RMIT Business Finance lecture 1
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Transcript of RMIT Business Finance lecture 1
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8/19/2019 RMIT Business Finance lecture 1
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Topic 1
Introduction ToBusiness/Corporate Finance
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Overview
In this lecture we will discuss
The nature of business/corporate finance;
The nature of financial markets;
The corporate objective;
Corporate financial decisions;
Critical factors in financial decision-making;
Valuation of a firm and real and financial
assets; &
inance vs! accounting
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Business/Corporate Finance
What Is Business/Corporate Finance?
Corporate inance is a bod% of knowledge which
focuses on e.plaining and interpreting financial markets! It
provides an anal%tical framework to guide managers of
firms and to assist them to evaluate corporate financial
decisions”.
*ishop0 Crapp0 aff and Twite 0 ,1123
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Financial Markets
4hat is a inancial #arket5
+ medium for the issue and e.change offinancial assets!
+ustralian financial market includes6
The big four7 banks and all otherbanks/building societies/savings & loansoperating in +ustralia3
The +ustralian 8tock 9.change +8:3 The +ustralian government bond market
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Financial Markets
inancial markets - bring together the bu%ers and sellers of debtand e
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Corporate Financial #ecisions$The %oal o& The Firm
'The Corporate O()ective*
The Corporate O()ective
*efore we discuss corporate financial decisions we should know what isthe main goal/objective of a firm from a corporate/business financeperspective6
#ain corporate objective6 obvious answer - #a.imise =rofit + Wrong!!!
The corporate objective can be stated in two different0 but e
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Corporate Financial #ecisions$The %oal o& The Firm
'The Corporate O()ective*
The Corporate O()ective
+ compan% should make decisions that increase
the wealth of its owners!This is s%non%mous with increasing the value ofthe firm!
>wner wealth is measured b% the marketcapitalisation o& securities for shares this is thetotal market value of all of the shares of a compan%on issue!
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Corporate Financial #ecisions$The %oal o& The Firm
'The Corporate O()ective*
,n -.ample o& Market Capitalisation
9.ample6 *B=-*illiton as at ()th ul% '(,2
8ecurit%6 >rdinar% 8haresDo! on issue E ?!2) billion,
Fast sale price - G2,!(('
#arket capitalisation of ordinar% sharesE
?!2) billion shares . G2,!(( H G,@@!((' billion, http6//www!bhpbilliton!com/home/investors/reports/ocuments/'(,'/*B=*illiton+nnual"eport'(,'!pdf *B=* +nnual "eport une '(,' p! @0 ()/(A/,2 26((pm!
' http6//www!as.!com!au/as./research/compan%Info!do5b%Has.Code&as.CodeH*B=0 +8: price0 ()/(A/,2 '6??pm!
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Corporate Financial #ecisions$The %oal o& The Firm
'The Corporate O()ective*
Why "hould , Company ,im To Ma.imise Its Market alue? 0
The "tandard -conomic Model -conomics )usti&ication$
The standard economic model 89#3 states6
Individuals are utilit% satisfaction/happiness3 ma.imisers
$tilit% is a function of consumption
Consumption is a function of wealth$tilit% ma.imising individuals wish to ma.imise their wealth
+nd we know that6
Individuals hold part of their wealth in the form of shares in companies0 and
The market value of a compan% is represented b% its share price multiplied b% the number of shareson issue
Therefore0
The greater the market value of a compan%Js shares0 the greater the compan%Ks market value0 andthe greater will be the wealth of its shareholders and therefore the greater will be their utilit%
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Corporate Financial #ecisions$,chievin The Corporate O()ective
2ey #ecisions In Business Finance
The two ke% decisions faced b% corporatefinance managers in achieving the corporate
objective are6
,! The investment decision
'! The financing decision
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Corporate Financial #ecisions$,chievin The Corporate O()ective
The Investment #ecisionThe wa% in which funds that have been raised areused in productive activities!
The objective is to generate a return to investors!
