Business Finance: Theory and Practice 15min Sample
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preface this book attempts to deal with financing and investment decision making with particular focus on the private sector of the U. K. Economy. It's approaches to set out the theories that surround each area of financial decision making and relate to these to what appears to happen in practice. Where theory and practice diverge. The book tries to reconcile and explain the differences. It's also attempts to assess the practical usefulness of some of the theories that do not seem to be applied widely in practice. Although the focus of the book is on the UK private sector, the theories and practices examined are for the main parts equally valid in the context of the private sector of all the world's countries. Also, much of the content of the book is relevant to many parts of the public sector, both in the UK and overseas. Most of the organizations to which the subject matter of this book relates will be limited to companies or groups of companies, though some may be partnerships, cooperatives or other forms. For simplicity, the word of business has been used as a general term for a business entity. Reference being made to specific legal forms only where the issue under discussion relates specifically to a particular form. The book attempts to make the subject as accessible as possible to readers coming to business finance for the first time, unnecessarily technical language has been avoided as much as possible and the issues are described in an air to form as well as in more formal statements. The more technical terms are included in the glossary at the end of the book, detailed proofs of theoretical propositions have generally been placed in appendices to the relevant chapters, readers should not take this to mean that these proofs are particularly difficult to follow. The objective was to make the book as readable as possible and it was felt that sometimes formal proofs can disturb the flow if they are included in the main body of the text. Although the topics are interrelated, the book has been divided into sections, chapters 123 are concerned with setting the scene, chapters 4 to 7 with investment decisions and chapters 8 to 12 with financing decision areas leaving chapters 13 to 16 to deal with hybrid matters. Some reviewers have made the point that the subject of Chapter nine, capital market efficiency pervades all aspects of business finance and should therefore be dealt with in an introductory chapter. After some consideration, it was decided to retain the same chapter order as in the previous editions. The logic for this, is that a complete understanding of capital-market efficiency requires knowledge that does not appear until Chapter eight. A very brief introduction to capital market deficiency appears at the beginning of chapter seven, which is the first chapter in which this topic needs to be specifically referred to. It is felt that the chapter ordering provides a reasonable compromise and one that makes life as straightforward as possible for the reader And making revisions for this 11th edition, the opportunity has been taken to make the book more readable and understandable. Most of the practical examples have been updated and expanded where possible examples of practice in particular real life businesses are given. This should make the book more focused on the real business world. More recent research evidence has been included discussion of sources of finance for small businesses and been expanded to and revised. Nothing in this book requires any great mathematical ability on the part of the reader. Although not essential. Some basic understanding of correlation, A statistical probabilities and differential calculus would be helpful. Any reader who feels that it might be necessary to brush up on these topics could refer to Bancroft and O Sullivan 2000. This reference and each of the other is given in the chapters are listed alphabetically at the end of the book. At the end of each chapter there are six review questions. These are designed to enable readers to assess how well they can recall key points from the chapter. Suggested answers to these are contained in appendix three at the end of the book. Also at the end of most chapters are up to nine problems. These are questions designed to test readers understanding of the contents of the chapters and to give some practice and working through questions. The problems are graded either as basic, that is fairly straightforward questions or as more advanced. That is. They may contain a few practical complications. Those problems marked with an asterix, about half of the total have suggested answers and appendix four, At the end of the book suggested answers to the remaining problems are contained in the instructor's manual, which is available as an accompaniment to this text. The book is directed at those who are studying business finance as part of an undergraduate course, for example, a degree in business studies. It is also directed at postgraduate post experience students who are either following a university course or seeking a professional qualification. It should also prove useful to those studying for the professional examinations of the accounting bodies. It is also hoped that those who are interested in business finance for its own sake, we'll find the book readable and helpful. Eddie Mclhinney Plan of the book, Parts one, The Business finance environment. Chapter one Introduction, Chapter two, a framework for financial decision making. Chapter three financial accounting statements and their interpretation. Part two Investment Decisions. Chapter four investment appraisal methods. Chapter five practical aspects of investment appraisal. Chapter six Risk and Investment Appraisal. Chapter seven Portfolio Theory and its Relevance to Real Investment Decisions. Part three financing decisions. Chapter eight, Sources of long term finance. Chapter nine The Secondary capital Market, The stock Exchange and its efficiency. Chapter 10, cost of capital estimations and the discount rate. Chapter 11 gearing the cost of capital and shareholders wealth. Chapter 12 The Dividend Decision, Parts four Integrated Decisions. Chapter 13 Management Management of Working Management of Working Capital. Chapter 14 corporate restructuring, including takeovers and divestments. Chapter 15. International Asylum of Business Finance. Chapter 16 Small businesses appendices, glossary references, index publishers acknowledgements. We are grateful to the following for permission to reproduce copyrighted material figures, Figure 16.1 After Business Demography, 2014, Office of National Statistics 2015. Office for National Statistics License under the Open government licence. V three, Figure 16.2 after British enterprise thriving or surviving Center for Business Research, University of Cambridge Cachet and he is a 2007 tables table 1.1 from beneficial ownership of