ABSTRACT
In this chapter we consider essential financial concepts and tools that financial managers use to make decisions. We begin with a discussion of risk considerations, including the risk/return tradeoff, risk diversification, and the impact of risk on enterprise value maximization. We then describe the general structure of interest rates and stock prices and the determination of the cost of capital. We conclude the chapter with a detailed look at time value of money, including present value and future value, and consider how the time value framework can be used to develop investment decisions rules.
As we’ve noted in Chapter 1, a company operating in a free market environment seeks to deliver goods and services to its customers in a timely, cost-effective, and prudent manner so that it can increase its net income. However, a company will only be able to do so if it can balance its risks properly. If it takes too much risk it stands a chance of reducing revenues and/or posting losses. If it takes too little risk it won’t be able to generate sufficient revenues or offer investors a suitable return.
