Question

finance: Define the five basic principles finance and justify
your analysis by illustrating examples: Choose one or more events described by media (CNN
Business, Financial Times, Dow Jones financial news etc.) about companies and financial
market. Analyse that event (s) applying the five basis principles of finance. Note: Each principle
is to be illustrated by at least one event. The events should be in 2020.

Answer 1

Five principles of finance are as follows-

A. Cash flow is what matters the most- it can be said that the cash flows of a company are always important as it will be reflecting the liquidity of the company and it will also reflect the company is highly solvent in the short-term and it is is having a futuristic cash flows also.

Ex- the shares of Tesla shot off due to increase in the cash flow of Tesla due to sale of the new vehicle even if it was not making profits and it was having higher cash flows.

B. Money has time value- time value of one of the most important principle of finance in which the value of money today is higher than the same amount of money tomorrow.

Ex- people were trying to sell their investment in the market correction as they believed that they will be losing upon the time value and the capital appreciation.

C. Risk will be requiring a reward- Higher the risk the higher will be reward, and lower the risk to the lower will be reward

Ex- those who invested into the market, at the time of the crisis were awarded the most and they were almost provided with almost 60% return in 3 months.

D. Market prices are generally right, as they will be reflecting the large consensus of the market and they will be derived by heavy transactions.

Ex- when the market started to go up, various experts countered that economy was weak, but it kept on going up and made new highs.

E. Conflict of interest- there will be a conflict of interest between the managers and its shareholders as the managers will be taking excessive risk in order to maximize the profits and that will be impacting the value of the shareholders.

Ex- The shares of Tesla fell down when they heard that management has sold its 5% stake