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BA_301_Exam__1_Review_Spring_2010(2)

BA_301_Exam__1_Review_Spring_2010(2) - BA 301 Exam#1 Review...

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BA 301 Exam #1 Review Spring 2010 J. Randall Woolridge Introduction What is Finance? The Management of Money The Three Primary Areas of Finance Corporate finance Institutions and markets Investments The Ten Principles of Finance Financial Decisions and the Financial Toolbox Financial statements and ratios Present value – future value Spreadsheet modeling Models of risk and return The Ten Principles of Finance Financial fact of the Day –Financial Crises in the US 2.1 Principle 1: Higher Returns Require Taking More Risk 2.2 Principle 2: Efficient Capital Markets are Tough to Beat 2.3 Principle 3: Rational Investors are Risk Averse 2.4 Principle 4: Supply and Demand Drive Stock Prices in the Short-run 2.5 Principle 5: Corporate Finance and Governance: Corporate Managers Should Make Decisions That Maximize Shareholder Value 2.6 Principle 6: Transaction Costs, Taxes and Inflation are Your Enemies 2.7 Principle 7: Time and the Value of Money are Closely Related 2.8 Principle 8: Asset Allocation is a Very Important Decision 2.9 Principle 9: Asset Diversification Reduces Risk 2.10 Principle 10: An Asset Pricing Model Should be Used to Value Investments 2.1 Principle 1: Higher Returns Require Taking More Risk A positive relationship exists between risk and expected return 2.2 Principle 2: Efficient Capital Markets are Tough to Beat Current stock prices reflect all publicly available information; and stock prices react completely, correctly, and almost instantaneously to incorporate the receipt of new information 2.3 Principle 3: Rational Investors are Risk Averse Risk aversion means that a rational investor prefers less risk to more risk 2.4 Principle 4: Supply and Demand Drive Stock Prices in the Short-run In the short-run, a stock’s current price is influenced by a temporary and extreme supply and demand imbalance or by the stock market’s reaction to the receipt of new information and may not have anything to do with the true long-term value of a company
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2.4 Corollary – Fundamentals Drive Stock Prices in the Long-Run 2.5 Principle 5: Corporate Finance and Governance: Corporate Managers Should Make Decisions That Maximize Shareholder Value 2.6 Principle 6: Transaction Costs, Taxes and Inflation are Your Enemies Transaction costs and the effects of taxes and inflation can greatly reduce the real returns on your investments 2.7
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