Finance Principles

***THIS HAS BEEN PASSED DOWN TO ME VIA A PROFESSOR***

Summary of Finance Principles every MBA Should Know

I) Market values are the only important values in finance; market values are cash values in a sale or purchase; book values are based on historical accounting numbers

II) Wealth is the present value of current and future consumption; cash is the only way you can pay for consumption goods and services

III) The goal of corporate managers should be to maximize shareholders' wealth; positive net present value projects represent increases in wealth; maximizing shareholders' wealth implies finding and investing in positive net-present value projects

IV) Investment decisions should be evaluated in terms of their impact on incremental expected future cash flows

V) Present value analysis discounts expected future cash flows at investors' opportunity costs (the rate of return on alternative investments of equal risk); net present value is the present value of cash flows minus their cost

VI) Expected cash flows are the probability-weighted possible future cash flows; no one knows the future, thus projecting expected future cash flows requires making assumptions concerning future revenues, operating costs, and investments in fixed and working capital

VII) Investors acquire portfolios to diversify the risk of individual assets; relevant risks to diversified investors are the additions to portfolio risk resulting from the inclusion of particular assets in diversified portfolios

VIII) In the CAPM, systematic risk is variations in total market returns affecting all assets; systematic risk is measured by an asset's beta coefficient (reflecting the asset's correlation with the market return) and is the only priced risk; unsystematic risk (uncorrelated with the market) is not priced