The presence of new competitors who can identify good profitable (value creating) projects.
The Agency Problem refers to the conflict of interest that arises when managers (agents) work for their own benefit rather than for the owners (principals), which can hurt the firm's value.
Incremental cash flow refers to the additional cash flow generated from a specific decision or project, focusing only on the changes that matter.
Firm value = $10 x 20 = $200.
$1 now is worth more than $1 tomorrow due to the potential to earn interest.
Differentiation and cost advantage.
Buying stocks, which can offer returns around 15%.
Taxes bias business decisions by affecting after-tax cash flow, which is more important for investment considerations.
After-tax cash flow is crucial as it determines the actual profitability of an investment after accounting for taxes.
An investment tax credit is a government incentive that allows businesses to deduct a certain percentage of their investment costs from their tax liability.
In the Agency Problem, the manager is considered the agent for the owners.
Ethical dilemmas in finance refer to situations where financial professionals face conflicts between their personal values and the ethical standards of their profession, often involving decisions that could harm stakeholders or violate trust.
The secondary market is the market in which previously issued securities are traded.
When comparing 'Chicken Rice Only' to 'Chicken Rice and Chicken Noodle Soup', the incremental cash flow would be the additional revenue and costs associated with adding the Chicken Noodle Soup to the menu.
Dividends are payments made to shareholders from a corporation's earnings, reflecting the company's profitability and financial health.
Efficient capital markets are characterized by speedy information dissemination, where stock prices reflect all available information, leading to correct asset pricing.
Creating wealth and maintaining it.
Shareholder Wealth = Stock Price x Number of Stocks.
BOI industrialize zones are designated areas where businesses can benefit from tax incentives to encourage investment and economic development.
If stock prices are correct in efficient capital markets, it implies that the firm's value must also be accurate.
Saving at a bank, which typically offers around 3% interest.
Investors provide capital to corporations and can earn returns through dividends and capital gains.
The government uses tax incentives to stimulate investment by reducing the tax burden on businesses, thereby encouraging economic growth.
Cash pays employees and creditors, while profit can be manipulated.
Maximizing profits is often seen as a means to maximize shareholders' wealth.
Uncertainty of returns can lead to situations where a profit of 2M in the first year does not equate to a profit of 2M in the second year.
Maximize shareholders' wealth.
The primary market is the market in which new issues of a security are sold to initial buyers.
A bigger conflict of interest leads to a bigger agency problem, which can negatively impact the firm's value.
It suggests that receiving money now is preferable to receiving the same amount in the future, as it can earn interest.
The goal of the firm in relation to shareholder wealth maximization is the same as maximizing firm value and maximizing stock price.
Launch new product line, open new store, buy stocks.
To minimize risk without reducing return.
Corporations manage cash flow by reinvesting profits, paying dividends, and ensuring they have enough liquidity for operations.
Maximizing Firm Value = Maximizing Stock Price.
Because it is essential to consider the overall risk and return in the context of a diversified portfolio.
The first time the firm’s stock is sold to the general public.
A new stock offering by a firm that already has stock that is traded in the secondary market.
Government securities are debt instruments issued by a government to finance its expenditures, considered low-risk investments.
The timing of returns, as it raises the question of whether to prioritize profit now or later.
Higher risk is associated with higher potential returns. Additional risk should only be taken if it is rewarded with additional return.
Secondary markets are platforms where previously issued financial instruments, such as stocks and bonds, are bought and sold.
No, all risk is not equal; some risk can be diversified away while other risks cannot.
Receiving $1 million now is better because it can grow to $1.03 million in one year at a 3% interest rate.
$1 million now will grow to $1.03 million in one year.
The principle that potential return rises with an increase in risk.
The concept that money available today is worth more than the same amount in the future due to its potential earning capacity.
The phenomenon where competition drives down prices and profits, making it difficult for firms to maintain high returns.
The conflict of interest that arises when agents (managers) do not act in the best interest of the principals (shareholders).
Different types of risks have varying impacts on investments, and some risks can be mitigated while others cannot.
The idea that cash flow is more important than profits for a business's survival and growth.
Ethical dilemmas can arise in various situations, including investment decisions, financial reporting, and corporate governance.
The additional cash flows that a company expects to receive from a project or investment.
Markets where stock prices reflect all available information, making it impossible to consistently achieve higher returns than the average.
Taxes can influence the choices businesses make regarding investments, financing, and operations to minimize tax liabilities.
