,Language: English, with some Dutch notes from lectures
Chapter 1
The goal of the financial manager is to create wealth for the shareholders, by making
decisions that will maximize the price of the existing common stock.
Share holders are the legal owners of the firm.
5 Principles that form the foundations of Finance.
* Cash flow is what matters
* Money has a time value
* Risk requires a reward
* Market prices are generally right
* Conflicts of interest cause agency problems
Cash flow is what matters
- It is cash flow, not profits that determines (bepaalt) the value of a business.
- Accounting profits are not equal to cash flows.
- It is possible for a firm to generate accounting profits (Boekhoudkundige winst)
but not have cash or to generate cash flows but not report accounting profits in the
books
- Incremental cash flow is the difference between the projected cash flows if
the project is selected, versus what they will be, if the project is not selected.
Money has a time value
- A euro received today is worth more than a euro received in the future, (Interest)
- Opportunity cost is the difference between the highest valued alternative and the
thing you have decided, that you had give up when you made the choice. ( Ik leen
Cindy
€1.000,- en vraag geen rente. Ik had ook Tjalling dat geld kunnen lenen tegen 8%, dus
dan heb ik een kans laten liggen om geld te verdienen, dus mijn oportunity cost zijn
dan
€80,- )
Risk requires a reward
- Investors expect a return when they put their savings in a bank (delay
consumption) and they expect to earn a higher rate of return on stocks relative to bank
savings account (taking on risk)
Market prices are generally right
- In an efficient market, the prices of all traded assets (such as stocks and
bonds) reflect all available information at any time.
- Stock prices are a useful indicator of the value of the firm. Prices changes
reflect changes in expected future cash flows. Good decisions will tend to increase
the stock prices.
Conflicts of interest cause agency problems
- Agency problems are problems and conflicts resulting from the separation of the
management and owners of the firm. (Ik ben een manager en kom tot de
, conclusie
dat het voor de eigenaar beter is om de fabriek te sluiten en de spullen elders in te
, kopen. Maar als ik dat aan de eigenaar rapporteer is de kans dat ik ontslagen wordt
groot omdat ik de manager ben van die fabriek. Dit wil ik niet en zal het niet
rapporteren om mijn baan te behouden. )
- Agency conflict is reduced through monitoring ( Annual reports),
compensation schemes
( stock options), and market mechanisms ( Takeovers)
- Ethical behaviour is doing the right thing!
- Ethical dilemma - Each person has his or her own set of values, which forms the
basis for personal judgments about what is the right thing.
- Sound ethical standards are important for business and personal success.
Unethical decisions can destroy shareholder wealth
The Role of Business in Finance
- Knowledge of financial tools is relevant for decision making in all areas of
business (be it marketing, production etc.)
- Decisions involve an element of time and uncertainty (Onzekerheid) … financial
tools help adjust (Aanpassen) for time and risk.
- Decisions taken in business should be financially feasible (Uitvoerbaar) …
financial tools help determine (Bepalen) the financial viability (levensvatbaarheid) of
decisions
.1 What long term investments should the firm undertake (ondernemen)??
Capital budgeting the decision making process with respect to investment in fixed assets.
(overwegging nemen van waar in je gaat investeren met betrekking tot vaste activa)
.2 How should the firm raise money to fund (financieren) these investments??
Capital structure decision the decision making process with funding choices (financierings
mogelijkheden) and the mix of long term sources of funds (fondsen).
.3 How can the firm best manage its cash flows as they arise (bezig zijn) in its day-to-
day operations??
Working capital management the management of the firm's current assets (Vlottende
activa) and short term financing.
Financial markets is a institutions and procedures that facilitate financial transactions
The Legal Forms of Business Organization
- Sole proprietorship
- Partnership
- Corporations
Sole proprietorship a business owned by a single individual
Partnership an association (Verenigen) of two or more individuals joining together as co-
owners to operate a business for profit.
- General partnership a partnership in which all partners are fully liable
(Volledig aansprakelijk) for the ineptness incurred (op gelopen schuldenlast)
by the partnership.
