5 Principles

cash flow is what matters- accounting profits aren't equal to cash flows; cash flow represent money that can be spent

have cash or to generate cash flows but not report accounting profits in the books

the value of a business (not profits)

difference between the cash flows the company will produce both with and without the investment it's thinking about making

money has a time value; a dollar received today is more valuable than a dollar received one year from now b/c of interest

highest-valued alternative that you had to give up when you made a choice

Risk Requires a Reward

• (1) a return for delaying consumption
• (2) additional return for taking on risk- risky investments are less attractive unless they offer the prospect of higher returns on stocks

market prices are generally right

one where prices of the assets traded in that market fully reflect all available information at any instant in time

of the value of the firm

conflicts of interest cause agency problems- managers often make decisions that lead to a decrease in the value of the firm's shares

separation of management and the ownership of the firm creates an agency problem- don't maximize shareholder wealth