Finance Fostering a Flourishing Economic Climate Essay

Based on the textbook readings and Saudi Vision 2030, identify two KSA leaders who embody the Five Principles That Form the Foundations of Finance.

Discuss how the leaders exemplify the Five Principles.

Discuss how these Five Principles relate to the Saudi Vision 2030.

Directions:
Discuss the concepts, principles, and theories from your textbook. Cite your textbooks and cite any other sources if appropriate.

-Five Principles That Form the Foundations of Finance:

A. Principle 1: Cash Flow Is What Matters. In measuring value, we will use cash flows rather than accounting profits because it is only cash flows that the firm receives and is able to reinvest. In addition, in making business decisions, we will concern ourselves with only what happens as a result of that decision.

B. Principle 2: Money Has a Time Value. Almost all financial decisions involve comparing money in different periods, perhaps investing today and receiving returns later, or borrowing money today and paying it off later. A dollar received today is worth more than a dollar received in the future because of the time value of money.

C. Principle 3: Risk Requires a Reward. There is a risk-return trade-off in finance—typical risk-averse investors won’t take additional risk unless they expect to be compensated with additional return. Almost all financial decisions involve some sort of risk-return trade-off.

D. Principle 4: Market Prices Are Generally Right. In general, financial markets are quick to impound new information into stock prices, and the prices tend to be correct.

E. Principle 5: Conflicts of Interest Cause Agency Problems. Self-interested managers will not work for the owners’ best interest unless it is in the managers’ best interest as well. The corporate agency problem is a result of the separation of ownership from the decision-makers of the firm. As a result, managers may make decisions that are not in line with the goal of maximization of shareholder wealth.

F. The Essential Elements of Ethics and Trust. Ethical behavior is doing the right thing, and ethical dilemmas are everywhere in finance. Ethical behavior is important in financial management, just as it is important in everything we do. Businesses cannot interact unless they trust each other. Unfortunately, precisely how we define what is and is not ethical behavior is sometimes difficult. Nevertheless, we should not give up the quest.

-Saudi Vision 2023 Useful Sources:

https://www.vision2030.gov.sa/

https://www.vision2030.gov.sa/v2030/overview/