25300 Chapter Notes - Chapter 8-14: Limited Liability, Byrsonima Crassifolia, Primary Market
Fundamentals of Business Finance Notes!
Introduction
Four Basics of Finance:!
•Corporate finance - basic theories and ideas of finance!
•Investments - financial assets such as shares and bonds!
•Financial institutions - firms dealing in financial matters!
•International finance - covers the above areas in a global context!
Factors in any financial decisions:!
-Dollar amount of the actually cash flow received or paid out!
-Timing of cash flow paid in or out!
-Risk and amount of uncertainty!
Financial manager’s responsibilities:!
•Investment decision - determining the value of the long-term asset, time and risk!
•Financing decision - determining best mix between debt and equity to finance decision!
•Working capital decision - managing short-term assets and liabilities!
Forms of Business:!
•Sole Trader - unlimited liability, minimal requirements, no survivorship!
• Partnership - unlimited liability, characterised by a partnership agreement!
•Company - limited liability, seperate legal entity, incorporated, public or private!
Principal and Agent Law - contractual relationship between an agent who is authorised to act on
behalf of the principal, e.g. salespeople, managers.!
Primary market - security or instrument issued to an investor for the first time, funded as debt or
equity.!
Secondary market - financial securities that are already issued, bought and sold, no additional
funds raised by firm.!
Depreciation - non-cash expense that represents an allocation of a non-current asset’s cost over
it’s useful life. Depreciation is not recorded on the balance sheet, but accumulated depreciation is
offset against relevant non-current assets.$
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Debt and Valuation
Debt!
Debt - amount of money borrowed today from a lender to be repaid in the future, under a
contractual obligation which commits the borrower to interest and principal repayments.!
Default - failure to meet required payments when due.!
Distinguishing features of debt:!
•Maturity - long or short term!
•Security - secured or unsecured!
•Ranking - senior or subordinate!
•Interest rate - fixed, variable or a combination!
•Repayment pattern - interest only, principal and interest, or capitalised interest!
•Currency - domestic or foreign!
•Source - markets or financial institutions!
Ways lenders protect against loss:!
•Secured debt - secured against asset, floating charge!
•Loan agreements - positive and negative covenants by maintaining certain ratios at minimum or
maximum and forbidding the sale of assets without consent!
•Guarantees!
Short-term debt:!
•Securities with a term of less than one year!
•Raise funds when first issued!
•Typically in the form of bills of exchange, promissory notes, and overdrafts!
Bills of exchange:!
•Must state amount payable and date payable!
•Discount instrument - only payment made at maturity, issued at a price less their face value,
interest is difference between security’s price and face value!
•May be ‘rolled over’ at maturity!
!
Legal definition of a bill - an unconditional order in writing, addressed by one person to another,
signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or
at a fixed or determinable future time, a sum certain in money to or to the order to a specified
person, or bearer.!
The acceptor (lender) to a bill provides an acceptance of the credit facility to be offered, accept
the bill and pay the holder its face value at maturity, considered as a guarantor by lenders.!
The drawer (borrower) to a bill is the party that wants the funds, the issuer of the bill, and who’s
liability is secondary to the acceptor; liability to repay the bill is the responsibility of the acceptor.!
The discounter to a bill buys the bill at a discount to its face value, and may sell the bill before
maturity, and may continue to be traded until it matures.!
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Long-term debt:!
-Money borrowed for a period longer than a year from the public or financial institutions !
-Rating agencies assess the credit worthiness of issues!
-Companies or governments issue debt securities to the public known as bonds!
Bonds:!
•Interest-only loan with a fixed term, periodic fixed interest payments called coupons, and a face
value repaid at maturity!
•Not all bonds have coupons - zero coupon bonds!
•ASX operates a small corporate bond market!
•Treasury binds are not traded on an organised exchange$
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Document Summary
Dollar amount of the actually cash ow received or paid out. Timing of cash ow paid in or out. Financial manager"s responsibilities: investment decision - determining the value of the long-term asset, time and risk, financing decision - determining best mix between debt and equity to nance decision, working capital decision - managing short-term assets and liabilities. Forms of business: sole trader - unlimited liability, minimal requirements, no survivorship, partnership - unlimited liability, characterised by a partnership agreement, company - limited liability, seperate legal entity, incorporated, public or private. Principal and agent law - contractual relationship between an agent who is authorised to act on behalf of the principal, e. g. salespeople, managers. Primary market - security or instrument issued to an investor for the rst time, funded as debt or equity. Secondary market - nancial securities that are already issued, bought and sold, no additional funds raised by rm.
