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The Last but Not Least WHAT WE DO AND DO NOT KNOW ABOUT FINANCE 1. WHAT WE DO KNOW: THE SIX MOST IMPORTANT IDEAS IN FINANCE (1) Net Present Value (2) Risk and Return (3) Efficient Capital Markets (4) MM’s Irrelevance Propositions (5) Option Theory (6) Agency Theory 2. WHAT WE DO NOT KNOW: SEVEN UNSOLVED PROBLEMS IN FINANCE (1) What Determines Project Risk and Present Value? (2) Risk and Return—Have We Missed Something? (3) Are There Important Exceptions to the Efficient-Market Theory? (4) How Can We Explain Capital Structure? (5) How Can We Resolve the Dividend Controversy? (6) How Can We Explain Merger Waves? (7) What is the Value of Liquidity? 3. WHAT WE DO KNOW: THE SIX MOST IMPORTANT IDEAS IN FINANCE (1) Net Present Value (Chapter 4，7，8，9) A. The Net Present Value decision analysis method is a shareholder, value-creating process for selecting alternatives. B. The NPV method considers cash flows, the timing of the cash flows, and the opportunity rate of return on capital, including the required rate of return by equity investors. C. NPV is used in capital budgeting, merger analysis, bond refunding, and lease/buy analyses where cash flows over time are considered relative to an outlay today. D. Maximize present value is a shareholder-focused, long run decision criterion for managers. NPV rule gives the manager one simple instruction：“ Maximize net present value” (2) Risk and Return (Chapter 10， 11，5，6) A. Investors require added returns for added nondiversifiable risk assumed. B. An asset is seldom held by itself, but in portfolios. The risk of an asset is the change in risk to a portfolio when it is added. C. The CAPM approaches measuring relative risk by establishing a risk measure relative to the market portfolio called beta. The higher the beta of an asset, the higher the investor required rate of return. D. The two crucial ideas behind the CAPM: * Investors don’t like risk and require a higher return to compensate. * Th