costco wholesale corporation
Chapter 1
An Introduction to the Foundations of Financial Management
Learning Objectives
Identify the goal of the firm.
Understand the five basic principles of finance and business, the consequences of forgetting those basic principles of finance, and the importance of ethics and trust in business.
Describe the role of finance in business.
Distinguish between the different legal forms of business.
Explain what has led to the era of the multinational corporation.
Slide Contents
1. The Goal of the Firm
2. Legal Forms of Business Organization
3. Role of Financial Manager in a Corporation
4. Income Taxation
5. Ten Principles of Finance
6. Finance and Multinational Firm
1. The Goal of the Firm
The goal of the firm is to create value for the firm’s legal owners (that is, its shareholders). Thus the goal of the firm is to “maximize shareholder wealth” by maximizing the price of the existing common stock.
2. Five Foundational Principles 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
Five Principles
“…while it is not necessary to understand finance in order to understand these principles, it is necessary to understand these principles in order to understand finance.”
Principle 1: Cash flow is what matters
Accounting profits are not equal to cash flows. It is possible for a firm to generate accounting profits but not have cash or to generate cash flows but not report accounting profits in the books.
Cash flow, and not profits, drive the value of a business.
We must determine incremental cash flows when making financial decisions.
Incremental cash flow is the difference between the projected cash flows if the project is selected, versus what they will be, if the project is not selected.
Principle 2: Money has a time value
A dollar received today is worth more than a dollar received in the future.
Since we can earn interest
An Introduction to the Foundations of Financial Management
Learning Objectives
Identify the goal of the firm.
Understand the five basic principles of finance and business, the consequences of forgetting those basic principles of finance, and the importance of ethics and trust in business.
Describe the role of finance in business.
Distinguish between the different legal forms of business.
Explain what has led to the era of the multinational corporation.
Slide Contents
1. The Goal of the Firm
2. Legal Forms of Business Organization
3. Role of Financial Manager in a Corporation
4. Income Taxation
5. Ten Principles of Finance
6. Finance and Multinational Firm
1. The Goal of the Firm
The goal of the firm is to create value for the firm’s legal owners (that is, its shareholders). Thus the goal of the firm is to “maximize shareholder wealth” by maximizing the price of the existing common stock.
2. Five Foundational Principles 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
Five Principles
“…while it is not necessary to understand finance in order to understand these principles, it is necessary to understand these principles in order to understand finance.”
Principle 1: Cash flow is what matters
Accounting profits are not equal to cash flows. It is possible for a firm to generate accounting profits but not have cash or to generate cash flows but not report accounting profits in the books.
Cash flow, and not profits, drive the value of a business.
We must determine incremental cash flows when making financial decisions.
Incremental cash flow is the difference between the projected cash flows if the project is selected, versus what they will be, if the project is not selected.
Principle 2: Money has a time value
A dollar received today is worth more than a dollar received in the future.
Since we can earn interest