Class notes
MNB1501
- Course
- Institution
ALL NEEDED FOR MNB1501
[Show more]
Seller
Follow
LLL56
Reviews received
Content preview
Learning Unit 9Financing decisions
INTRODUCTION AND AIM
In this learning unit we first examine financial markets and the sources and forms of
1105
short-term finance. This is followed by a discussion on the sources and forms of long-term
finance and the cost of long-term capital.
98 STUDY CHAPTER 14 (sections 14.10 – 14.11) IN ITBM
Contents of this learning unit
−− Financial markets
−− Short-term financing
−− Long-term financing decisions
99 Learning objectives
After completing this topic, you should be able to
yy describe the money and capital markets as providers of finance
yy explain the types of short-term financing and the short-term financing decision (the
financing of current assets)
yy describe the forms and sources of long-term financing
yy explain the cost of capital
yy explain the long-term financing decision
1106
KEY TERMS
financial institutions long-term financing
financial markets shareholders’ interest
primary markets long-term debt
secondary markets money markets
long-term financing decisions capital markets
risk short-term financing decisions
forms of short-term financing
132
, MNB1601/001/4/2017
Refer to the end of chapter 14 in the prescribed book to familiarise yourself with the key
1107
terms for this learning unit before continuing.
9.1 FINANCIAL MARKETS
Study section 14.10.1 in ITBM
Individuals (or organisations) with surplus funds (referred to as a surplus unit) can invest
1108
those funds in businesses requiring finance (referred to as deficit units). However, it
would be rather difficult, especially for an individual, to find out where the investment
opportunities are. It would also be difficult for businesses to deal with a large number
of small investors, especially if they want to invest their money for short periods of time
only. Thus intermediary organisations, known as financial institutions, have been estab-
lished to act as a go-between. For example, a large number of people may open savings
accounts with a bank (i.e. a financial institution). The bank uses these savings to invest in
businesses requiring finance. The fact that individuals withdraw their money from their
savings accounts and then deposit money again into their savings accounts does not
affect the bank’s investment in the businesses. In this way, such a financial institution
meets an important need, because it allows the surplus units (investors) the flexibility of
investing and withdrawing their funds at short notice, while the deficit units are assured
of a relatively stable supply of funds.
In the same way, it would be very difficult for a large business to sell shares directly to an
1109
investor, and then buy them back again when the investor needs the cash. That is why
stock exchanges are established, where shares can be bought and sold without the com-
pany concerned being exposed to frequent fluctuations in the availability of funds. The
prescribed book describes a number of these financial institutions (including the Johan-
nesburg Stock Exchange) that operate within the “financial market”.
Bear in mind that there is a formal financial market (where business is done through fi-
1110
nancial institutions) and an informal financial market (where business is done privately).
If you are a shareholder in a private company, for example, and you sell your shares to a
friend, you are operating in an informal financial market.
A further classification of the financial market is the primary market, which refers to the
1111
issue of financial claims for the first time, and the secondary market, which refers to the
trading of those claims. A financial claim refers to any form of evidence that the holder
has invested funds in a particular institution. It can range from a savings account deposit
book to a share certificate. When such claims are negotiable (i.e. they can be traded), they
are referred to as financial instruments.
The financial market is also classified in terms of time. The money market refers to the
1112
trading of short-term financial instruments (e.g.30-day deposits), while the capital market
refers to the trading of long-term financial instruments (e.g. shares).
133
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller LLL56. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $3.97. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
67866 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now