Cash: Focus is always on cash flows, not accounting earnings. Time: Money has a time value. Decisions must take account of the timing of the cash flows. Risk: Risk refers to variability of a cash flow stream. Greater variability means greater risk. The role of the financial manager is to deal with the uncertainty associated …
Real assets are assets that can be put to productive use to generate a return e.g. machinery and equipment Financial assets are assets that represent a claim to a series of cash flows against an economic unit Example: Shares A claim against a company Cash flows = dividends and sale price Bonds A claim against …
Capital Structure: Is the process used by a company to select real assets (projects) to invest in Is essentially the process used to decide on the optimum use of scarce resources Key consideration: whether or not the proposal provides an adequate return to investors Which real assets should the firm invest in, in order to …
Capital structure relates to the mix of debt and equity used by a company The focus is usually on debt, which is referred to as ‘leverage’ or ‘gearing’ Theoretically, the best way of measuring the leverage of a company is to divide market value of interest-bearing debt by market value of equity However, The market …
The Investment Decision The way in which funds that have been raised are used in productive activities The objective is to generate a return to investors Also known as capital budgeting or project evaluation The Financing Decision The mix of funding (debt and equity) obtained from capital markets This is addressed via analysis of capital structure How …
Agency problems arise when one party (principal) engages another party (agent) to perform actions on their behalf Agents may not always act in best interest of principal A firm is an example where an agency problem arises because of the separation of ownership and control Managers/agents may not always act in the best interests of …
The corporate objective can be stated in two different, but equivalent, ways: “Maximise the value of the company” OR “Maximise shareholder wealth” This means using scarce resources (capital and labour) in the most efficient manner possible Having issues with your finance module? SMS us at +65 9758-7925 or email: enquiry@starcresto.com
Accounting, with its emphasis on review and compliance, generally has an historical outlook Finance, with its emphasis on valuation and decision-making, generally has a focus on the future The focus of financial decision-making is on the future Decisions are based on estimates or forecasts of future cash flow streams Forecasts are based on all available …