Comprehensive analysis of financial principles, valuation methods, and market dynamics
Understanding the fundamental principles of financial management
Finance focuses on the bottom line of business activities through acquisition and disposal of assets.
Real Assets
Financial Assets
Two primary financial objectives for any business entity.
Grow Wealth
Use Wealth
Fundamental questions addressed in financial analysis.
Every business decision ultimately reduces to the valuation of assets, making valuation the core focus of financial analysis.
Understanding the movement of cash through business operations
Cash raised from investors by selling financial assets
Cash invested in real assets (tangible and intangible)
Cash generated by business operations and activities
Key responsibilities and decision-making processes
Determine which projects to invest in
Decide how to finance projects
Determine what to pay back to shareholders
Determine what risks to take or avoid and implement strategies to manage financial exposure
Maximize shareholder wealth through strategic financial decisions
Tangible and intangible business assets
Corporate stocks and bonds
Financial agreements and derivatives
Future income streams and payments
Principles and methods for determining asset value
Each asset is defined by its cash flow pattern over time
Time value of money considerations
Uncertainty and risk premium
Find traded assets with equivalent cash flow characteristics in timing and risk
Valuation through analysis of demand and supply dynamics
Assets with same payoffs have same prices
Present value of $1,100 in one year at 5% return
Present value of $1,100 in one year at 20% return
Difference between risky and safe expected returns
The present value of a cash flow equals its expected value discounted at the opportunity cost of capital, which properly adjusts for both time and risk considerations.
Market structures and their economic functions
Individuals
Firms
Intermediaries
Short-term debt securities and instruments
Long-term securities and investment instruments
Securities with payoffs tied to other underlying prices
Efficient allocation of capital across time and economic states
Market prices reflect all available information
Rich security set, free access, competitive trading, no frictions
Banks
Insurance
S&Ls
Mutual Funds
Strategic goals and stakeholder considerations
Maximizing current market value is the only plausible financial objective for corporate managers, incorporating present value of all current and future cash flows adjusted for timing and risk.
Financial managers help shareholders achieve their objectives through strategic decision-making
Increase Firm Market Value
Perfect financial markets enable separation of ownership and management
Real-world considerations that complicate the value maximization objective
"Couldn't wait to see payoff from long-term project"
"Not prepared to give up current lifestyle"
"Market consensus may be wrong about project"
Shareholder differences can be settled in financial markets through individual trading decisions, allowing the firm to focus on value maximization.
Key insights and fundamental principles
The present value of a cash flow equals its expected value discounted at the opportunity cost of capital, which properly accounts for both the time value of money and risk considerations, forming the foundation of modern financial decision-making.
Principles
Framework
Application