Home Uncategorized The Five Principles

Uncategorized

The Five Principles

Although quality is more important than quantity, your initial post will typically be 150 words, and your replies 100 words for 2 students ( I will UPLOAD later).

After reading about Five Principles that form the foundations of finance in Chapter 1, find an article (try CNBC, or Yahoo Finance if you are having trouble) and talk about how the news story relates to one or more of the Five Principles.

The PowerPoint has The 5 Pricnceble.

Foundations of Finance

Tenth Edition

Chapter 1

An Introduction to the Foundations of Financial Management

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
If this PowerPoint presentation contains mathematical equations, you may need to check that your computer has the following installed:
1) Math Type Plugin
2) Math Player (free versions available)
3) NVDA Reader (free versions available)
1

Learning Objectives
1.1 Identify the goal of the firm.
1.2 Understand the basic principles of finance, their importance, and the importance of ethics and trust.
1.3 Describe the role of finance in business.
1.4 Distinguish among the different legal forms of business organization.
1.5 Explain what has led to the era of the multinational corporation.
1.6 Describe how this course and the skills you will develop in it will help you in your career and in your life.

The Goal of the Firm

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
The Goal of the Firm
The goal of the firm is to _________________________________________________________________________________________________________________________________________?

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
The Goal of the Firm
The goal of the firm is to create value for the firm’s owners (that is, its shareholders). Thus the goal of the firm is to “maximize shareholder wealth” by maximizing the price of the existing common stock.
Good financial decisions will increase stock price, and poor financial decisions will lead to a decline in stock price.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
Five Principles That Form the Foundations of Finance

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
Principle 1: Cash Flow Is What Matters
Accounting profits are not equal to cash flows. It is possible for a firm to generate accounting profits but not have cash or to generate cash flows and not report accounting profits in the books.
Cash flow, and not profits, drive the value of a business.
We must determine incremental or marginal cash flows when making financial decisions.
Incremental cash flow is the difference between the projected cash flows if the project is selected versus what they will be if the project is not selected.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
Principle 2: Money Has a Time Value (1 of 2)
A dollar received today is worth more than a dollar received in the future.
Because we can earn interest on money received today, it is better to receive money sooner rather than later.

Principle 2: Money Has a Time Value (2 of 2)
Opportunity Cost – It is the cost of making a choice in terms of next best alternative that must be forgone.
Example: By lending money to your friend at zero percent interest, there is an opportunity cost of 1% that could potentially be earned by depositing the money in a savings account in a bank.

Principle 3: Risk Requires a Reward
Investors will not take on additional risk unless they expect to be compensated with additional reward or return.
Investors expect to be compensated for “delaying consumption’’ and “taking on risk.’’
Thus, investors expect a return when they deposit their savings in a bank (e.g., delayed consumption), and they expect to earn a relatively higher rate of return on stocks compared to a bank savings account (e.g., taking on risk).

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
Principle 4: Market Prices Are Generally Right
In an efficient market, the market prices of all traded assets (such as stocks and bonds) fully reflect all available information at any moment in time.
Thus stock prices are a useful indicator of the value of the firm. Price changes reflect changes in expected future cash flows. Good decisions will tend to increase in stock price and vice versa.
Note there are inefficiencies in the market that may distort the market prices from value of assets. Such inefficiencies are often caused by behavioral biases.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
Principle 5: Conflicts of Interest Cause Agency Problems
The separation of management and the ownership of the firm creates an agency problem. Managers may make decisions that are not consistent with the goal of maximizing shareholder wealth.
Agency conflict is reduced through monitoring (e.g., annual reports), compensation schemes (e.g., stock options), and market mechanisms (e.g., takeovers).

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
Ethics and Trust in Business
Ethical behavior is doing the right thing! But what is the right thing?
Ethical dilemma—Each person has his or her own set of values, which forms the basis for personal judgments about what is the right thing.
Sound ethical standards are important for business and personal success. Unethical decisions can destroy shareholder wealth (e.g., Enron scandal).

