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FM8: SPECIAL TOPICS IN FINANCIAL MANAGEMENT

THE PRINCIPLES THAT FORM

THE BASICS OF FINANCIAL
MANAGEMENT
It is not necessary to understand finance in order to
understand these principles, it is however necessary
to understand these principles in order to
understand financial management.
10 PRINCIPLES OF FINANCIAL
MANAGEMENT

Principle #1

THE RISK-RETURN
TRADE-OFF
We won’t take on additional risk
unless we expect to be
compensated with additional
return.
10 PRINCIPLES OF
FINANCIAL MANAGEMENT
Principle #2

THE TIME VALUE OF

MONEY
A dollar received
today is worth
more than a
dollar received in
the future.
 Principle #3
We should use cash flows
CASH-NOT to measure the benefits
PROFITS-IS KING that accrue from taking
on anew project.
10 PRINCIPLES OF
FINANCIAL MANAGEMENT
10 PRINCIPLES OF FINANCIAL
MANAGEMENT

Principle #4

INCREMENTAL
CASH FLOWS
It’s only what changes that
counts.
10 PRINCIPLES OF
FINANCIAL MANAGEMENT
Principle #5

THE CURSE OF
COMPETITIVE
Why it’s hard to
find exceptionally
profitable
projects
PRINCIPLE #5: THE CURSE OF COMPETITIVE

2 COMMON WAYS OF MAKING

MARKETS LESS COMPETITIVE
01 Product 02
Achieve a cost
advantage over
Differentiation
competitors and
Economies of scale
 Principle #6

EFFICIENT CAPITAL The markets are quick

MARKETS and the prices are right.

10 PRINCIPLES OF
FINANCIAL MANAGEMENT
10 PRINCIPLES OF
FINANCIAL MANAGEMENT

Principle #7

THE AGENCY
PROBLEM

Managers won’t work for

owners unless it’s in
their best interest.
10 PRINCIPLES OF
FINANCIAL MANAGEMENT
Principle #8

TAXES BIAS
BUSINESS DECISIONS
Hardly any
decision is made
by the financial
manager without
considering the
impact of taxes.
10 PRINCIPLES OF FINANCIAL
MANAGEMENT

Principle #9

ALL RISK IS NOT

EQUAL
Some risk can be diversified
away, and some cannot.
10 PRINCIPLES OF
FINANCIAL MANAGEMENT

Principle #10
ETHICAL BEHAVIOR IS DOING THE RIGHT THING AND
ETHICAL DILEMMAS ARE EVERYWHERE IN