Revision Notes Topic 1: Introduction to Finance Finance and financial ...

Revision Notes Topic 1: Introduction to Finance Finance and financial decision making o Finance is the study of decisions regarding money and other financial asset markets. o The three key decisions faced by financial managers:  The investment decision – relates to the manner in which funds raised in capital markets are employed in productive activities  The financing decision – relates to the mix of funding obtained from capital markets, in terms of proportional holdings of equity and debt.  The dividend decision – relates to the form in which returns generated by the firm are passed on to equity holders o Forms of business organization: Sole Proprietorship Partnership Corporation Strengths Owner receives all Raise more funds than Limited liability. profits (as well as Sole. Long life of firm. loses). More available brain Ownership is readily Independence. power. transferable. Low organizational Borrowing power costs. enhanced by more owners Weaknesses Unlimited liability. Unlimited liability. More expensive to Limited fund raising. Difficult to achieve organize. Difficult to give large-scale operations. Greater government employees long term When a partner regulation career opportunities. retires/dies, partnership ends. Limited vs unlimited liabilities o Limited liability – ordinarily, company shareholders are not liable for the debts of the company. o Unlimited liability – the condition imposed on a sole proprietorship (or partnership) allowing the owner’s total wealth to be taken to satisfy creditors. The Agency Problem o From this conflict of owner and personal goals arises what has been called the agency problem. o The likelihood that managers may place personal goals ahead of corporate goals. Time Value of Money o Time value of money = an explicit recognition that a dollar received today is worth more than a dollar received tomorrow. o Today money is known as Present Value (PV) and future money is known as Future Value (FV)