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FINN 3120 Lecture 1: CHAPTER 1

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scarletimpala207
29 Oct 2018
School
UNC
Department
Finance
Course
FINN 3120
Professor
Cynthia Bush

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Document Summary

What we do focus on is the effect that our decision should have on the stock price if everything were held constant. Five principles that form the foundations of finance: principle 1: cash flow is what matters. In measuring value, we will use cash flows rather than accounting profits because it is only cash flows that the firm receives and is able to reinvest. In addition, in making business decisions, we will concern ourselves with only what happens as a result of that decision: principle 2: money has a time value. Almost all financial decisions involve comparing money in different time periods, perhaps investing today and receiving returns later, or borrowing money today and paying it off later. A dollar received today is worth more than a dollar received in the future because of the time value of money: principle 3: risk requires a reward.

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Related Questions

What is the market price of a share of stock for a firm that pays dividends of $1.20 per share, has a P/E of 14, and a dividend payout ratio of 0.4?

The Market Value Added (MVA) is the ____.

  1. indicator of how successful a firm has been at increasing its financing its assets
  2. return on total capital minus cost of capital
  3. indication of an increase in operating efficiency
  4. positively related to the present value of all expected future EVA.

For our purpose, Shareholders' Value Maximization will be the preferred goal for all of the following reasons EXCEPT:

  1. The shareholders' value maximization goal deals with accounting profit, while the profit maximization goal attempts to make cash available to meet financial needs.
  2. Shareholders' value maximization is a long-run goal and the public image of the corporation may be of deep concern to shareholders including the wealth effect
  3. The effects of all financial decisions are reflected in the price of the stock being traded in efficient markets
  4. The complexities and uncertainties in the external environment are all absorbed in the value of the stock.

Since shareholder wealth is the present value of the expected future returns to the owners of the business. The primary normative goal of the firm is to make the most efficient use of the firm’s scarce financial and physical resources and thereby to maximize shareholder value. Thus, realization of the shareholder wealth maximization goal is constrained by social responsibility concerns and problems arising out of agency relationships. Since the class comprises of students spanning different majors we should know that managers can take a variety of actions to influence the magnitude, timing, and risk of the firm’s free cash flows. These actions are often classified in the context of operating, investment, financing, and dividend decisions. Would you agree?

Select one of the following statements and give your interpretation of what is meant. Do you think the statement is accurate? What conditions would make it more or less true?

a. “The existence of financial futures contracts allows our firm to hedge against temporary market declines without liquidating our portfolios.”

b. “Given my confidence in the market, I plan to use stock index futures to increase my exposure to market movements.”

c. “We used currency futures to hedge the exchange rate exposure of our international mutual fund focused on German stocks.”

d. “Our firm took a hit because we wrote put options just before the stock market crash.”

e. “Before hedging our stock portfolio with options on index futures, we search for the index that is most appropriate.”

f. “We prefer to use covered call writing to hedge our stock portfolios.”

g. “The swaps market is another Wall Street-developed house of cards.”

h. “As a dealer in interest rate swaps, our bank takes various steps to limit our exposure.”

i. “The regulation of commercial banks, securities firms, and other financial institutions that participate in the swaps market could create a regulatory war.”