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
The Role of Finance in Business (1 of 2)
Three basic issues are addressed by the study of finance:
What long-term investments should the firm undertake? (Capital budgeting decision)
How should the firm raise money to fund these investments? (Capital structure decision)
How should cash flows arising from day-to-day operations be managed? (Working capital decision)

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
The Role of Finance in Business (2 of 2)
Knowledge of financial tools is relevant for decision making in all areas of business (be it marketing, production, etc.) and also in managing personal finances.
Decisions involve an element of time and uncertainty; financial tools help adjust for time and risk.
Decisions taken in business should be financially viable; financial tools help determine the financial viability of decisions.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
Figure 1.2 How the Finance Area Fits into a Firm

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
The Legal Forms of Business Organization (1 of 2)

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
The Legal Forms of Business Organization (2 of 2)
Business Forms
Sole Proprietorship
Partnership
Corporation
Hybrid
S-Type
LLC

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
Sole Proprietorship
Business owned by an individual
Owner maintains title to assets and profits
Unlimited liability
Termination occurs on owner’s death or by the owner’s choice

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
Partnership
Two or more persons come together as co-owners.
General Partnership: All partners are fully responsible for liabilities incurred by the partnership.
Limited Partnerships: One or more partners can have limited liability, restricted to the amount of capital invested in the partnership. There must be at least one general partner with unlimited liability. Limited partners cannot participate in the management of the business, and their names cannot appear in the name of the firm.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
Corporation
Functions legally as a separate entity and apart from its owners.
Corporation can sue, be sued, purchase, sell, and own property.
Owners (shareholders) dictate direction and policies of the corporation, oftentimes through elected board of directors.
Shareholder’s liability is restricted to amount of investment in company.
Life of corporation does not depend on the owners; corporation continues to be run by managers after transfer of ownership through sale or inheritance.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
The Trade-Offs: Corporate Form
Benefits: Limited liability, easy to transfer ownership, easier to raise capital, unlimited life (unless the firm goes through corporate restructuring such as mergers and bankruptcies)
Drawbacks: No secrecy of information, maybe delays in decision making, greater regulation, double taxation

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
Double Taxation Example (1 of 2)
Assume earnings before tax = $1,000
Federal tax @ 25% = $250
After-tax income available for distribution to shareholders = $750
Compute the taxes if the company chooses to distribute the entire after-tax profits to shareholders as dividends.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
Double Taxation Example (2 of 2)
If corporation distributes profits as dividends to shareholders, shareholders will be taxed again.
Assuming dividends are taxed @ 15%
Dividend tax = 15% of $750 = $112.50
==>

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
S-Corporations and Limited Liability Companies (LLCs) (1 of 2)
S-Type Corporations
Benefits
Limited liability
Taxed as partnership (no double taxation like corporations)
Limitations
Owners must be people so cannot be used for a joint ventures between two corporations

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
S-Corporations and Limited Liability Companies (LLCs) (2 of 2)
Limited Liability Companies (LLC)
Benefits
Limited liability
Taxed like a partnership
Limitations
Qualifications vary from state to state
Cannot appear like a corporation otherwise it will be taxed like one

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
Table 1.1 The Different Business Organizational Forms (1 of 2)
Blank Number of Owners Liability for Firm’s Debts Change in Ownership Dissolves the Firm Taxation
Sole Proprietorship One Yes Yes Personal/Pass-Through
Types of Partnerships Blank Blank Blank Blank
1. General Partnerships No Limit Each partner is liable for the entire amount Yes Personal/Pass-Through
2. Limited Partnerships At least one general partner (GP), no limit on limited partners (LP) GP – Yes, LP – No GP – Yes, LP – No Personal/Pass-Through

Table 1.1 The Different Business Organizational Forms (2 of 2)
Blank Number of Owners Liability for Firm’s Debts Change in Ownership Dissolves the Firm Taxation
Types of Corporations Blank Blank Blank Blank
1. Corporation No Limit No No Both corporate and personal taxes
2. S-corporation Maximum of 100 No No Personal/Pass-Through
3. Limited Liability Company No Limit No No Personal/Pass-Through

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
Finance and the Multinational Firm: The New Role

