Chapter 1 Introduction to Finance

Chapter 1 Introduction to Finance - Five Principles that...

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Five Principles that Form the Foundations of Finance 1. Cash flow is what matters: a. The difference between the cash flows a company will produce both with and without the investment it is thinking about making 2. Money has a time value a. Dollar received today is more valuable than a dollar received one year from now. b. Opportunity cost: the next best alternative available to the decision maker for a given level of risk 3. Risk Requires a Reward a. A return for delaying consumption: investors will want to receive at least the same return that is available for risk free investments b. An additional return for taking on risk: higher the risk, higher the reward 4. Market prices are generally right a. Efficient market: a market in which the prices of securities at any instant in time fully reflect all publicly available information about the securities and their actual public values b. Product market prices are often slower to react to important news than are prices in financial markets, which tend to be very efficient and quick to respond to news.
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