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In: Finance

five basic principles of Finance ??? explain with some example ??

five basic principles of Finance ??? explain with some example ??

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Expert Solution

Five basic principles of finance are

1. Cash flow is what matters as it drives the value of a business so it is highly important to keep a control over the cash flows of the business.For example valuation of a business depends upon the free cash flows of the firm.

2. Money has a time value money, invested cash that has potential to grow has a time value element attached to it so investment should be made after consideration of the time value of money.For examle capital budgeting decesion are only made after consideration of time value of money.

3. Risk requires a reward ,the higher the risk, the higher the reward so risk weighting must be done before making an investment.For example risk weighted average cost of capital is adopted for consideration of various capital budgeting projects.

4. Market process are generally right sound choices and they will lead to greater market value so there should be a proper check over market processes in order to sustain in the long run.For examle there shoud be proper diversification to adopt a new product line.

5. Conflicts of interest cause agency problems,keeping the line between different divisions with the corporation, So better and effective channel must be maintained in order to avoid and resolve conflict between principal and agent.For example there are several conflicts between management and share holders and there are various conflicts resolving channels.


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