takes a long time to recover  Social responsibility means firms have to be responsible to more than just owners - all stakeholders! i.e., Japan nuclear disaster