Questions and Answers
What is the core principle of finance that states any amount of money is worth more the sooner it is obtained?
What is the key concept in understanding the time value of money?
Why do rational investors prefer to receive money today rather than the same amount of money in the future?
What happens when money is deposited into a savings account?
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Why is the time value of money important in financial investment decisions?
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What would an investor prefer between two projects with identical descriptions, except for the time of cash disbursement?
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What is the term for the concept that money is more valuable when received closer to the present?
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What happens when an investor receives money one year in the future instead of today?
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What is the result of not understanding the time value of money in investment decisions?
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Why is Project A more attractive than Project B if Project A promises a $5 million cash disbursement in year 1, and Project B offers a $5 million cash disbursement in year 5?
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Study Notes
Fundamentals of Financial Management
- The size of the firm and its growth capacity are essential considerations for allocating funds.
- The status of assets (long-term or short-term) and the mode of fund raising also play a crucial role in financial decision-making.
- A good asset mix and proper allocation of funds are vital for a firm's survival and sustenance.
Profit Planning
- Profit making is a primary function and goal of a business organization.
- Profit is achieved through pricing, industry contention, economic state, demand and supply mechanism, cost, and output.
- A healthy mix of variable and fixed factors of production leads to increased profitability.
- Continuous valuation of depreciation cost of fixed factors of production is necessary to maintain a tandem.
Understanding Capital Markets
- Shares of a company are traded on the stock exchange, involving a high risk.
- A financial manager must understand and calculate the risks involved in trading shares and debentures.
- The distribution of profits is crucial, as some investors prefer not to distribute dividends to shareholders, instead investing in the business for growth.
Decision Areas in the Financial Market and Objectives of the Firm
- The financial decision-making process involves investments, financing, dividends, and asset management.
- A financial manager must analyze external and internal variables affecting the company's activities.
- The decision-making process can be divided into investment, financing, and dividend decisions.
Financial Ratios
- Gross margin ratio: compares gross profit to net sales to show profitability.
- Operating margin ratio: compares operating income to net sales to determine operating efficiency.
- Return on assets ratio: measures how efficiently a company uses its assets to generate profit.
- Return on equity ratio: measures how efficiently a company uses its equity to generate profit.
Market Value Ratios
- Market value ratios evaluate the share price of a company's stock.
Financial Statement Analysis
- Common size analysis (vertical analysis) is a tool used to analyze financial statements.
- It evaluates financial statements by showing each line item as a percentage of the base amount for that period.
Time Value of Money
- The concept of time value of money states that money is more valuable when received closer to the present.
- The key to conceptualizing the time value of money is the concept of opportunity cost.
- Rational investors prefer to receive money today rather than the same amount of money in the future due to its potential to grow in value over time.
- Understanding the time value of money is crucial in guiding financial investment decisions.
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Description
Learn about the key aspects of financial management, including fund allocation, asset management, and profit planning to ensure a firm's survival and success.
