The Financial Environment Flashcards
(10 cards)
Other influences on financial decision-making
*The financial and economic environment
*The government
*Capital markets
Explain inflation
When the demand for goods outstrips supply - inflation occurs.
Suppliers can increase the price of goods without losing sales.
The goods become more expensive and the real value of money falls.
What is the effect of inflation on business finance?
Inflation introduces risk into financial decision-making as future cash flow streams are subject to change by unknown amounts.
Where sales price is not amended to take account of inflation, or cannot be amended, then profitability will be affected.
Inflation also has financing implications, as the replacement cost of assets and working capital increases.
What is the effect of changes in interest rates on business finance?
From a company perspective, the price of goods may not increase, but the cost of debt and equity will. Therefore, the company will have to make a higher premium on each investment to satisfy its financiers (shareholders) and less investments will be undertaken.
The variability of interest rates introduces financial risk to financial decision-making.
What is the effect of foreign exchange rates on business finance?
A business finance manager has to have an awareness of the impact of foreign exchange rates on expected cash flows when their company imports or exports goods.
Changes in exchange rates can increase or decrease the price of supplies and/or the revenues received from a foreign entity.
What is the effect of globalisation on business finance?
Cheaper transport costs and ease of communication across the world means that all business finance managers have to consider global resources for sourcing products, labour, capital etc.
What are capital markets?
Capital markets are markets for trading long-term financial securities.
Examples of financial securities traded on capital markets?
Ordinary shares
Long-term debt securities such as debentures, unsecured loans and convertible bonds
Preference shares
What are the 2 main functions of capital markets?
They are a place where long-term funds can be raised by companies from those with funds to invest such as financial institutions and private investors. This function is known as the primary market.
They provide a ready means for investors to sell shares and bonds that they own and to buy additional ones to increase their portfolio. This function is known as the secondary market.
Why should a business manager have a knowledge of the financial markets environment?
For sourcing capital (debt and equity), for assessing reaction to dividend policy and for assessing how the financial environment will impact on the availability of funding.
