Lecture 1 - Introduction To Business Finance Flashcards Preview

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

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

2

Accounting view of the firm

The balance sheet

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

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

3

Financial view of the firm

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

Liabilities:
- fixes claim on cash flows
- residual claim on cash flows

4

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

5

Three examples

Marketing:
- launching a new advertising campaign

Operations:
- introducing a new production line in a factory

Strategy:
- merging with another firm

6

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