Chapter 1
The goal of the financial manager is to create wealth for the shareholders, by making
decisions that will maximize the price of the existing common stock.
Share holders are the legal owners of the firm.
5 Principles that form the foundations of Finance.
* Cash flow is what matters
* Money has a time value
* Risk requires a reward
* Market prices are generally right
* Conflicts of interest cause agency problems
Cash flow is what matters
- It is cash flow, not profits that determines (bepaalt) the value of a business.
- Accounting profits are not equal to cash flows.
- It is possible for a firm to generate accounting profits (Boekhoudkundige winst)
but not have cash or to generate cash flows but not report accounting profits in the
books
- Incremental cash flow is the difference between the projected cash flows if
the project is selected, versus what they will be, if the project is not selected.
Money has a time value
- A euro received today is worth more than a euro received in the future, (Interest)
- Opportunity cost is the difference between the highest valued alternative and the
thing you have decided, that you had give up when you made the choice. ( Ik leen
Cindy
€1.000,- en vraag geen rente. Ik had ook Tjalling dat geld kunnen lenen tegen 8%, dus
dan heb ik een kans laten liggen om geld te verdienen, dus mijn oportunity cost zijn
dan
€80,- )
Risk requires a reward
- Investors expect a return when they put their savings in a bank (delay
consumption) and they expect to earn a higher rate of return on stocks relative to bank
savings account (taking on risk)
Market prices are generally right
- In an efficient market, the prices of all traded assets (such as stocks and
bonds) reflect all available information at any time.
- Stock prices are a useful indicator of the value of the firm. Prices changes
reflect changes in expected future cash flows. Good decisions will tend to increase
the stock prices.
Conflicts of interest cause agency problems
- Agency problems are problems and conflicts resulting from the separation of the
management and owners of the firm. (Ik ben een manager en kom tot de
, conclusie
dat het voor de eigenaar beter is om de fabriek te sluiten en de spullen elders in te
, kopen. Maar als ik dat aan de eigenaar rapporteer is de kans dat ik ontslagen wordt
groot omdat ik de manager ben van die fabriek. Dit wil ik niet en zal het niet
rapporteren om mijn baan te behouden. )
- Agency conflict is reduced through monitoring ( Annual reports),
compensation schemes
( stock options), and market mechanisms ( Takeovers)
- Ethical behaviour is doing the right thing!
- Ethical dilemma - Each person has his or her own set of values, which forms the
basis for personal judgments about what is the right thing.
- Sound ethical standards are important for business and personal success.
Unethical decisions can destroy shareholder wealth
The Role of Business in Finance
- Knowledge of financial tools is relevant for decision making in all areas of
business (be it marketing, production etc.)
- Decisions involve an element of time and uncertainty (Onzekerheid) … financial
tools help adjust (Aanpassen) for time and risk.
- Decisions taken in business should be financially feasible (Uitvoerbaar) …
financial tools help determine (Bepalen) the financial viability (levensvatbaarheid) of
decisions
.1 What long term investments should the firm undertake (ondernemen)??
Capital budgeting the decision making process with respect to investment in fixed assets.
(overwegging nemen van waar in je gaat investeren met betrekking tot vaste activa)
.2 How should the firm raise money to fund (financieren) these investments??
Capital structure decision the decision making process with funding choices (financierings
mogelijkheden) and the mix of long term sources of funds (fondsen).
.3 How can the firm best manage its cash flows as they arise (bezig zijn) in its day-to-
day operations??
Working capital management the management of the firm's current assets (Vlottende
activa) and short term financing.
Financial markets is a institutions and procedures that facilitate financial transactions
The Legal Forms of Business Organization
- Sole proprietorship
- Partnership
- Corporations
Sole proprietorship a business owned by a single individual
Partnership an association (Verenigen) of two or more individuals joining together as co-
owners to operate a business for profit.
- General partnership a partnership in which all partners are fully liable
(Volledig aansprakelijk) for the ineptness incurred (op gelopen schuldenlast)
by the partnership.
