Financial Management Overview Flashcards
Present value
Determines the value today of expected future cash flow
Time value of money
The value of investment determined by the size of the future cash flow & the timing of cash flow
No Arbitrage Principle
Occurs when the same goods are bought and sold in different markets to take advantage of any price difference
Efficient markets
Postulate that security markets respond immediately & without prejudice to all information available
Portfolio theory
Investment must be diversified to reduce risk
“Never put all your eggs in one basket”
Agency theory
Managers act as agents of the shareholders and must act to maximize the shareholders’ wealth
separation of management & ownership means that managers of huge listed companies own a very small share of the company’s shares
Capital asset pricing model
Seeks to measure the risk of financial assets & express the price in terms of required return
Financial manager
The planning, organization, management and control of financial activities such as the acquisition & use of funds for business purposes
Purpose of financial manager
Maximize the value of the firm
Maximize shareholder value
Ethical considerations regarding the purpose of the financial manager: Cost-cutting
Management must consider whether cost cutting will increase the value of the stakeholders in the long run. Cutting costs can now increase profits, but reduce prosperity in the future
Ethical considerations regarding the purpose of the financial manager: Acquisition of smaller businesses
Consider whether it is ethical to buy out new entrants to the market who will endure that the bill will not be successfully implemented & costs will not be reduced
Role of the Financial Manager
- Use the objectives to frame decision-making
- Create wealth-creative investment opportunities & funds to finance the investment
Why do companies need a financial manager?
- The financial manager is required to acquire investment opportunities
- The financial manager must decide on the financing of each investment project
Corporate strategy
The process by which an entity acquires stakeholders by ensuring sustainability and competitive advantage
Porter’s Five Forces
- Level of competition among exisiting companies in the sector
- Exsistence & threat of substitute products
- Threat of new entrants & existence of barriers to entry
- Bargaining power of a firm’s clients
- Bargaining power of a firm’s suppliers
