Lecture 1 - Introduction To Business Finance Flashcards Preview

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Flashcards in Lecture 1 - Introduction To Business Finance Deck (6):

Accounting versus Finance

Accounting goal:
- create a set of statements that represent accurately the financial standing of a company at a specific point in time
- accounting is historical-looking & static

Finance goal:
- make business decisions based on accounting statements and assumptions about what is going to happen in the future
- finance is forward looking and dynamic


Accounting view of the firm

The balance sheet

- long lived real assets
- short lived assets
- investment in securities
- assets which are not physical

- short term liabilities
- debt obligations of the firm
- other long term obligations
- equity investment in the firm


Financial view of the firm

- existing investments that generate cash flows today
- expected value that will be created by future investments

- fixes claim on cash flows
- residual claim on cash flows


What is business finance

Every decision made in a business has financial implications, & any decision that involves the use of money is a corporate finance decision. Defined broadly, everything that a business does fits under the rubric of corporate finance


Three examples

- launching a new advertising campaign

- introducing a new production line in a factory

- merging with another firm


Maximising the value of a business (firm)

The investment decision - invest in assets that earn a return greater than the minimum acceptable hurdle rate
- The hurdle rate should reflect the riskiness of the investment and the mix of debt & equity used to fund it
- the return should reflect the magnitude & the timing of the cash flows as well as all side effects

The financing decision - find the right kind of debt for your firm & the right mix of debt & equity to fund your operations
- the optimal mix of debt & equity maximises firm value
- the right kind of debt matches the tenor of your assets

The Dividend Decision - if you cannot find investments that make your minimum acceptable rate, return the cash to the owners of the business
- how much cash you return depends upon current & potential investment opportunities
- how you choose to return cash to the owners will depends on whether they prefer dividends or buybacks