P_ch01 - What is Finance? What Creating wealth and...

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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 Goal Maximize shareholders wealth OR Maximize profits Goal of the Firm Goal 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 Goal 2) Shareholder Wealth 2) Maximization? Maximization? 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 Financial Markets Financial cash Corporation Investors securities reinvest Cash flow dividends, etc. tax Government Secondary markets The Corporation and The Financial Markets Financial Primary Market Market in which new issues of a Market security are sold to initial buyers. buyers. Secondary Market Market in which previously Market issued securities are traded. issued The Corporation and The Financial Markets Financial Initial Public Offering (IPO) The first time the firm’s stock is The sold to the general public. sold Seasoned New Issue A new stock offering by a firm new that already has stock that is traded in the secondary market. traded Financial Management Axioms Financial 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 10) finance. finance. Risk-Return Risk-Return High risk High return Take additional risk ONLY IF rewarded Take 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 Cash don’t don’t Accounting profit can be manipulated Incremental Cash Flow Count Incremental Only what change that matter. Chicken Rice Only Vs. Chicken Rice and Chicken Noodle Soup Curse of Competitive Mkt Curse New competitor – always Identify good profitable (value creating) projects 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 Thus, firm’s value 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 Government increase investment increase All risk is not equal. All Some risk can be diversified away Diversify: a strategy use to minimize risk without Diversify: reducing return reducing Can’t look at a project in isolation. Ethical dilemmas Ethical ???????? ...
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This note was uploaded on 07/11/2011 for the course FINANCE fin 3701 taught by Professor Tengihla during the Spring '11 term at Assumption College.

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