notes 1 - Finance Exam 1 NOTES 8/24/2006: The Financial...

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Finance Exam 1 None of the Above is NEVER the answer. NOTES 8/24/2006: The Financial Function 1. Pragmatic Microeconomics: Theory of the firm. Putting what you learn in micro-econ to practice. Focus on marginal costs and marginal revenues. 2. Decision-making in the Corporation: a. Capital budgeting decisions = decisions that strategically change the direction of the firm b. For example, how assets are valued, how to move money through time, what’s relevant in making business decisions. 3. Goal of the firm: Maximizing shareholder wealth a. Profit Maximization: i. Typical goal in micro-econ ii. One period model iii. No uncertainty b. To made the model realistic, add in: i. Time value of money ii. Uncertainty in risk iii. Multi-periods c. Shareholder wealth = market price per share of CS = number of shares of CS outstanding d. To operationalize this goal of making shareholders rich, specific goals are many times established for the various operating units (using ratios). 4. The Agency Problem: A result of the separation of management and owners. It may interfere with the implementation of this goal. a. Managers may do what’s in their best interest instead of what’s in the owners’ best interest. b. For example, when Campbell’s soup manager died, the price went up 15% in 15 minutes because now they could do new things that the old manager wouldn’t allow. 5. 10 Principles: a. The Risk-Return Trade-off- We won’t take on additional risk unless we expect additional returns as compensation. Called “expected return”, “return for delayed consumption”, and “return for expected risk”. Look at graph…. . b. Time Value of Money- A dollar today is worth more than a dollar in one year. So you must have an adjustment to compare things. c. Cash is King- Measuring the timing of costs and benefits. d. Incremental Cash Flows- It’s only what changes that counts. e. The Curse of Competitive Markets- Why it’s hard to find exceptionally profitable projects. f. Efficient Capital Markets- The markets are quick and the prices are right. g. The Agency Problem- Managers won’t work for the owner’s unless it’s in their best interest. h. Taxes bias business decisions i. All Risk is not Equal- Some risk can be diversified away and some cannot. j. Ethical behavior is doing the right thing and ethical dilemmas are everywhere in finance.
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NOTES 8/29/2006: Organizational Forms 1. Proprietorship a. Largest number (but not in terms of Ees) b. One person owns it, holds titles, and is legally responsible c. PROS- Easy to establish, low organizational cost d. CONS- Legally liable for all obligations (unlimited legal liability), difficulty in raising capital, difficulty in the transfer of ownership, selling the business is selling a job. 2.
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This note was uploaded on 04/02/2008 for the course FIN 3104 taught by Professor Ajkeown during the Fall '07 term at Virginia Tech.

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notes 1 - Finance Exam 1 NOTES 8/24/2006: The Financial...

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