Powerpoint Week 1

• Key concept 1 - The time value of money:

  • Is the guarantee of £100 in a year's time worth the same as £100 today?
  • Factors that cause money in the future to be less valuable than money now:
  • Inflation
  • Opportunity cost
  • Risk
  • Uncertainty
  • Present value formula:
  • PV = present value of a sum of money received in the future
  • FV = the value of a sum of money you receive in the future
• Key concept 2 - Risk and reward:

  • Investors prefer a sure thing most of the time
  • Risky investments offer a possibility of actual return differing from the expected return
  • Risk premium compensates for taking on risk
  • Non-financial situations with higher risk associated with higher reward:
  • Jumping a red light
  • Financial situations with higher risk associated with higher reward
• 3 key tasks of finance directors:

  • Financing decisions
  • Returns to equity decisions
  • Investment decisions
  • Interconnectedness of these decisions
• Purpose of a company:

  • To maximize shareholder wealth
  • To support wider stakeholders
• The agency problem:

  • Arises due to different interests of shareholders, managers, and debtholders
  • Shareholders, managers, and debtholders have different motivations and horizons
  • Ways to deal with the agency problem:
  • Option 1: do nothing
  • Option 2: monitoring
  • Option 3: reward good behavior
  • Problems with using share options for rewarding good behavior