TEN AXIOMS OF FINANCE

TEN AXIOMS OF FINANCE - If an industry is generating large...

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TEN AXIOMS OF FINANCE 1. Time Value of Money (Chapters 6, 8, 9, and 11) A dollar received today is worth more than a dollar received in the future. 2. Cash, Not Accounting Profits, is King (Chapters 1, 3, 4, and 10) The value of an asset equals the present value of expected future net cash flows it will generate. 3. Incremental (Marginal) Cash Flows (Chapters 10 and 11) It is only the change that counts. 4. The Risk Return Trade-Off (Chapter 7) Investors will not take on additional risk unless they expect to be compensated with additional return. 5. All Risk is Not Equal (Chapters 7 and 11) Some risk can be diversified away and some risk cannot. “Don’t put all of your eggs in one basket.” 6. Efficient Capital Markets (Chapters 2, 7, 8 and 9) Capital markets are quick and asset prices are right. 7. The Curse of Competitive Markets (Chapter 11) It is difficult to find exceptionally profitable projects.
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Unformatted text preview: If an industry is generating large profits, new entrants are usually attracted, thereby driving down profits to a level that is commensurate with that industrys risk level. 8. The Agency Problem (Chapter 2) Managers have incentives that are different than owners and will not work for owners unless it is in their best interest. 9. Taxes Bias Business Decisions (Chapters 2 and 11) Nearly all investment decisions by financial managers include the impact of taxes. 10. Ethical Behavior Ethical dilemmas are everywhere in finance and in life. The difficulty arises when attempting to define doing the right thing. Each of us has our own set of values which forms the basis for our own personal judgments about what is right and what is wrong. Societies adopt a set of rules and laws that prescribe the right thing to do....
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This note was uploaded on 08/22/2009 for the course FIN 3310 taught by Professor Potts during the Spring '08 term at Baylor.

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