BFF1001 Lecture Notes - Lecture 1: Capital Budgeting
Foundations of Finance
Week 1: What is Finance
What is Finance?
Finance is the raising of money (capital)
How do we Finance?
1. Raising equity
- Existing funds of owners
- Sharing ownership
- Selling part of the business to the public
2. Raising Debt
- Borrow money
What is investment?
Investment is the making of money, using capital.
How do we invest?
Used to buy assets that make money (generate a return)
Assets bought depend on the type of business being run
The process of using capital to buy assets is called; capital
CAPITAL
Shareholders need a return for owning the business
Creditors (whom money is borrowed from) require interest
Thus there is a loss of capital
As investment is the use of capital to buy assets that generate a return
How is the choice of assets (capital budgeting) affected by the cost of capital?
The assets bought with capital should earn more than the cost of capital.
Document Summary
Selling part of the business to the public: raising debt. Investment is the making of money, using capital. Used to buy assets that make money (generate a return) Assets bought depend on the type of business being run. The process of using capital to buy assets is called; capital. Shareholders need a return for owning the business. Creditors (whom money is borrowed from) require interest. Thus there is a loss of capital. As investment is the use of capital to buy assets that generate a return. The assets bought with capital should earn more than the cost of capital. It total assets earn less than total cost of capital, the business is involvement and may not be able to continue operation. The efficient flow of funds is important for the efficient growth of the economy. Mispriced: price paid is not appropriate, being over or under fair value. Value is defined later: surplus and deficit units have liquidity.
