This document contains a summary from the textbook: Principles of Managerial Finance and lecture notes. It encompasses Learning areas 2 - 8 (Learning Area 1 is revision of basic mathematics) which is the whole curriculum for the semester.
Contents
LA 2: Chapter 1: The role of managerial finance ............................... 2
LA 2: Chapter 2: The financial market environment .......................... 7
LA 3: Chapter 3: Financial statements and analysis......................... 13
LA5: Chapter 6: Interest Rates and bond valuation.........................28
LA 5: Chapter 7: Share Valuation ....................................................... 35
LA 6: Chapter 15: Working capital and current assets
management ........................................................................................ 42
LA 6: Chapter 16: Current liabilities management ........................... 53
LA 7: Chapter 4: Cash flow and financial planning ......................... 57
LA 8: Chapter 8: Risk and return ..........................................................61
1
,LA 2: Chapter 1: The role of managerial finance
1.1 FINANCE AND BUSINESS
Finance The science and art of managing money
e.g. how firms invest their money
Career 1. Financial services
opportunities The design and delivery of financial advice and products
2. Managerial finance
The duties of the financial manager:
manages financial affairs of all businesses
Legal forms of Sole proprietorship
business Owned by 1 person
organisation Operated for their own profit
Strengths Weaknesses
Low organizational cost Unlimited liability
Independence Limited fund-raising
Secrecy Lacks continuity
Partnership
Owned by 2/ more people
Formally established by partnership agreement
Strengths Weaknesses
Can raise more funds Unlimited liability
Borrowing power Dissolve when partner
enhanced dies
More brain power Difficult to liquidate/
transfer
Company
Entity created by law
Shareholders: Owners of company
Dividends: periodic distribution of cash to shareholders
Board of directors are elected by shareholders and
responsible for:
approving goals/ plans
setting general policy
guiding corporate affairs
approving major expenditures
Strengths Weaknesses
Limited liability Higher taxes –
Ownership readily corporate income is
transferable taxed
Better access to Expensive to organise
financing Lacks secrecy
2
,1.2 GOAL OF THE FIRM
Maximise Managers have to assess returns
shareholder Which will determine whether managers should increase
wealth firm’s share price
Which will maximise shareholder wealth
Maximise Timing:
profit Sooner rather than later
Returns in first year could be reinvested to provide greater
future earnings
Cash flows:
Profit doesn’t result in cash flows available to shareholders
Firms can show positive profit even when cash outflow
exceeds inflow
Higher earnings don’t result in higher share price
Risk:
Actual outcomes may differ from those expected
Increased risk reduce firm’s share price
Risk averse: shareholders must be compensated for bearing
risk
Stakeholders:
Goal is to preserve stakeholder well-being
Part of firm’s social responsibility
Shareholder wealth maximization can be achieved through
co-operation with stakeholders
Ethics
Standards of conduct/ moral judgement
Violations:
Creative accounting
Earnings management
Misleading financial forecasts
Insider trading
Fraud
Excessive executive compensation
Options backdating
Bribery
Kickbacks
To assess ethical viability:
Arbitrary/ Capricious/ Single out group?
Violate moral/ legal rights?
Conform to accepted standards?
Alternative courses of action
Positive benefits:
Reduce potential litigation/ judgement costs
Maintain positive corporate image
Gain loyalty/ commitment/ respect
Positively affect share price
3
, 1.3 MANAGERIAL FINANCE FUNCTION
Organisation Treasurer:
of finance Chief financial manager
function Manages firm’s cash
Oversees pension plans
Manages key risks
Reports to CFO
Focus: external
Foreign exchange managers:
Manages/ monitors firm’s exposure to loss from currency
fluctuations
Reports to treasurer
Relationship Guidelines for efficient business operation
to economics Supply-and-demand analysis
Profit-maximising strategies
Price theory
Primary economic principle:
Marginal cost-benefit analysis:
Financial decisions/ actions taken only when added
benefits exceed added costs
Relationship Emphasis on cash flows:
to Accountants primary function:
accounting develop/ report data for measuring performance
comply with/ file reports required by securities
regulators
File/ pay taxes
Accrual basis: Recognises revenue at time of sale and
expenses when they are incurred
Cash basis: Recognises revenue/ expenses only with
respect to actual inflow/ outflow of cash
Decision making:
Accountants collect/ present financial data
Financial managers evaluate statements/ develop
additional data/ make decisions of returns/ risks
Primary activities of financial manager:
Making investment decisions which determine what types
of assets the firm holds (Current/ fixed assets)
4
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