The Principles of Finance

There are ten principles that form the basis of FINANCIAL MANAGEMENT. These can be called as the foundation of finance that plays a significant role in decision making made by financial managers here we go…

  1. The risk returns trade-off: Investors won’t take an additional risk unless they expect to be compensated with additional return.
  2. Time Value of Money: A dollar received today is worth more than a dollar received a year from now.
  3. CASH, not profits are KING: It is cash flows, not profits that are actually received by the firm and can be reinvested.
  4. Incremental Cash Flows: It’s only what changes that counts. The incremental cash flow is the difference between the cash flows if the project is taken on versus what they will be if the project is not taken on.
  5. The Curse of Competitive Markets: Why it’s hard to find exceptionally profitable
  6. Efficient Capital Markets: The markets are quick and the prices are right. An efficient market is characterized by a large number of profit-driven individuals who act independently.
  7. The Agency Problem: A problem resulting from conflicts of interest between the manager/agent and the stockholder.
  8. Taxes Bias: Business Decisions.
  9. All Risk: Is not Equal-some risk can be diversified away, and some cannot.
  10. Ethical Behavior: is doing the right thing, and ethical dilemmas are everywhere in finance.