This is dealt with under the topic of capitalbudgeting7 or project evaluation7 Topic 3
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Corporate Financial #ecisions$,chievin The Corporate O()ective
The Investment/Capital Budetin #ecisionThe investment decision deals with the evaluation of investmentopportunities!
Involves evaluating the6 siLe of future cash flows;
timing of future cash flows; and risk of future cash flows!
The
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Corporate Financial #ecisions$,chievin The Corporate O()ective
The Financin #ecision
The mi. of funding obtained from capital markets!
The proportional holdings of debt and e
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Corporate Financial #ecisions$,chievin The Corporate O()ective
The Financin #ecision
The financing decision deals with the determination of the firmJs capitalstructure
The
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Critical Factors In Financial #ecisionMakin
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Cash Time Risk
Three Critical Factors
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Critical Factors In Financial #ecisionMakin
CashFlow ,nalysis
ocus is alwa%s on cash-flows0 not accounting earnings!CashFlow Timin
#one% has a time value; ecision-making in finance must take account of the timing ofthe cash-flows!
+ dollar toda% is worth more than a dollar at some future date!
There is a trade-off between the siLe of an investmentKs cash-flow and when the cash-flow is received!
CashFlow 4isk
"isk refers to variabilit% of a cash-flow stream; +djustments must be made to takeaccount of differing degrees of variabilit% - the risk-return relationship must alwa%s be
kept in mind!The role of the financial manager is to deal with the uncertaint% associated withinvestment decisions!
+ssessing the risk associated with e.pected future cash-flows is critical to investmentdecisions
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aluation o& The Firm ,nd ,ssets
The corporate objective6 #a.imise the valuation market value3 of the
compan%/ wealth of the owners shareholders3!8o0 we need to ma.imise the market value of the firmKs assets!
+ssets can be classified as either6
4eal ,ssets$ +ssets that can be put to productive use to generate areturn e!g! machiner% and e
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aluation o& The Firm ,nd ,ssets
aluation o& , Firm
+ firm is a collection of real assets e!g! plant0 ene approach is to value the real assets of the firm!
: =roblem6=roblem6 ""eal assets are not fre
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aluation o& The Firm ,nd ,ssets
Financial ,ssets
9.amples of inancial +ssets68hares e
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aluation o& The Firm ,nd ,ssets
Balance "heet Woolworths 5td 'WOW* 6une 78 98191
, http6//www!woolworthslimited!com!au/annualreport/'(,'/pdf/44N+",'Nin"eport!pdf0 4oolworths +nnual "eport '(,' p! 110 ()/(A/,2 26()pm!
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Current ,ssets :;(Total ,ssets :91
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Finance vs< ,ccountin
*oth disciplines are concerned with a firmKs assets and liabilities!
+ccounting0 with its emphasis on review and compliance0 generall%has an historical outlook!
inance0 with its emphasis on valuation and decision-making0generall% has a focus on the future!
The primar% focus of accounting is stewardship/compliance!
+ccounting standards give discretion in the selection of accountingprocedures which can6
a3 cause comparabilit% problems when anal%sing reports of differentcompanies0 and
b3 enable deliberate manipulation of financial reports creativeaccounting or window dressing0 e!g! 9nron & +rthur +nderson '((,3
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Finance vs< ,ccountin
!ro(lems With ,ccountin !ro&it From , Corporate Finance !erspective$
,< What pro&it? ,! G amount or O return5 Is a G,(m profit better than a G,m profit5
9.ample =roject + Cost G,b0 profit G,(m0 O return ,O
=roject * Cost G,m0 profit G,m0 O return ,((O
'! *efore-ta. v! after-ta.!
B< elect o& time E Ignores time value of mone% concept! 9.ample G,(m overeight %ears vs! G2m over two %ears E which is better5
C< elect o& risk E =rofit streams are not adjusted for risk!
Is a G,(m profit better than a G,m profit5
G,(m E high risk project; could lose all our mone%! G,m E low risk project; ver% little chance of losing our mone%!
#< elect o& cash&lows E accounting earnings/profits are calculated on anaccrual basis0 not cash-flow basis!
-< ,r(itrary allocations E e!g! depreciation0 provisions!
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