COM 371 Final Review

COM 371 Final Review - F inancial Managemen t Decisions The...

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Financial Managemen t Decisions The treasurer is concerned with 3 primary corporate financial decisions. Capital Budgeting: process of planning and managing a firm’s investments in fixed assets. The key concerns are the size, timing, and riskiness of cash flows. Capital Structure: mix of debt and equity used by a firm. Working Capital Management: managing short-term assets and liabilities. Goal of Financial Managemen t Maximize shareholder wealth Maximize share price Maximize firm value Agency Problem Agency Relationship: relationship between principal (shareholders) who pays agent (management) to represent them. Agency costs appear due to conflicts of interest between the parties: between shareholders and shareholders, shareholders and managers, debitors and creditors. Management goals: Safe job, excessive perks Better pay Less efforts Examples of Managemen t Actions that don’t benefit shareholder s Make the firm bigger, although less effective Suboptimal decisions such as: mergers, acquisitions, unprofitable investments, equity issues Passing up good projects: lost opportunities Don’t take risk (managers are too risk averse) Remedy against Agency Costs More effective Board of Directors Better managerial compensation contracts that link the performance of the firm and the pay amount (stock options, bonuses, raise) - pay packages that included more option and stock components - contracts should be designed in such a way as to prevent managers from profiting or increases in their firm’s share prices attributable to overall market rises Time Importance Time allows you the opportunity to postpone consumption and use the money to earn interest or return on investment . Types of Simple Interest: interest paid (earned) on the original amount, or principal,
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borrowed (lent). SI = P 0 (i)(n) Compound Interest: interest paid (earned) on any previous interest earned, as well as on the principal borrowed (lent). Future Value The value at some future time of a present amount of money, or a series of payments, evaluated at a given interest rate. FV = P 0 (1 + i) n Future Value Interest Factor (Compounding Factor) ( 1 + r) t Present Value The current value of a future amount of money, or a series of payments, evaluated at a given interest rate. PV 0 = FV n / (1 + i) n Discount Factor: 1/(1 + r) t Annuity Equal payments that occur at regular intervals over a fixed period of time. Ordinary Annuity: if the first payment occurs at the end of the period Annuity Due: if the first payment occurs at the beginning of the period PVA (r,t) = C((1-(1+r) - t )/r) Steps to Solve Time Value of Money Problems 1. Read problem thoroughly 2. Create a time line 3. Put cash flows and arrows on time line 4. Determine if it is a PV or FV problem 5. Determine if solution involves a single CF, annuity stream(s), or mixed flow 6. Solve the problem Perpetuity An annuity in which the cash flow continues forever (infinite payments). PV
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This note was uploaded on 07/25/2011 for the course BUS 371 taught by Professor Franz during the Fall '10 term at University of Victoria.

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COM 371 Final Review - F inancial Managemen t Decisions The...

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