Introduction to Business Finance

Topics: Net present value, Internal rate of return, Cash flow Pages: 50 (16003 words) Published: August 22, 2013
Business Finance
Semester 2 – 2009 Version 1.0.3

Page 3 Page 7 Page 10 Page 14 Page 18 Page 23 Page 26 Page 29 Page 32 Page 38 Page 42 Basic Concepts Introduction to Financial Mathematics The Valuation of a Firm’s Securities Capital Budgeting Capital Budgeting Applications – Part 1 Capital Budgeting Applications – Part 2 Risk and Return The Capital Asset Pricing Model Cost of Capital and Raising Capital Capital Structure Dividend Policy

Copyright © Ka Hei Yeh 2009 First Edition published October 2009. (Revised February 2010) This work is licensed under the Creative Commons Attribution Attribution-Non-CommercialNo Derivative Works 2.5 Australia Licence. To view a copy of this license, visit or send a letter to Creative nd/2.5/au/ Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA. Disclaimer: The author does not guarantee the accuracy of the notes available and will not be held liable for any damages (including lost marks etc.) as a result of the use of these notes. Use at your own discretion with etc.) caution. Do not rely on them; these notes are not intended to serve as a replacement for your own own.

Business Finance– Semester 2 2009


Basic Concepts

Basic Concepts
Background Before we delve into the harder components of business finance, it is imperative that we learn the basics first. Types of Business Forms If you have previously studied Business Studies for the HSC, you can skip this section. Businesses are usually formed based on a set structure. The most common of these are: • Sole Proprietorships This is where the business is owned by a single person. It is very simple, fast to establish and generally has very minimal government regulations. The owner gets to keep all the profits himself so there is incentive to work harder. The downside is that it has unlimited liability (where if the business goes bankrupt, everything the owner owns can be taken by creditors). There is also difficulty in raising large sums of money as you are a single person. Since the business profits are also the owner’s profits, there is no distinct line between personal income and business income. The business will only generally last as long as the owner is alive or wants to run it. Partnerships This is generally the same as a sole proprietorship except that there is more than one owner. It generally has the same advantages and disadvantages as a sole proprietorship does. Corporations A corporation is a legal entity. That is, it is treated like a “person”. In this sense, there is limited liability for the owners as the creditors will only be able to extend as far as the entity itself is (ie. Just the business). It differs from the two forms above in that the owners are generally not the people who are running the business; the managers are. It is advantageous in that it is much easier to raise funds than other forms; and ownership can be transferred easily and, as such, has an unlimited life. Its disadvantages are that there are many processes that must be completed to form a corporation and these take a lot of time and money. The earnings of the corporation are also liable to corporate tax.

It is possible that some businesses may be a hybrid of a selection of the above. Generally, a business will pick a structure that suits their needs and has the most advantages for them. Financial Management Decisions Decisions relating to financial management can be split into two broad categories. These are: • The Investment Decision This is the decision is also sometimes known as capital budgeting. This is the decision that is made on how to move effectively use raised funds to generate revenue for the firm. This could be a decision on which project to take etc.

Business Finance– Semester 2 2009


Basic Concepts

The Financing Decision This is the decision about...
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