College aantekeningen
MNB1501
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ALL NEEDED FOR MNB1501
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Learning Unit 9Financing decisions
INTRODUCTION AND AIM
In this learning unit we first examine financial markets and the sources and forms of
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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
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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
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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
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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
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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-
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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
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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
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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).
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