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Unformatted text preview: What is Finance?
What Creating wealth and maintaining it Launch new product line
Open new store
Buy stocks Goal of the Firm
Maximize shareholders wealth
Maximize profits Goal of the Firm
1) Profit Maximization?
this goal have problems with: a) timing of returns Profit NOW or LATER?? b) uncertainty of returns 2M profit 1st yr = 2M profit 2nd yr Goal of the Firm
2) Shareholder Wealth
this is the same as:
a) Maximizing Firm Value
b) Maximizing Stock Price Maximize Shareholder Wealth
Maximize Owner owns stock Stock price = $10 Shareholder Wealth = $10 Firm has 20 stocks Firm value = $10 x 20 = $200
Maximizing Firm Value = Maximizing Stock Price The Corporation and
cash Corporation Investors securities
reinvest Cash flow dividends,
etc. tax Government Secondary
markets The Corporation and
Financial Primary Market Market in which new issues of a
security are sold to initial
buyers. Secondary Market Market in which previously
issued securities are traded.
issued The Corporation and
Financial Initial Public Offering (IPO) The first time the firm’s stock is
sold to the general public.
sold Seasoned New Issue A new stock offering by a firm
that already has stock that is
traded in the secondary market.
traded Financial Management Axioms
1) Risk - return trade-off.
2) Time value of money.
3) Cash - not profits - is king.
4) Incremental cash flows count.
5) The curse of competitive markets.
6) Efficient capital markets.
7) The agency problem.
8) Taxes bias business decisions.
9) All risk is not equal.
10) Ethical dilemmas are everywhere in
Risk-Return High risk High return Take additional risk ONLY IF rewarded
with additional return
with Save at Bank (3%) or Buy stock (15%) Time Value of Money
Time If we can earn interest rate: $1 Now > $1 Tomorrow Apply to investment decision Win 1M from lottery 1M now vs. 1M 1-yr from now If earn 3% interest rate 1M now = 1.03M 1-yr from now Cash is King
Cash Cash is more important!
Why? Cash pays employees and creditors, profit
don’t Accounting profit can be manipulated Incremental Cash Flow Count
Incremental Only what change that matter.
Chicken Rice Only
Chicken Rice and Chicken Noodle Soup Curse of Competitive Mkt
Curse New competitor – always Identify good profitable (value creating)
projects Imperfect market Differentiate, cost advantage, etc. Efficient capital markets.
Efficient Speedy information Stock price include information Price of assets are correct Thus, if stock price is right so must
firm’s The Agency Problem
The Manager is the agent for owners They have conflict of Interest Work for his/her benefit Bigger conflict, bigger agency problem Hurt the firm value Taxes bias business decisions.
Taxes After-tax cash flow is more important Investment tax credit BOI industrialize zone Government use tax incentive to help
increase All risk is not equal.
All Some risk can be diversified away
Diversify: a strategy use to minimize risk without
reducing Can’t look at a project in isolation. Ethical dilemmas
Ethical ???????? ...
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