Language: English, with some Dutch notes from lectures

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Language: English, with some Dutch notes from lectures

Chapter 1 The goal of the financial manager is to create wealth for the shareholders, by making decisions that will maximize the price of the existing common stock.Share holders are the legal owners of the firm.

• Principles that form the foundations of Finance.
• Cash flow is what matters
• Money has a time value
• Risk requires a reward
• Market prices are generally right
• Conflicts of interest cause agency problems

Cash flow is what matters

• It is cash flow, not profits that determines (bepaalt) the value of a business.
• Accounting profits are not equal to cash flows.
• It is possible for a firm to generate accounting profits (Boekhoudkundige winst)

but not havecash or to generate cash flows but not report accounting profits in the books

• Incremental cash flow is the difference between the projected cash flows if

the project isselected, versus what they will be, if the project is not selected.Money has a time value

• A euro received today is worth more than a euro received in the future, (Interest)
• Opportunity cost is the difference between the highest valued alternative and the

thing you have decided, that you had give up when you made the choice. ( Ik leen Cindy €1.000,- envraag geen rente. Ik had ook Tjalling dat geld kunnen lenen tegen 8%, dus dan heb ik een kans laten liggen om geld te verdienen, dus mijn oportunity cost zijn dan

€80,- )

Risk requires a reward

• Investors expect a return when they put their savings in a bank (delay

consumption) and they expect to earn a higher rate of return on stocks relative to bank savings account (taking on risk) Market prices are generally right

• In an efficient market, the prices of all traded assets (such as stocks and

bonds) reflect all available information at any time.

• Stock prices are a useful indicator of the value of the firm. Prices changes

reflect changes in expected future cash flows. Good decisions will tend to increase the stock prices.Conflicts of interest cause agency problems

• Agency problems are problems and conflicts resulting from the separation of the

management and owners of the firm. (Ik ben een manager en kom tot de 2 / 4

conclusie dat het voor de eigenaar beter is om de fabriek te sluiten en de spullen elders in te 3 / 4

kopen. Maar alsik dat aan de eigenaar rapporteer is de kans dat ik ontslagen wordt groot omdat ik de manager ben van die fabriek. Dit wil ik niet en zal het niet rapporteren om mijn baan te behouden. )

• Agency conflict is reduced through monitoring ( Annual reports),

compensation schemes

• stock options), and market mechanisms ( Takeovers)
• Ethical behaviour is doing 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 The Role of Business in Finance

• Knowledge of financial tools is relevant for decision making in all areas of

business (be it marketing, production etc.)

• Decisions involve an element of time and uncertainty (Onzekerheid) … financial

tools help adjust (Aanpassen) for time and risk.

• Decisions taken in business should be financially feasible (Uitvoerbaar) …

financial tools helpdetermine (Bepalen) the financial viability (levensvatbaarheid) of decisions .1What long term investments should the firm undertake (ondernemen)??Capital budgeting the decision making process with respect to investment in fixed assets.(overwegging nemen van waar in je gaat investeren met betrekking tot vaste activa) .2How should the firm raise money to fund (financieren) these investments??Capital structure decision the decision making process with funding choices (financierings mogelijkheden) and the mix of long term sources of funds (fondsen)..3How can the firm best manage its cash flows as they arise (bezig zijn) in its day-to- day operations??Working capital management the management of the firm's current assets (Vlottende activa) and short term financing.Financial markets is a institutions and procedures that facilitate financial transactions The Legal Forms of Business Organization

• Sole proprietorship
• Partnership
• Corporations

Sole proprietorship a business owned by a single individual Partnership an association (Verenigen) of two or more individuals joining together as co- owners to operate a business for profit.

• General partnership a partnership in which all partners are fully liable

(Volledig aansprakelijk) for the ineptness incurred (op gelopen schuldenlast) by the partnership.

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