Financial Management BUS 310 Jon Hunter

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Financial ManagementBUS 310Jon Hunter
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Reading a stock quote

• Hi Lo Stock Sym Div Yld PE Vol
  Hi Lo Close Chg
• 98 77 Genl Elec GE 2.08 2.0 24 28140
  97 93 95 1

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Internal growth rate

• Return on equity
• Retained earnings
• g ROE x r
• g growth rate
• ROE return on equity
• r retention rate

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Valuing common stock- Single holding period

• Present value of all cash flows
• Dividends
• Anticipated sale price

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Valuing common stock-multiple holding periods

• Dividend discount model
• Includes growth rate
• Value dividend/
• (required rate growth rate)

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Ten Axioms of Financial Management

• 1. The risk-return trade-off We wont take on
  additional risk unless we expect to be
  compensated with additional return. The greater
  the risk, the greater the expected return.
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• 2. The time value of money A dollar received
  today is worth more than a dollar received in the
  future. A dollar received today is worth more
  than a dollar received tomorrow because a dollar
  received today can earn a days interest by
  tomorrow.

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Ten Axioms of Financial Management

• 3. Cash- not profits- is king. Accounting
  profit or loss frequently does not coincide with
  the actual transfer of money. The first rule of
  running any business Do not run out of cash.
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• 4. Incremental cash flows Its only what
  changes that counts. Think incrementally. How
  will a decision change the cash flow of the
  company?

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Ten Axioms of Financial Management

• 5. The curse of competitive markets Why its
  hard to find exceptionally profitable projects.
  Success attracts competition. Competition lowers
  profits.
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• 6. Efficient capital markets The markets are
  quick and the prices are right. Security prices
  adjust very quickly and appropriately to new
  information.
• 7. The agency problem Managers wont work for
  owners
• unless its in their best interest. Most
  people will work harder for themselves than they
  will for someone else.

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Ten Axioms of Financial Management

• 8. Taxes bias business decisions. Decisions using
  cash flows must always use after-tax cash flows.
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• 9. All risk is not equal. Some risk can be
  diversified away
• and some cannot. Total risk is a combination
  of firm-specific risk, which can be diversified
  away, and market risk, which cannot be
  diversified away. (But see the futures markets.)
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• 10. Ethical behavior is doing the right thing,
  and ethical dilemmas are everywhere in finance.
  Businesses that are not trusted by other
  businesses or by customers will not maximize the
  wealth of stockholders. Perhaps the primary goal
  of firms should address stakeholders and not just
  stockholders.