10 Principles of FinMa

Question 1

The cash flows we consider
are the after-tax incremental
cash flows to the firm as a
whole.

Answer 1

Taxes Bias
Business Decisions

Question 1

The markets are quick and the
prices are right.

The values of all assets and
securities at any instant in time
fully reflect all available
information.

Answer 1

Efficient
Capital Markets

Question 2

The 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.

Answer 2

Incremental
Cash Flows

Question 3

A dollar received today is worth more than a dollar received in the future.

Because we can earn interest on money received today, it is better to receive money earlier rather than later.

Answer 3

The Time
Value of Money

Question 4

It is hard to find exceptionally profitable projects

If an industry is generating large profits, new entrants are usually attracted. The additional competition and added capacity
can result in profits being driven down to the required rate of return.

Product Differentiation, Service and Quality can separate products from competition

Answer 4

The Curse
of Competitive Markets

Question 5

Managers won’t work for the owners
unless it is in their best interest

A agency problem resulting from conflicts
of interest between the manager/agent and
the stockholder/owners.

Managers may make decisions that are not in
line with the goal of maximization of
shareholder wealth.

Answer 5

The
Agency Problem

Question 6

Some risk can be diversified
away, and some cannot

The process of diversification
can reduce risk, and as a result,
measuring a project’s or an
asset’s risk is very difficult.

Answer 6

All Risk is
Not Equal

Question 7

We won’t take on additional risk unless we expect to be compensated with additional
return.

Investment choices have different amounts of risk and expected returns.

The more risk an investment has, the higher its expected return will be

Answer 7

The Risk Return Trade-off

Question 8

Each person has his or her own
set of values, which forms the
basis for personal judgments
about what is the right thing

Answer 8

Ethical Behavior is Doing
the Right Thing, and Ethical Dilemmas
Are Everywhere in Finance

Question 9

Cash Flow, not accounting profit, is used as our measurement
tool.

Cash flows, not profits, are
actually can be reinvested

Answer 9

Cash—
Not Profits—Is King