Finance Class Notes - 1/22/08 Role of the Financial Manager...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
1/22/08 Role of the Financial Manager o Firm Organization Real Assets: it has value because it cost that much Financial Assets: It has value because it will generate income o Finance vs. Accounting? Accountants: past, record-keeping Finance: future, generated values Finance: the science of attributing value to things Different structures, all thought about the same way Capital budgeting (spending money) vs. Finance (raising money) Good investment: cash flows > investment Difficulty: o Investment = Now o Return = Later o Financial Risk What’s left when you pay back your investment? Plowback. Will look at investment decision and financing decision separately Capital markets = places where we can get money o Personal o Bank o Stock Goal: attributing value o How do we compare inputs to outputs? o Well, what makes something valuable? Others opinions Historical data Sales/market value Personal value Salvage value Time Value of Money (TVM) o The best we can do to resolve what is valuable o Discards everything above except market value (ignores personal value, salvage, accounting, etc) o Assumptions that make this true: Perfect market: no transaction costs, no taxes, no price manipulation; buy and sell freely Our market is not perfect This makes market value insufficient because it means that each party has a different value (ex. Expedia doesn’t care about taxes, but guest does, thus Expedia doesn’t have as high of a value). Efficient Market: all information is reflected in price Everyone shares the same information If everyone has different information, everyone has different value
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Complete Market: product is available to all If not, we have an indefinitely high transaction cost o If all three assumptions are true, everyone would agree on value of everything If everyone agrees, that price is the market price o But all three of these assumptions are not always true (if they were, there would be no reason to trade) The question is: how close to being true are they? If close, the value that we can come up with will be good and useful Time Value of Money o Mantra 1: Value of an asset is equal to the present value of its future cash flows o Mantra 2: $1 today is worth more than $1 tomorrow Why? Interest: the longer its there, the longer it accrues Inflation: a dollar today can purchase more than it can purchase tomorrow Consumption: you can choose what you want to do with the dollar today o Opportunity cost: all of the things you could be doing with the money you have now Investing: the income that comes in should be better than anything else than what we could have done 1/24/08 Finance is about trying to attribute value to things based on future value present value Time value of Money o R is a special variable that represents opportunity cost o Use R to compare value of “today” dollar and “tomorrow” dollar
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 8

Finance Class Notes - 1/22/08 Role of the Financial Manager...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online