UK shares by value. Office of National Statistics. two September 2015. Office for National Statistics License under the open government licence. V three, Table 14.1 After national statistics, 2015 mergers and acquisitions involving U. K. Companies. Fourth quarter 2015, tables eight and nine. Office for National Statistics license under the Open Government licence. V. Three point oh, Table 14. Table 14.2 After national statistics, 2015 mergers and acquisitions involving U. K. Companies. Fourth quarter 2015, Table 67 and eight. Office for national Statistics license under the Open government licence. V. Three, text extract on pages 4 29 through 30 from Associated british Foods PLC, 2015 Annual report http colon forward slash forward slash www dot A B F dot c o dot UK forward slash documents forward slash PDFs forward slash 2015 forward slash A B f dash. Annual dash report percent sign 202015. Parts one, The Business Finance Environment. Business finance is concerned with making decisions concerning which investments the business should make and how best to finance those investments. The first part of this book attempts to explain the context in which those decisions are made. This is not just important in its own right, but also serves as an introduction to later parts of the book. Chapter one explains the nature of business finance. It continues with some discussion of the framework of regulations in which most private sector businesses operate. Chapter two considers the decision making process with particular emphasis on the objectives pursued by businesses. It also considers the problem faced by managers when people who are affected by a decision have conflicting objectives. Chapter three provides an overview of the resources and nature of the information provided to financial decision makers by financial accounting, by financial accounting statements prepared by businesses on a regular, for example, annual or six monthly basis, As it has explained in Chapter one. Business finance and accounting are distinctly different areas. Financial statements are however, a very important source of information for basing financial decisions on chapter one. Introduction, objectives in this chapter, we shall deal with the following the rule of business finance. The importance of the consideration of risk and financial decision making. The relationship between business and the relationship between business finance and other disciplines, particularly accounting. The importance of the limited company as a legal form in which most UK businesses exist. The nature of the limited company. What is meant by limited liability, the formation of limited companies. The requirements for businesses trading as limited companies to signal the fact to the world, through the company name directors and their relationship with shareholders, the duty of directors to account for their actions. The way in which companies are managed corporate governance typical means of financing companies and the rights of suppliers of corporate finance liquidation of companies. The nature of derivatives private equity funds. 1.1, the role of business finance businesses are in effect, investment agencies or intermediaries. This is to say that their role is to raise funds from various sources and to invest. Those funds. Usually funds will be obtained from the owners of the business, the shareholders and from long term lenders, with some short term finance being provided by banks, perhaps in the form of overdrafts by other financial institutions and by other businesses prepared to supply goods or services on credit, trade, payables or trade creditors. Businesses typically invest in real assets such as land, buildings, plant and inventories, or stock. Though they may also invest in financial assets, including making loans to and buying shares in other businesses. People are employed to manage the investments that is to do all those things necessary to create and sell the goods and services that the business provides surpluses remaining after meeting the cost of operating the business wages, raw material costs and so forth, accrue to the investors of crucial importance to the business will be decisions about the types and quantity of finance to raise and the choice of investments to be made. Business finance is the study of how these financing and investment decisions should be made in theory, and how they are made in practice. A practical subject. Business finance is a relatively new subject. Until the 1960s, it's consisted mostly of a narrative accounts of decisions that has been made and how if identifiable. it consisted mostly of narrative accounts of decisions that had been made and how if identifiable, those decisions had been reached. More recently, theories of business finance have emerged and been tested so that the subject now has a firmly based theoretical framework, a framework that stands up pretty well to testing with real life events. In other words, the accepted theories that attempt to explain and predict actual outcomes and business finance broadly succeed in their aim. Business finance draws from many disciplines, financing and investment decision making relates closely to certain aspects of economics, accounting law, quantitative methods and the behavioral sciences. Despite the fact that business finance draws what it finds most useful from other disciplines, it is nonetheless a subject in its own right. Business finance is vital to the business decisions on financing and investment, go right to the heart of the business and its success or failure. This is because such decisions often involved financial amounts that are very significant to the business concerned and once made, such decisions are not easy to reverse. So the business is typically committed in the long, so the business is typically committed in the long term, to a particular type of finance or to a particular investment. Although modern business finance practice relies heavily on sound theory, we must be very clear that business finance is an intensely practical subject, which is concerned with real world decision making. one point to risk and business finance, all decision making involves the future. We can only make decisions about the future, no matter how much we may regret it, we cannot to alter the past. Financial decision making is no exception to this general rule. There is only one thing certain about the future which is that we cannot be sure what it's going to happen. Sometimes we may be able to predict with confidence, that's what will occur will be one of a limited range of possibilities. We may even be able to ascribe statistical probabilities to the likelihood of occurrence of each possible outcome. But we can never be completely certain of the future. Risk is therefore an important factor in all financial decision making and one that must be considered explicitly in all cases in business finance as in other aspects of life risk and return tend to be related