Principles of Finance Notes - 1456 Words

Principles of Finance Notes Theory Questions Explain why the NPV approach is preferred to the IRR approach (2006) The NPV approach takes into account the timing of cash flows and the IRR does not. For example if you took 2 projects that required the same initial outlay and had the same cash inflows for the same period of time but one project was deferred for one year, using the NPV we would have different values but the IRR would give us the same. The NPV approach takes into account the scale of the project and the IRR does not. For example The NPV approach can include multiple positive and negative cash flows in its calculations whereas the IRR cannot. The IRR is the discount rate that makes a project break even. If market conditions†¦show more content†¦A firms choice of investments are separate from its owners attitudes towards the investments. 2. It is possible to separate a firms investment decisions from the firms financial decisions. The first point means that the primary goal of any firm is to maximise its value, regardless of the attitudes of the firms owners. The second point means that a firms value is not determined by the way it is financed or the dividends paid to the firms owners. Explain the concepts of business risk and financial risk. (/2010) Business risk is the possibility that a company will have lower than anticipated profits, or that it will experience a loss rather than a profit. Business risk is influenced by competition, economic climate, government regulation amongst others. A company with a higher business risk should choose a capital structure that has a lower debt ratio to ensure that it can meet its financial obligations at all times. The ratios used to evaluate business risk include the contribution margin ratio, operating leverage ratio, financial leverage ratio and total leverage ratio. Financial risk is the possibility that shareholders will lose money when they invest in a company that has debt, if the companys cash flow proves inadequate to meet its financial obligations. When a company uses debt financing, its creditors will be repaid before its shareholders if the company becomes insolvent. Investors can use a number of ratios to evaluate financialShow MoreRelatedNotes On Principles Of Finance Essay717 Words   |  3 Pages TRIDENT UNIVERSITY INTERNATIONAL SLP One – The Roll of the Financial Manager Finance 301 – Principles of Finance Write a two to three page paper discussing what you find interesting about this company, and whether or not you think this company will have a successful future. Get to the company s web site, into the investors relations section and provide some financial highlights of your company for the past year. 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