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Fundamentals of Finance Notes Complete

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Introduction to Finance
What is Finance?
Finance is the art and science of managing money, incorporating the decisions
regarding money and other financial asset markets
Individual Level, Business Level and Government Level
Corporate World
Sole Proprietorship
A business owned by one person and operated for their own profit
- Not a separate legal entity
- Unlimited Liability
A business owned by two or more people and operated for a profit
- Not a separate legal entity
- Unlimited Liability for all partners
An intangible business entity, created by law
- A separate Legal Entity
- Limited Liability
- Can be sued (not tied to individual owners)
Corporate Objective and Decisions
To maximise value of the company or to maximise shareholder wealth
1. Investment Decisions: Relates to the manner in which funds are raised in
capital markets are employed in productive activities
- What to invest in
- Where to spend
- What Activities
2. Financing Decisions: Relates to the mix of funding obtained from capital
markets, in terms of proportional holdings of debt and equity
- How to fund the investment
- Gain debt or
- Issue Shares
3. Dividend Decisions: Relate to the form in which generated returns re passed
onto the equity holders

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- How much dividends to pay to shareholders, if any
- A claim against a company
- Cash Flow  Dividends and Capital Gains
- A claim against a bond issuer
- Cash Flow  Interest and Principal repayment
Bank Accounts
- A claim against a bank
- Cash Flow  interest and principal
Capital Markets
A capital market is a medium for the issue and exchange of assets, and can be seen as
a means for exchanging current and future consumption
- Big four banks are elements of the capital market
- Australian Securities Exchange is an element of the Aus capital market
- The Australian government bond market is an element also
Flow of Funds
1. Flow begins with investors, who invest in capital markets via consumption and
investment decisions. They can invest through, shares, putting money into
bank account, bonds and many more
2. Corporation acquire funds from the capital markets, by selling financial assets
(issuing shares, bank account ect)
3. Corporations then use these funds to acquire real assets to generate cash flow
4. These cash flows can then be repaid to investors or retained as a source of
Measuring Wealth of Corporate Owners
- A company should make decisions that increase the wealth of its owners
- This therefore goes hand in hand with increasing value of a firm
- Owners wealth is measured by ‘market capitalisation’ of securities
Agency Problem: Caused by separation of ownership and control, this refers to
management of firms not making decisions that will be in the best interest of
maximising the wealth of the firm

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Incentive and mechanisms can be designed to encourage company decision makers to
maximise wealth of owners
- Company Regulators (ASIC)
- Directors Remuneration Packages
- Ownership of shares by directors
- Shareholder voting power
Computing Taxable Income
Assessable Income
Means all income that taxpayers earn in Australia and Overseas
- Wages, salaries, fees, commissions
- Business income, dividends, interest, rentals
- Royalties and capital gains
Allowable Deductions
Encompasses all expenditure by the taxpayer in order to earn assessable income in a
particular tax year
- Expenses relating to your employments
- Expenses relating to your investments
- Expenses incurred whilst running a business
Taxable Income = Assessable Income – Allowable Deductions
Tax Rate
Individuals: Marginal (depends on how much earned)
Companies: Fixed at 30%
1. Determine Assessable Income
2. Calculate Taxable Income
3. Multiply taxable income by tax rate to compute tax
4. Determine net income after tax
5. Pay tax to government
Investments and Financial Markets
1. Bonds
2. Property
3. Managed Funds
1. Bonds
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