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Profit Maximization - E-Commerce - Lecture Slides, Slides of Fundamentals of E-Commerce

E-Commerce is taking over the traditional commerce practices. It is of special concern for the IT students. Following are the key points of these Lecture Slides : Profit Maximization, Shareholder Wealth, Maximization, Time Dimension, Accounting Concept, Different Interpretations, Ignores Risk, Cash Flow, Accounting Profits, Financial Analysis

Typology: Slides

2012/2013

Uploaded on 07/30/2013

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SWM and Profit Maximization

•Shareholder Wealth Maximization is not the

same as Profit Maximization

Reasons:

–Profit maximization has no time dimension

–Profit is an accounting concept with many

different interpretations

–Profit maximization ignores risk

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Download Profit Maximization - E-Commerce - Lecture Slides and more Slides Fundamentals of E-Commerce in PDF only on Docsity!

SWM and Profit Maximization

•^ Shareholder Wealth Maximization is

not

the

same as Profit MaximizationReasons:^ –^ Profit maximization has no time dimension^ –^ Profit is an accounting concept with manydifferent interpretations^ –^ Profit maximization ignores risk

Maximizing Shareholder Wealth • To maximize shareholder wealth, the financialmanager must maximize the market value of the firm’s common stock • Three factors determine the market value ofcommon stock:^ –^ Size of the firm’s cash flow^ –^ Timing of the firm’s cash flow^ –^ Risk of the firm’s cash flow stream

Cash Flow

•^ Cash flows, not accounting profits, are criticalto most financial analysis •^ Important cash flow concepts:

–^ Timing of cash inflows versus cash outflows –^ Cash flow is not equal to operating profit.

Concept of Net Present Value • The net present value (NPV) of an investmentrepresents the contribution of the investmentto the value of the firm • To maximize shareholder wealth, reject allprojects with a negative NPV • NPV = PV of cash inflows - PV of cash outflows

Profit Maximization - E-Commerce - Lecture Slides, Slides of Fundamentals of E-Commerce

Related documents

Partial preview of the text

Download Profit Maximization - E-Commerce - Lecture Slides and more Slides Fundamentals of E-Commerce in PDF only on Docsity!

SWM and Profit Maximization

•^ Shareholder Wealth Maximization is

not

the

same as Profit MaximizationReasons:^ –^ Profit maximization has no time dimension^ –^ Profit is an accounting concept with manydifferent interpretations^ –^ Profit maximization ignores risk

Cash Flow

•^ Cash flows, not accounting profits, are criticalto most financial analysis •^ Important cash flow concepts:

–^ Timing of cash inflows versus cash outflows –^ Cash flow is not equal to operating profit.

Concept of Net Present Value • The net present value (NPV) of an investmentrepresents the contribution of the investmentto the value of the firm • To maximize shareholder wealth, reject allprojects with a negative NPV • NPV = PV of cash inflows - PV of cash outflows

NPV Example: Intuition

$1 M

$400K

$400K

$400K

Solution is calculated by discount each of thecash flows back to time period zero using a

discount rate of 20%.

NPV Example: Solution

(^ )^

(^ )

^ (^ )

^

^

^

^

^

^

^

^

^

^

^

^

^

^

^

=PMT

-PMT

NPV Decision

Reject the project.

Accepting the project will

destroy significant shareholder value