financial management decisions
Financial management decisions:
1. Capital budgeting (investment) – the whole process of analyzing projects and deciding whether they should be included in the capital budget.
Spending capital on assets that will yield highest return for comp over desired time period
What to buy so that comp will gain most value
2. Capital structure (financing) – the manner in which a firm’s assets are financed; that is, the right side of balance sheet. Capital structure is normally expressed as the percentage of each type of capital used by the firm such as debt, preferred stock, and common equity.
3. Working capital (dividends???) – a firm’s investment in short term assets – cash, marketable securities, inventory and accounts receivable.
Capital Asset Pricing Model (CAPM) A model based on the proposition that any stock’s required rate of return is equal to the risk-free rate of return plus a risk premium reflecting only the risk remaining after diversification. The CAPM equation is
Application difficulties – difficult to measure/ estimate
Risk free rate
Beta - A measure of a stock’s market risk, or the extent to which the returns on a given stock move with the stock market
Risk premium - The extra return that an investor requires to hold risky Stock I instead of a risk-free asset.
stock’s risk can be eliminated by diversification, so rational investors should hold portfolios of stocks rather than just one stock. the Capital Asset Pricing Model (CAPM), which links risk and required rates of return, using a stock’s beta coefficient as the relevant measure of risk. asset pricing models:
CAPM
the Arbitrage Pricing Theory model and the Fama-French three-factor model.
1. Capital budgeting (investment) – the whole process of analyzing projects and deciding whether they should be included in the capital budget.
Spending capital on assets that will yield highest return for comp over desired time period
What to buy so that comp will gain most value
2. Capital structure (financing) – the manner in which a firm’s assets are financed; that is, the right side of balance sheet. Capital structure is normally expressed as the percentage of each type of capital used by the firm such as debt, preferred stock, and common equity.
3. Working capital (dividends???) – a firm’s investment in short term assets – cash, marketable securities, inventory and accounts receivable.
Capital Asset Pricing Model (CAPM) A model based on the proposition that any stock’s required rate of return is equal to the risk-free rate of return plus a risk premium reflecting only the risk remaining after diversification. The CAPM equation is
Application difficulties – difficult to measure/ estimate
Risk free rate
Beta - A measure of a stock’s market risk, or the extent to which the returns on a given stock move with the stock market
Risk premium - The extra return that an investor requires to hold risky Stock I instead of a risk-free asset.
stock’s risk can be eliminated by diversification, so rational investors should hold portfolios of stocks rather than just one stock. the Capital Asset Pricing Model (CAPM), which links risk and required rates of return, using a stock’s beta coefficient as the relevant measure of risk. asset pricing models:
CAPM
the Arbitrage Pricing Theory model and the Fama-French three-factor model.