FINS1613
Business Finance
Semester 2 – 2009 Version 1.0.0 12th October 2009

Contents
Page 3 Page 7 Page 10 Page 14 Page 18 Page 23 Page 26 Page 29 Page 32 Page 38 Page 42 Basic Concepts Introduction to Financial Mathematics The Valuation of a Firm’s Securities Capital Budgeting Capital Budgeting Applications – Part 1 Capital Budgeting Applications – Part 2 Risk and Return The Capital Asset Pricing Model Cost of Capital and Raising Capital Capital Structure Dividend Policy

Note: This course has prerequisites and, as such, these notes are written assuming that you have sound knowledge from those prerequisite courses.

Business Finance– Semester 2 2009

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Basic Concepts

Basic Concepts
Background Before we delve into the harder components of business finance, it is imperative that we learn the basics first. Types of Business Forms If you have previously studied Business Studies for the HSC, you can skip this section. Businesses are usually formed based on a set structure. The most common of these are: • Sole Proprietorships This is where the business is owned by a single person. It is very simple, fast to establish and generally has very minimal government regulations. The owner gets to keep all the profits himself so there is incentive to work harder. The downside is that it has unlimited liability (where if the business goes bankrupt, everything the owner owns can be taken by creditors). There is also difficulty in raising large sums of money as you are a single person. Since the business profits are also the owner’s profits, there is no distinct line between personal income and business income. The business will only generally last as long as the owner is alive or wants to run it. Partnerships This is generally the same as a sole proprietorship except that there is more than one owner. It generally has the same advantages and disadvantages as a