Business Finance Summary

Business Finance, Investors, Firms and Markets

• Investments in assets are important because assets generate the cash flows that are needed to meet operating expenses and provide a return to owners of the business.
• Financing decisions involved generating funds internally or form external sources to the business. Such as by issuing debt or equity securities.
• Financing charges amount to non-operating cash flows
• The required rate of return caters for the costs to both shareholders and debt holders for funds committed to the project. Therefore, using the required rate of return involves the financing charges being incorporated into the discount rate NOT the Net Cash Flows.
• Fishers Separation Theorem states:
 Two time points: present and future
 No uncertainty, outcome of all decisions is known now
 No imperfections in the capital market
 All decision makers are rational
 Companies managers use resources according to shareholders o The theorem assumes that there is certainty and a frictionless capital market in which the interest rates for borrowers equals interest rate for lenders. o Shows a company can make a dividend/investment decision that is in the best interest of all shareholders. o Using ROR it is possible to show that the viability of project will depend on the ROR in respect to interest rate introduced through the capital market o If the interest rate is lower than both projects, then the combination of both projects is best accepted and if no combination is possible (i.e. an upgrade and another project) then both projects are accepted. o NPV calculates the projects REQUIRED RATE OF RETURN to convert future cash flows to their equivalent values today.

Capital rationing describes the situation where firms have limited resources and independent projects

Therefore,

IF A CAPITAL MARKET EXSISTS