Definitions of Finance

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Definitions for Finance FIN/370 February 24, 2014

Finance Definitions
Finance – Is the study of people and business invest and raise capital to fund them. It is the study of how it addresses the following: 1. What long-term investments should the firm undertake?This area of finance is generally referred to as capital budgeting. 0 2. How should the firm raise money to fund these investments?The firm’s funding choices are generally referred to as capital structure decisions.
3. How can the firm best manage its cash flows as they arise in its day-to-day operations?This area of finance is generally referred to as working capital management.
The principle of finance is the following:
Principle 1: Money Has a Time Value A dollar received today is worth more than a dollar received in the future. Conversely, a dollar received in the future is worth less than a dollar received today. Principle 2: There Is a Risk-Return Tradeoff We won’t take on additional risk unless we expect to be compensated with additional return. Principle 3: Cash Flows Are the Source of Value Cash flow measures the amount of cash that can actually be taken out of the business over an interval of time. As a result, it is the source of value. Principle 4: Market Prices Reflect Information Investors respond to new information by buying and selling. As a result, prices reflect what is known. The speed with which investors act and prices respond reflects the efficiency of the market.
The role of finance in an organization is key to it success and…...

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