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    10 Axioms

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    Jann Kerky
    This document outlines ten principles of basic financial management including the risk-return tradeoff, time value of money, and efficient capital markets. It discusses how markets are not perfectly competitive and how to gain advantages. It defines efficient markets and lists their key characteristics including security prices rapidly reflecting all public information. The document also covers the agency problem, how taxes impact decisions, different types of risks that can and cannot be diversified, and the role of ethics in finance. It concludes by defining financial institutions, markets, and the suppliers and users of funds.

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    10 Axioms

    Uploaded by

    Jann Kerky
    229 views6 pages
    This document outlines ten principles of basic financial management including the risk-return tradeoff, time value of money, and efficient capital markets. It discusses how markets are not perfectly competitive and how to gain advantages. It defines efficient markets and lists their key characteristics including security prices rapidly reflecting all public information. The document also covers the agency problem, how taxes impact decisions, different types of risks that can and cannot be diversified, and the role of ethics in finance. It concludes by defining financial institutions, markets, and the suppliers and users of funds.

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    Financial Management

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    This document outlines ten principles of basic financial management including the risk-return tradeoff, time value of money, and efficient capital markets. It discusses how markets are not perfectly competitive and how to gain advantages. It defines efficient markets and lists their key characteristics including security prices rapidly reflecting all public information. The document also covers the agency problem, how taxes impact decisions, different types of risks that can and cannot be diversified, and the role of ethics in finance. It concludes by defining financial institutions, markets, and the suppliers and users of funds.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    229 views6 pages

    10 Axioms

    Uploaded by

    Jann Kerky
    This document outlines ten principles of basic financial management including the risk-return tradeoff, time value of money, and efficient capital markets. It discusses how markets are not perfectly competitive and how to gain advantages. It defines efficient markets and lists their key characteristics including security prices rapidly reflecting all public information. The document also covers the agency problem, how taxes impact decisions, different types of risks that can and cannot be diversified, and the role of ethics in finance. It concludes by defining financial institutions, markets, and the suppliers and users of funds.

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    © All Rights Reserved
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    Ten Axioms/Principles of Basic

    Financial Management
    The Risk-Return Trade-off - We Wont Take on Additional Risk
    Unless We Expect to Be Compensated with Additional Return.
    The Time Value of Money - A Dollar Required Today is Worth
    More Than A Dollar Received in the Future
    Cash - Not Profit - Is King
    Consider Incremental Cash Flows - Its Only What Changes
    that Counts
    The Curse of Competitive Markets - Why Its Hard to Find
    Exceptionally Profitable Projects
    Key: Invest in Markets That Are Not Perfectly Competitive
    How? 1. Differentiate your product.
    2. Achieve a cost advantage over competitors.

    Ten Axioms/Principles of Basic


    Financial Management
    Efficient Capital Markets - The Markets Are Quick and The
    Prices Are Right
    - Efficient Market - market in which the values of all assets
    and securities at any instant in time fully reflect all
    available public information. The market price of a
    security is a consensus among market players.
    - Characteristics:
    1. Security prices should reflect all available public
    information about the economy, about financial
    markets and about the specific co. involved.
    2. Market prices of individual securities adjust very rapidly
    to new information which can result in a change in the
    intrinsic value of a security but subsequent security
    price movements will follow what is known as random
    walk.

    Ten Axioms/Principles of Basic


    Financial Management

    - Characteristics of Efficient Capital Market (Contd):


    3. One simply cannot use past security prices to predict
    future prices in such a way as to profit on average.
    4. Unanticipated portion of return (expected return actual return) earned on a security is unpredictable
    and does not systematically differ from zero over a
    sufficient no. of observations. It is also not correlated
    to any information be it publicly available or insider.
    5. There is sufficiently large number of market
    participants who in their attempts to earn profits
    promptly receive and analyze all information that is
    publicly available concerning companies whose
    securities they follow.

    Ten Axioms/Principles of Basic


    Financial Management
    The Agency Problem - Managers Wont Work for the Owners
    Unless Its in Their Best Interest
    Taxes Bias Business Decisions
    All Risk is Not Equal - Some Risk Can Be Diversified Away and
    Some Cannot
    Diversification - allows good and bad events or observations
    to cancel each other out thereby reducing total variability
    without affecting expected return.

    Ten Axioms/Principles of Basic


    Financial Management
    Two Types of Risk:
    1. Systematic/Market/Unavoidable Risks. Ex: changes in
    nations economy, tax reform by Congress. These are risk
    that affect securities overall and consequently, cannot be
    diversified away.
    2. Unsystematic/Diversifiable/Avoidable Risks. Ex: wildcat
    stirke, entry of new competitor, technological breakthrough
    that make product obsolete. These risks are unique to a
    particular company, being independent of economic,
    political and other factors that affect securities in a
    systematic manner.

    Ethical Behavior is Doing the Right Thing and Ethical


    Dilemmas are Everywhere in Finance

    Financial Institutions:
    Commercial Banks
    Mutual Savings Bank
    Savings and Loan
    Associations
    Pension Funds
    Life Insurance Cos.
    Investment Banking
    Houses (or Brokerage
    Houses)

    Financial Markets:
    Money Markets
    Capital Markets

    Suppliers and Users of


    Funds:
    Individuals
    Businesses
    Governments

    Financial Markets - place where entities


    demanding funds are brought together with
    those having surplus funds.
    Money Markets - market for short-term
    (< 1 yr.) debt securities.
    Capital Markets - market for long-term
    debt and corporate stocks.

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