Finance Overview and Value Creation

A situation where an agent (like a manager) making decisions for a principal (like a company owner) might prioritize their own interests over the principal's best interests.

A theory that financial markets are influenced by the irrational behavior of investors and their emotional biases, rather than just by rational economic factors.

A field of finance that considers both financial returns and environmental sustainability when making financial decisions. It aims to balance profit with the well-being of the planet and its stakeholders.

A dollar received today is worth more than a dollar received in the future, due to the potential for interest, returns, and inflation.

Cash flows are the driving force behind a business's value. Receiving cash sooner is more valuable than receiving it later.

There's always a trade-off between higher risk investments & higher potential return. Accepting more risk should come with a higher potential reward.

The process of finding ways to reduce costs in all parts of a business, not just cutting specific expenses. This can involve utilizing resources more efficiently.

Financial markets respond quickly and effectively to new information. Investors buy and sell their investments based on this information.

Finance is the study of how to make decisions about money. It involves how money is raised and used by businesses, governments, and individuals.

Finance applies economic principles and mathematical tools to make decisions about allocating money under uncertainty.

The Net Present Value (NPV) method was developed by Irving Fisher in 1907. It helps evaluate projects by comparing future cash flows to their present value.

Harry Markowitz's portfolio theory, developed in 1952, states that diversification can reduce risk without lowering potential returns.

Modigliani and Miller (M&M) in 1958-1963 contributed to modern corporate finance with their theories on capital structure, which deals with how companies raise money.

Eugene Fama's concept of efficient markets in the 1960s suggests that prices reflect all available information, making it difficult to consistently beat the market.

The Capital Asset Pricing Model (CAPM) was developed in the 1960s by William Sharpe and John Lintner. It helps calculate the expected return on an investment given its risk.

Options pricing theory, developed in the early 1970s by Fischer Black, Myron Scholes, and Robert Merton, helps determine the value of options (contracts giving you the right to buy or sell an asset at a certain price).

Marketing decisions often involve spending money now to generate future profits. Financial tools like NPV, IRR, and EVA can help analyze these investments.

Financial managers have significant control over money allocated to marketing. Building a strong, collaborative relationship with finance is essential for successful marketing campaigns.

Close collaboration between finance and accounting is critical for effective decision-making. Financial managers rely on accounting information, and accountants must understand how it's used for financial decisions.

Financial knowledge is valuable in various business areas, not just finance. Understanding financial data helps make better decisions and increases personal value within the organization.

Economics and finance share many tools and concepts. Financial professionals need to understand economic principles to make informed decisions, and economists need to understand finance to analyze economic activity.

Decisions made by companies regarding how to raise and allocate capital, including debt and equity financing, and how to distribute profits.

Decisions about which assets to buy, hold, or sell, including stocks, bonds, real estate, and other investments.

Professionals who help people or businesses manage their financial affairs and plan for their financial future, including investments, savings, and retirement planning.

Professionals who manage investment portfolios for individuals, businesses, or institutions, aiming to maximize return while managing risk.

A broad term that covers various financial services offered by institutions, including banking, insurance, investment management, and more.

The use of financial concepts and strategies within a business or organization, including budgeting, financial analysis, and investment decisions.

Professionals who work in the insurance industry, helping individuals and businesses protect themselves from financial losses caused by unexpected events.