Finance Chapter 1

1-1. What is finance? What types of decisions do people in finance make?

Finance is concerned with decisions about money. Financial decisions deal with how money is raised and used by business, governments, and individual. Investment (financial assets, real assets) financing (funding)

a. Decisions made by businesses and individuals as they choose securities for their investment portfolios.

b. Determining the optimal mix of securities that should be help in a portfolio

1-2. Why should persons who pursue careers in business have a basic understanding of finance even if their jobs are in areas other than finance, such as marketing or personnel?

There are financial implications in virtually all business decisions, and non-financial executives must know enough finance to incorporate these implications into their own specialized analyses.

1-3. What does it mean to maximize the value of a corporation?

Stockholder wealth maximization translates into maximizing the value of the firm as measure by the price of its common stock.

1-4. In general terms, how is value measured? What three factors determined value? How does each affect value?

A firms value is determined by the cash flows it is expected to generate in the future, as well as the risk associated with those expected cash flows. The value of a firm can be measured by the market value of its stock. First the value of any investment is based on the cash flows the asset is expected to generate during its life. Second, investors prefer to receive a particular cash flow sooner than later and third, investors generally are risk averse which means they are willing to pay more for investments with more certain cash flow for investments with less certain or riskier, cash flows. The affect the firms value because they affect the amount, timing, and riskiness of the cash flows the firm produces.

1-5. What is the difference between stock price maximization and profit maximization?...