Financial THeory

Financial THeory - Finance Theory & Financial Strategy...

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Team 5: Trung Duong Financial Strategy STEWART C. MYERS
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Finance Theory and Financial Strategy “Despite its major advances, finance theory has had scant impact on strategic planning. Strategic planning needs finance and should learn to apply finance theory correctly. However, finance theory must be extended in order to reconcile financial and strategic analysis.”
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Finance Theory and Financial Strategy Strategic planning is many things, but it surely includes the process of deciding how to commit the firm's resources across lines of business. Discounted cash-flow analysis is widely used in finance theory. Strategic planning is not like "capital budgeting on a grand scale“, because capital budgeting in practice is a bottom-up process. The aim is to find and undertake specific assets or projects that are worth more than they cost.
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Finance Theory and Financial Strategy ht p:/ images.google.com/imgres? NwM:&tbnh=121&tbnw=115&prev=/images%3Fq%3DStrategy%2Bplanning%26gbv%3D2%26hl%3Den%26client%3Dfirefox-a%26rls%3Dorg.mozil a:en-US:of icial%26sa%3DG
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Finance Theory and Financial Strategy Finance theory has made major advances in understanding how capital markets work and how risky real and financial assets are valued. Finance theory stresses cash flow and the expected return on competing assets. Strategic and financial analyses are not reconciled
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Explanations of the gap between finance theory and strategic planning Finance theory and traditional approaches to strategic planning may be kept apart by differences in language and "culture." Discounted cash flow analysis may be misused, and consequently not accepted, in strategic applications. Discounted cash flow analysis may fail in strategic applications even if it is properly applied.
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The Relevant Theory: NPV NPV equals PV less the cash outlay required at t = 0
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The Relevant Theory: PV PV = present (market) value; C t = forecasted incremental cash flow after corporate taxes T = project life (C T includes any salvage value); r = the opportunity cost of capital , defined as the equilibrium expected rate of return on securities equivalent in risk to the project being valued.
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The opportunity cost of capital varies from project to project, depending on risk. The opportunity cost of capital for a line of business, or for the firm, is a value weighted average of the opportunity costs of capital for the projects it comprises. The opportunity cost of capital depends on the use of
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Financial THeory - Finance Theory & Financial Strategy...

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