Slide 1.

The Business Finance

Environment

Chapter 1
Introduction

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Slide 1.2

Objectives
In this chapter we shall deal with the following:
the role of business finance
the importance of the consideration of risk in
financial decision making
the relationship between business finance and other
disciplines, particularly accounting
the nature of the limited company

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Slide 1.3

Objectives (Continued)

directors and their relationship with shareholders

corporate governance
liquidation of companies
the nature of derivatives
private equity funds

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Slide 1.4

Business nance
Investment decisions.
Financing decisions.
Usually involving significant amounts.
Risk always a major factor.
Not the same as accounting

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Slide 1.5

Figure 1.1

Relationship between risk and return

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Slide 1.6

Organisation of businesses
Most UK businesses are limited companies.
Artificial person, with separate legal personality.
Enables investors to limit their losses on equity
investments.
Shares in the ownership of companies can be transferred.
Managed by directors on behalf of shareholders.
Duty of directors to account for their management of the
shareholders assets.

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Slide 1.7

Corporate Governance
Corporate governance has become a major issue;
scandals have led to the emergence of a code of practice
that directors of Stock Exchange listed companies are
expected to follow (the UK Corporate Governance Code).
The Code is based on three guiding principles:
Disclosure
Accountability
Fairness

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Slide 1.8

Long-term financing
Businesses are financed long term by a combination of:
ordinary shares (equities)
preference shares
borrowings.

Ordinary shareholders are the ultimate owners of the

company and share profits and losses; all companies must
have some ordinary shares.
Preference shares entitle the holders to the first portion
of any dividend paid up to a maximum level. They are
relatively uncommon.
Borrowing involves taking funds from lenders under a
contractual relationship, usually involving commitments
to pay interest and repay the principal.
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Slide 1.9

Liquidation
Limited companies can only come to an end through a formal
liquidation (winding up).
Liquidation is usually initiated either by:
the shareholders
unpaid creditors (those owed money by the company) often referred to
as bankruptcy

Order of payment of claimants (out of funds raised by selling the

companys assets)
1. pre-preferential creditors (tax authorities and employees (for any arrears of
salaries and wages))
2. secured creditors those whose loans are secured on a particular assets
of the business
3. unsecured creditors those owed money by the company who do not
have specific security (trade payables)
4. the shareholders in a forced liquidation, usually the shareholders will
receive nothing because there are insufficient funds.
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Slide 1.10

Derivatives
Assets or liabilities whose value is related to that of
some other asset
An option is an example of a derivative
Many derivatives have the objective of removing or
reducing risk (e.g. an option)
Nearly all large businesses use derivatives to a greater
or lesser extent

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Slide 1.11

Private equity funds

Funds pooled privately by large investors.
Funds often used to buy listed businesses and delist
them.
Replace senior management and, typically, increase levels
of borrowing.
Resell the businesses, sometimes through relisting them.

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Slide 1.12

The End

Thank You

McLaney, Business Finance: Theory and Practice PowerPoints on the Web, 10th edition Pearson Education Limited 2015