week 1 reading

week 1 reading - EFM 1,2,3,8 Chapter 1 introduction 1....

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EFM 1,2,3,8 Chapter 1 introduction 1. setting financial goals for business consistent with aspiration of the entrepreneur 2. use financial statements and reports to manage growing business and to make informed decisions 3. using forecasting to assess the progress of the business and to determine how well it is meeting expected results 4. effective managing of cash flow 5. raising funds for ventures via debt or equity 6. how to exit business setting financial goals->revenue forecasting->expense forecasting->monitoring performance financial markets are divided into 1. capital markets for large financing >1 year (equity financing and long term business loans). Useful when cash flows might not be adequate to pay back the principle immediately 2. money markets have instruments whose terms is less than a year, where the purpose is to help a firm survive a period of short-term negative cash flow. Ability to access funding depends on the ability of investors to assess risk Total risk/stand along risk: is the amount of risk an investor faces when he holds ownership in only one asset Total risk=diversifiable risk+non diversifiable risk Diversifiable risk (company specific risk) is the portion of total risk that disappears when a portfolio is diversified. Non diversifiable risk is market related risk A proxy for non diversifiable risk is Beta which is a ratio of change in return to a specific stock with a change in the stock market. A high Beta means the stock is more volatile than the market Return= (P1-P0)/P0*P1 P0 is the price at start of period; P1 is the price at end of a time period. Variance= Sum(R i -R avg ) 2 /n R i -is the return of a particular period; R avg is mean of N periods; N is number of periods of data avial Standard deviation is the sqrt of the variance R i =A+beta(R mi ) R i is the return in period i; A is a constant from regression; R mi retrun on stock market in period I; Beta (change in return on stock)/ (change in return on stock market) Required rate of return is the min return necessary to compensate for risk= R f +beta(R m -R f ) R f is the risk free rate (US treasury); R m is the average return on market portfolio proxy; R m -R f is known as the market risk premium Identifying stakeholder and using stakeholder analysis to guide ethical decision making, and applying the decisions to create a culture. Ch 2 setting financial goals Quick and dirty valuation 1. Most recent end year profits before interest, tax, depreciation, and amortization (EBITDA) 2. add unusual bonus or extra compensation 3. evaluate growth potential of business based on recent growth in profit over past 3 years 4. evaluate any important industry or market trends that might affect profits for next 3 years 5. assign a profit multiple to estimate future profit 3-8, 3/4 steady or decline, 4/5 steady or incline, 6+ profit increase
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This note was uploaded on 02/25/2012 for the course TCM 6010 taught by Professor Benjamincompaine during the Fall '11 term at Northeastern.

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week 1 reading - EFM 1,2,3,8 Chapter 1 introduction 1....

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