31266 Study Guide - Final Guide: Legal Personality, Operating Cash Flow, Sole Proprietorship
Corporate finance: basis theories and ideas of finance
•
Investments: financial assets such as shares and bonds
•
Financial institutions: firms dealing in financial matters
•
International finance: covers the above areas in global context
•
Four basic areas of finance
Balance sheet
What the firm owns
•
Cash
•
Accounts receivable
•
Inventory
•
Current assets
•
Tangible assets
•
Intangible assets
•
Non-current assets
•
What the firms owes
•
Accounts payable
•
Current liabilities
•
Non-current liabilities
•
Equity/capital
•
Shareholders funds
•
Balance sheet is historical accounting
•
Product the cash flows over time
○
Real or productive assets
•
Claim on cash flows of productive assets
○
Financial or paper assets
•
Not concerned with past
○
Market value (what is value of the assets today)
○
Balance sheet for finance
•
Market values and book values
Income statement
Sales
+Other income
-COGS
-Administration expenses
-Other expenses
-Depreciation
=Operating income (Earnings before interest and tax EBIT)
-Interest expense
-taxes
=net income or profit after tax
Lec 1 Orientation
F Page 1
Maximisation of share price
○
Maximise shareholder wealth
•
No time frame
○
What measure of profit? (depends on accounting standards)
○
Profit maximisation is not an appropriate goal
•
Other goals are also not appropriate
•
Goal of Financial Management
Dollar amount
•
Time (time value of money)
•
Risk (uncertainty -> higher return -> higher risk)
•
Factors in any financial decisions
The trade-off between expected return and risk
The most important decision
○
Determine the value of long-term asset
○
Evaluate size, time, risk of cash flows
○
Select assets that create most shareholder wealth
○
Investment decisions: what assets to buy (capital budgeting)
•
Determine the best mix between debt and equity
○
Trade-off between return and risk
○
Financing decisions: where does the money come from (capital structure)
•
Managing short-term assets and liabilities
○
Forms part of the investment decision
○
Working capital decisions
•
Financial manager's responsibilities
Single owner
○
Unlimited liability
○
Lasts as long as the owner is alive or sells
○
Easy and inexpensive
○
Minimal reporting requirements
○
Sole trader/ proprietorship:
•
Similar to sole trader
○
All share in gains and losses
○
Unlimited liability
○
If one leaves, partnership ends
○
Partnership:
•
Separate legal entity
Company:
•
Forms of business
Lec 2 Introduction
F Page 2
Separate legal entity
○
Unlimited life
○
Formal and legal requirements
○
Limited liability for shareholders
○
Easy to raise capital
○
To increase the shareholders wealth
○
The shareholders cannot influence managers
○
Managers run the firm for the owners
•
Agency problem
Security or instrument issued to an investor for the first time
•
Public offering or private placement
•
Can be debt or equity funding
•
Primary market
Financial securities that are already issued are bought and sold
•
Way of transferring ownership
•
i.e. securities exchange
•
Investor-to-investor trading
•
Non additional funds are raised by the firm
•
Secondary market
F Page 3
Document Summary
Corporate finance: basis theories and ideas of finance. Investments: financial assets such as shares and bonds. International finance: covers the above areas in global context. Market value (what is value of the assets today) =operating income (earnings before interest and tax ebit) What measure of profit? (depends on accounting standards) Risk (uncertainty -> higher return -> higher risk) Investment decisions: what assets to buy (capital budgeting) Financing decisions: where does the money come from (capital structure) Determine the best mix between debt and equity. Lasts as long as the owner is alive or sells. Security or instrument issued to an investor for the first time. Financial securities that are already issued are bought and sold. Non additional funds are raised by the firm. Profits can be measured in various ways, or manipulated. Wealth-maximisation takes into account the size of cash flows, timing and risk. A dollar today is worth more than a dollar tomorrow.
