Finance 1 ANSWERS to ALL homework exercises (week 1 till 7) - UVA EBE Question And Answer
What is finance - Answer-Defined as the science and art of managing money
Financial services - Answer-Is the area of finance concerned with the design and delivery of advice and financial products
to individuals, businesses, and governments
Managerial finance - Answer-Is concerned with the duties of the financial manager working in a business
Goal of the firm - Answer-Maximize shareholder wealth
Decision rule for managers - Answer-Only take actions that are expected to increase the share price
What three facts should be known when picking which investment is preferred - Answer-1. Timing is important- the
receipt of funds sooner rather than later is preferred
2. Profits do not necessarily result in cash flows available to stockholders
3. Profit maximization fails to account for risk
Five foundational principles of finance - Answer-1. Cash flow is what matters
2. Money has a time value
3. Risk requires a real reward
4. Market prices are generally right
5. Conflicts of interest cause agency problems
Three things to know about principle 1, "cash flow is what matters" - Answer-1 accounting profits are equal to cash flow
2 cash flow, and not profits, drive the value of a business
3 we must determine incremental cash flows when making financial decision
Two things to know about principle 2 "Money has a time value" - Answer-1 a dollar received today is worth more than a
dollar received in the future Because we can earn interest on money received today
2 there is such a thing as opportunity cost
Opportunity cost - Answer-What is the next test alternative available to the decision maker for a given level of risk
Two things to be known about principle 3 "risk requires a reward" - Answer-1. We won't take on additional risk unless
we expect to be compensated with additional reward/return
2. Investors expect to be compensated for "delayed consumption" and "taking on risk"
What is finance - Answer-Defined as the science and art of managing money
Financial services - Answer-Is the area of finance concerned with the design and delivery of advice and financial products
to individuals, businesses, and governments
Managerial finance - Answer-Is concerned with the duties of the financial manager working in a business
Goal of the firm - Answer-Maximize shareholder wealth
Decision rule for managers - Answer-Only take actions that are expected to increase the share price
What three facts should be known when picking which investment is preferred - Answer-1. Timing is important- the
receipt of funds sooner rather than later is preferred
2. Profits do not necessarily result in cash flows available to stockholders
3. Profit maximization fails to account for risk
Five foundational principles of finance - Answer-1. Cash flow is what matters
2. Money has a time value
3. Risk requires a real reward
4. Market prices are generally right
5. Conflicts of interest cause agency problems
Three things to know about principle 1, "cash flow is what matters" - Answer-1 accounting profits are equal to cash flow
2 cash flow, and not profits, drive the value of a business
3 we must determine incremental cash flows when making financial decision
Two things to know about principle 2 "Money has a time value" - Answer-1 a dollar received today is worth more than a
dollar received in the future Because we can earn interest on money received today
2 there is such a thing as opportunity cost
Opportunity cost - Answer-What is the next test alternative available to the decision maker for a given level of risk
Two things to be known about principle 3 "risk requires a reward" - Answer-1. We won't take on additional risk unless
we expect to be compensated with additional reward/return
2. Investors expect to be compensated for "delayed consumption" and "taking on risk"
