ALL THE NOTES YOU WILL NEED TO PASS THE EXAM. Second-year first-semester business finance notes, all chapters start to finish. Notes made from the lecture slides, textbook and lecturer talking points thus making them in-depth and comprehensive.
1. WHAT IS CORPORATE/ BUSINESS FINANCE?
Corporate Finance is concerned with decisions about the cash ows of the business (in and out)
Deals with how money is raised (capital) and used (investment) by the business
• Various types of sourcing capital: Financing decisions
• Various types of investments: Investing decisions
Financial management embraces all features of nancial function including:-
• planning
• organizing
• directing
• controlling
Financial management is connected to economics as nancial decisions are made as per the
changing economic environment. Some economic indicators being:
1. Gross domestic product (GDP)
‣ Goods produced and services provided in a country during one year
2. In ation
‣ Rate at which the value of currency is dropping
e.g. in ation rate in uences the prices of resources
3. Interest
‣ Cost of borrowing money: Repo & Prime rate
‣ Repo rate: reserve banks to commercial banks
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‣ Prime rate: commercial banks to bank customers
4. Exchange rates
‣ Price of on currency in terms of another currency (R to $)
2. THE FINANCIAL MANAGER
The nancial manager is responsible for the management of an entity’s nancial activities.
How do they t into the corporate structure?
‣ Capital expenditure (buying buildings)
‣ Cash (cash and cash equivalents)
‣ Credit (credit extension to customers)
‣ Financial planning (budgeting, investing)
‣ Tax matters (compliance with SARS)
‣ Financial accounting (Record-keeping)
‣ Cost accounting (cost of production)
3. FINANCIAL MANAGEMENT DECISIONS
The three categories of nancial decisions that nancial managers must make.
These nancial decisions must create value in the long run:
Capital budgeting
‣ An acquisition and management of non-current assets ( capital projects or capital
investments)
‣ Only invest in non-current assets that add value because nance managers aim to create
value for shareholders
‣ Evaluate Net Present Value (NPV) to determine whether the investment adds value
➡ Cash out ows / Cash payments
➡ Cash in ows/ Cash receipt
NPV of an asset’s cash in ows should exceeds its cost
Example:
Capital structure
‣ How to source the funding to nance long-term and short-term assets?
‣ A mix of debt and equity funding to fund the activities of the business
‣ The decision maker must consider the cheapest capital structure
‣ The option chosen to nance the investment will have an impact on the business from a risk
and value perspective.
‣ Sources of capital / nance/funding:
➡ Debt: borrowed money (bank loans, bonds etc)
- Low rate becuz low uncertainty
- Interest Payable, Coupon payable, no ownership and no voting rights
➡ Equity: the amount of money a business has if it is to be liquidated (retained earnings,
personal savings, issue shares etc)
- High rate becuz high uncertainty
- Preference Shares are a nancial instrument used by companies to raise capital that
comes with the dividend option for shareholders.
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- Ordinary Shares are also a nancial instrument used by companies to raise capital that
comes with dividends & voting rights for the shareholders
- Ordinary shares are where the company makes pro t and pays, so if the company
makes no pro t, the ordinary shares aren' t paid. Whereas preference shares have a right
to be paid (preference gets paid rst)
- Higher risk higher return (no pro t no return) compared to preference
Working capital management
‣ How will daily activities of the company be managed?
‣ Day-to-day management of short– term assets and short-term liabilities
‣ Managers make these decisions for the entity to remain pro tably and liquid
➡ Inventory
are products sold on cash-only, credit only or both
➡ Debtors/ Receivables
repayment terms for customers/ debtors for e.g. o er discounts for early repayments
➡ Creditors/ Payables
pay cash for supplies or buy supplies on credit
4. THE GOALS OF FINANCIAL MANAGEMENT
The goal is to maximize pro ts, maximize the rate of return and maximize shareholders’ wealth
4.1 Pro t maximization
• Increase the net pro t attributable to ordinary shareholders by increasing revenue and decreasing
all expenses (operating and other)
• High Revenue and low expenses can be increased by more e cient marketing campaigns,
increasing productivity, reducing waste, using the most cost-e ective sources to fund the debt, etc.
- Extreme cutting of cost can jeopardize the health and safety of employees, customers, and
communities at risk (e.g. low quality products sold to customers)
• The goal of pro t maximization has tow main aws
- Manipulation of accounting pro t
- Pro t maximization ignores timing /occurrence and risk associated with generating pro t
4.2 Maximising the rate of return
• To overcome aws of pro t maximization, managers can consider investments that are necessary
to generate the pro t
• The net pro t after tax to total assets ratio is maximized instead of just maximizing net pro t after
tax. The ratio indicates how well the entity’s investments generate value.
• It compares total assets with the money it returns to the shareholders.
• Weaknesses of RR:-
- Manipulation of accounting values (net pro t and total assets)
- Pro t maximization ignores timing /occurrence and risk associated with generating pro t
4.3 Maximizing shareholders’ wealth
• Pro t and required rate (RR) are nancial accounting based and they re ect the historical
performance/ past/retrospective. They are not su cient to indicate future performance.
• A forward-looking goal centered on increasing the wealth of the owners/ shareholders of the
business
- Shareholders’ wealth depends on the number of shares that the shareholder owns and the
current share price.
- Reduction in the shareholders’ wealth can be attributed to the sharp decrease in the entity's net
pro t
• Maximizing shareholders’ wealth represents future goals of increasing the wealth of the owners.
5. FORMS OF BUSINESS OWNERSHIP IN SOUTH AFRICA
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• There are several legal forms of business ownership in SA.
• The most common are;- Sole proprietorships, Partnerships, and Companies.
Legal sense of an entity
- Separate entity from the owner = owner has limited liability for pro t or losses
- NOT separate entity from the owner = the owner is responsible for pro t and losses
5.1 Sole Proprietorship
• Controlled by one person
• Easy to start with few formalities other than a trading license
• The existence of the business is limited to the lifespan of the owner.
- The business will only survive for as long as the owner continues to run it.
• The owner becomes the manager and makes decisions in his/her own best interest
the owner maximizes his/her own wealth
• If the business prospers, the owner receives all the bene ts, but if it fails the owner is responsible
for all the losses
• The sole proprietorship is not a separate legal business from the owner. The owner is liable for all
losses or debts of the business.
- Personal assets may be used to settle outstanding debts
• The owner pays personal tax on pro ts made by the business
5.2 Partnership
• A private agreement between 2 to 20 partners who provide skills and equity
• Partners are liable for any losses or debts of the business
• The advantage compared to a sole proprietorship: Partners can raise more capital collectively
• It is easy to start, an oral agreement between partners is su cient to start a partnership
- A written partnership agreement is advisable to eliminate potential future disagreements and
misunderstandings.
• The lifespan of the business is limited to the founders.
- A new partnership must be formed if a partner leaves, dies, becomes insolvent or new partner
joins
• The partnership is not a separate legal business from the partners. Partners are liable for all losses
or debts of the business.
- The personal assets of partners may be used to settle outstanding debts.
HOWEVER, if a partner is unable to pay
- If partner A has no personal assets to cover the business debt, the creditor can claim the assets
of partner B only to settle the debt of the partnership.
• Pro ts are distributed according to their contribution to capital. As well as debts.
If partner G contributes 60% of capital to the business he will gets 60% pro ts/debts
5.3 Company
• It is a separate legal business from the owners. The business can be sued or taxed separately from
the owners. Owners have limited liability.
- It is regulated by the Companies Act No71 of 2008.
• The act makes provision for two categories of the company:
a) NON-PROFIT; and
b) PROFIT
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