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Summary Financial Overview and Capital Markets
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Summary of 5 pages for the course Corporate Financial Management at UCT (Complete summary)
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MODULE 1: FINANCIAL OVERVIEW & CAPITAL MARKETSFINANCIAL MANAGER
Uses quantitative tools and analyses to make decisions that create value for the
owners of the firm
The goal is to maximize firm value
3 FUNDAMENTAL DECISIONS
1. Capital budgeting/Investment
Involves deciding what productive assets to buy
Most important decision; productive assets generate most of firms cash
inflows; long term decisions and mistakes can be costly (large cash outlays)
2. Capital structure/Financing
Determines how the productive assets are financed
Trade-offs between the advantages and disadvantages of debt & equity
financing
3. Working capital management
Determines how current assets and current liabilities are managed
Seeks to maximize value creation
FORMS OF BUSINESS OWNERSHIP
1. SOLE PROPRIETORSHIP
Unincorporated owner-managed business
Easy & cheap to form; least regulated; taxed once as personal income of
owner
No perpetual succession; unlimited liability; capital is limited to one owners
wealth; difficult to sell ownership interest
2. PARTNERSHIP
Formed by 2/more persons who operate in terms of an agreement
Taxed once as personal income of partners; ability to raise for equity capital;
share expertise and duties
No perpetual succession, jointly and severally liable; difficult to sell ownership
interest
3. COMPANY
Incorporated legal entity; separate from owners; governed by Companies
Act
Limited liability, has perpetual succession; capital can be raised easily; easy
to sell ownership interest
Separation of ownership and management; double-taxing of company
profits
Private: prohibits sale of securities to public and restricts transferability of its
securities
Public: can be listed/unlisted
GOAL OF FINANCIAL MANAGEMENT
The goal is not profit maximisation as this can lead to:
Manipulation of accounting profits
It doesn’t reflect cash flows
It doesn’t tell us when cash flows are going to be received
It ignores uncertainty/risks associated with cash flows
The goal is MAXIMIZING FIRM VALUE/SHAREHOLDER WEALTH:
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