BUAD110 Chapter Notes - Chapter 13: Market Risk, Reinvestment Risk, Liquidity Risk
1 Jun 2018
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Department
Course
Professor
CH 13: Financial Management of the Firm and Investment Management
Learning Objective 1
● Firms rely on financial managers to make capital budgeting decisions and to raise funds
to finance the production and sale of products/services
● Main goal is to turn accounting profits into economic profits
○ Measured by higher common stock prices
● Agency costs arise when managers undertake activities that are beneficial to themselves
but do not increase common stock profits
Learning Objective 2
● Time value of money- a dollar received tomorrow is worth less than a dollar received
today
● Interest rates link future values to present values
● Main components of nominal interest rates
○ Real interest rate
○ Inflation rate
○ Default risk premium
● When money is invested for more than one period, it can grow at an increasing rate
overtime
Learning Objective 3
● Net present value (NPV)- used to evaluate alternative products/services, the present
value of future earnings minus the initial investment cost of the product/service
● NPV > or equal to 0 is acceptable
Learning Objective 4
● Financial managers must acquire the necessary funds to pay for their initial investment
costs
○ Most funds are generated internally by retained earnings, affected by the firm’s
dividend policy
○ Sometimes must seek external financing including bank loans or the issuance of
bonds and stocks
● Debt financing tends to be lower cost than equity financing or common stock due to the
tax deductibility of interest payments
● Financial managers attempt to use an optimal mix of sources of funds that minimizes
their overall cost
Learning Objective 5
● Investment managers- seek to buy and sell securities issued by firms to make a profit for
their clients
● Brokers and dealers- execute the buy and sell orders of the public for a service fee
● Investment bankers- help firms issue their bonds and stocks
Document Summary
Ch 13: financial management of the firm and investment management. Firms rely on financial managers to make capital budgeting decisions and to raise funds to finance the production and sale of products/services. Main goal is to turn accounting profits into economic profits. Agency costs arise when managers undertake activities that are beneficial to themselves but do not increase common stock profits. Time value of money- a dollar received tomorrow is worth less than a dollar received today. Interest rates link future values to present values. When money is invested for more than one period, it can grow at an increasing rate overtime. Net present value (npv)- used to evaluate alternative products/services, the present value of future earnings minus the initial investment cost of the product/service. Npv > or equal to 0 is acceptable. Financial managers must acquire the necessary funds to pay for their initial investment costs.
