How much, and when?
Map the timeline.
Timing is part of the value; equal nominal amounts can have different present worth.
Side 41
Finance
A study of how money moves across time under uncertainty. Finance turns future cash flows into present decisions by combining discounting, risk, valuation, funding choices and market prices.
cash flow→time→risk→price→allocation
06core lenses
05valuation tools
05risk questions
41Side
A dollar today and a dollar later are different objects.
Time value converts cash flows occurring at different dates into a common basis.
What return is required?
Opportunity cost + risk.
The discount rate reflects what investors require for delaying consumption and bearing uncertainty.
How does value grow?
Future value.
Returns earned on prior returns create nonlinear accumulation over time.
What is future money worth now?
Present value.
Discounting reverses compounding and makes dated cash flows comparable.
Which stream creates more value?
Use one date basis.
Projects should be compared after translating their cash flows into a common value framework.
Present valuePV = FV / (1 + r)^t
Value is an estimate of future economic benefit.
Price is observed in a market; value is inferred from assumptions about cash flows, growth, risk and terminal conditions.
Discount expected future cash flows.
Value depends on forecast cash generation and the rate used to discount it.
Value created after investment cost.
A positive net present value means discounted benefits exceed discounted costs under the assumptions used.
Rate making NPV equal zero.
Useful but can mislead when cash-flow patterns are unusual or projects differ greatly in scale.
Value relative to earnings, sales or cash flow.
Comparable-company methods inherit the market’s pricing of the peer set.
Value beyond explicit forecast.
Often dominates DCF results, making long-run assumptions especially important.
Different futures, different cash flows.
Valuation can be expressed across scenarios rather than hidden inside one deterministic forecast.
Expected return is inseparable from uncertainty.
Finance distinguishes risks that can be diversified from risks tied to broad market exposure and from risks unique to a specific cash-flow stream.
How widely do returns vary?
Standard deviation captures dispersion but not every economically relevant form of risk.
Do assets move together?
Diversification works when exposures are not perfectly correlated.
How sensitive to market movement?
Beta estimates systematic co-movement under a particular market model.
What happens in rare extremes?
Average volatility can understate asymmetric or clustered losses.
Can the asset be sold when needed?
Market depth can disappear precisely when investors most want to exit.
Will promised cash flows arrive?
Default probability, recovery and exposure determine lender loss.
How a firm is financed changes who bears risk.
Debt and equity distribute claims differently across states of the world.
Debt
Contractual claim.
Interest and principal are promised payments; failure to meet them can trigger default consequences.
Equity
Residual claim.
Shareholders receive what remains after contractual claims and absorb more upside and downside variability.
Leverage
Debt amplifies equity outcomes.
Fixed obligations can increase returns to equity in good states and losses in bad ones.
Cost of capital
Funding has an opportunity cost.
Weighted financing costs provide a hurdle for projects with comparable risk.
Flexibility
Unused capacity has option value.
More borrowing today can reduce room to finance future shocks or opportunities.
Markets transform dispersed expectations into prices.
Prices aggregate orders, beliefs, liquidity needs, constraints and information—without becoming perfect statements of intrinsic value.
| Market | Primary claim | Key price variable | Main risk |
|---|---|---|---|
| Equity | Residual ownership | Share price / valuation multiple | Business and market risk |
| Bond | Contractual cash flow | Yield / spread | Rate and credit risk |
| Money market | Short-term funding | Short-term rate | Liquidity and rollover risk |
| FX | Currency exchange | Exchange rate | Macro and relative-rate risk |
| Derivative | Contingent payoff | Premium / implied variables | Model, market and counterparty risk |
Finance becomes useful when it changes allocation.
The decision problem is not merely what something is worth, but where scarce capital should go.
A project has high IRR but tiny scale.
Compare absolute NPV, reinvestment assumptions and strategic constraints rather than ranking projects only by percentage return.
A company can repurchase shares or build a new plant.
Compare expected return, risk, funding cost, strategic option value and the value of retaining flexibility.
An asset looks cheap relative to peers.
Ask whether the discount reflects worse growth, risk, capital intensity, accounting differences or a genuine pricing gap.
A portfolio has many holdings but one common factor.
Count exposures, not tickers. Diversification fails when different assets all depend on the same underlying risk.
Principles of Corporate FinanceBrealey, Myers & Allen · corporate finance
Investment ValuationAswath Damodaran · valuation
InvestmentsBodie, Kane & Marcus · portfolio and markets
Against the GodsPeter Bernstein · history of financial risk