5 Principles

  1. Principle 1
    cash flow is what matters- accounting profits aren't equal to cash flows; cash flow represent money that can be spent
  2. it is possible for a firm to generate accounting profits but not
    have cash or to generate cash flows but not report accounting profits in the books
  3. cash flow drives
    the value of a business (not profits)
  4. incremental cash flows
    difference between the cash flows the company will produce both with and without the investment it's thinking about making
  5. Principle 2
    money has a time value; a dollar received today is more valuable than a dollar received one year from now b/c of interest
  6. opportunity cost
    highest-valued alternative that you had to give up when you made a choice
  7. Principle 3
    Risk Requires a Reward
  8. want a return that satisfies two requirements
    • (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
  9. principle 4
    market prices are generally right
  10. efficient market
    one where prices of the assets traded in that market fully reflect all available information at any instant in time
  11. stocks are a useful indicator
    of the value of the firm
  12. principle 5
    conflicts of interest cause agency problems- managers often make decisions that lead to a decrease in the value of the firm's shares
  13. agency problem
    separation of management and the ownership of the firm creates an agency problem- don't maximize shareholder wealth
Card Set
5 Principles
finance chapter 1