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
Finance and the Multinational Firm: The New Role
Coca-Cola, among other companies, receives significant profits from overseas sales.
U.S. firms are looking to international expansion to discover profits.
In addition to U.S. firms going abroad, we have also witnessed many foreign firms making their mark in the United States. For example, auto industry dominated by Toyota, Honda, Nissan, and BMW.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
Developing Skills for Your Career
Finance is a skill needed regardless of career choice. In this class, you will learn:
Critical thinking skills
Excel skills
Data analysis skills
Collaboration and communication skills

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
Key Terms (1 of 2)
Agency problem
Capital budgeting
Capital structure decisions
Corporation
Efficient market
Financial markets
General partnership
Incremental cash flow

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
Key Terms (2 of 2)
Limited Liability Company (LLC)
Limited partnership
Partnership
Opportunity cost
S-corporation
Sole proprietorship
Working capital management

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
Copyright
This work is protected by United States copyright laws and is provided solely for the use of instructors in teaching their courses and assessing student learning. Dissemination or sale of any part of this work (including on the World Wide Web) will destroy the integrity of the work and is not permitted. The work and materials from it should never be made available to students except by instructors using the accompanying text in their classes. All recipients of this work are expected to abide by these restrictions and to honor the intended pedagogical purposes and the needs of other instructors who rely on these materials.

36
Total tax=250+112.5=$362.5 or 36.25%

.MsftOfcThm_Text1_Fill {
fill:#000000;
}
.MsftOfcThm_MainDark1_Stroke {
stroke:#000000;
}

Maham Khan

Week 1

COLLAPSE

Top of Form

The article that I found highlights principle 4 which says that market prices are usually right. A concept that goes along with this principle is the idea of an efficient market which says that market prices reflect all available information at any moment in time. An applicable way to understand this is through stock value. Stock prices are useful indicators of the value of a firm and thus it can be interpreted that changes in stock price indicate the value of what may be currently offered by the firm. The article highlights certain stores that saw an increase in shares such as Target and Lowe’s. These stores were and continue to be very popular stores amongst the general public especially during the time of quarantine. The changes in values reflects the increasing demand for the firm.

https://www.cnbc.com/2020/08/19/stocks-making-the-biggest-moves-in-the-premarket-target-lowes-jj-momenta-gilead-more.html

Romualdo Ancog

Week 1 Discussion Board

COLLAPSE

The article I found was, “Airbnb has been brutalized by the pandemic, but will IPO anyway in ‘forgiving’ market.” This is an interesting article because it talks about how the company Airbnb is massively valued, 11.3 billion. Still, over the previous year, they took substantial hits with their revenue falling nearly 70%. The first core aspect of finance, shown in this article, is the fourth one: market prices are generally right. This article outlines the concept of market prices by even though the company is doing poorly currently, the market expects them to do better in the future. Therefore the market price does not decrease. This new clearly shows how markets are preemptive and often looks to the future about future possibilities.

https://finance.yahoo.com/news/airbnb-has-been-brutalized-by-the-pandemic-but-will-ipo-anyway-in-forgiving-market-153236640.html

Bottom of Form

Turn in your highest-quality paper
Get a qualified writer to help you with

“ The Five Principles ”

Get high-quality paper

NEW! AI matching with writer

Hire a Writer

Client Reviews

4.9

Sitejabber

4.6

Trustpilot

4.8

Our Guarantees

100% Confidentiality

Information about customers is confidential and never disclosed to third parties.

Original Writing

We complete all papers from scratch. You can get a plagiarism report.

Timely Delivery

No missed deadlines – 97% of assignments are completed in time.

Money Back

If you're confident that a writer didn't follow your order details, ask for a refund.

New to Your Trusted Assignment Help Service? Sign up & Save

Calculate the price of your order

Type of paper needed:

Pages:

You will get a personal manager and a discount.

Academic level:

We'll send you the first draft for approval by at

Total price:

$0.00

Power up Your Academic Success with the
Team of Professionals. We’ve Got Your Back.

Power up Your Study Success with Experts We’ve Got Your Back.

Order Now Order Now