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BUSINESS FINANCE (MAN2089) Lecture Notes

Sandra Watson
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Business Finance Lecture Notes

University of Surrey


Business Finance Lecture Notes
Lecture 1: Introduction to Corporate Finance (1,2)
1.1 Corporate Finance and the Financial Manager
The three pillars of corporate finance
No matter what type of business you start, you would have to answer the following
questions in one way or another:
1. What long term investments should you make? For example, what lines of business
will you be in, and what sort of buildings, machine and equipment would you need?
2. Where will you get the long-term financing to pay for your investment? Will you bring
in other owners, or will you borrow the money?
3. How will you manage your everyday financial activities, such as collecting from
customers and paying suppliers? (i.e. liquidity)
Broadly speaking, corporate finance is the study of ways to answer these questions.
Investment: what do you need to start a firm?
Capital budgeting
Capital budgeting — the process of planning and managing a firm’s long-term
In capital budgeting, the financial manager tries to identify investment opportunities that
are worth more to the firm than they cost to acquire. This means that the value of the
cash flow generated by an asset exceeds the cost of that asset. Evaluating the size,
timing and risk of future cash flows is the essence of capital budgeting. For example, the
decision for Tesco to open up another store would be an important capital budgeting
“1 of “117
Cash invested in assets must be matched by an equal amount
of cash raised by financing, as shown on the figure to the left.
The balance figure represents that both accounts need to be
balanced appropriately.
Capital structure
Capital structure — the mixture of long-term debt and equity
maintained by a firm.
The second question that needs to be answered concerns ways in which the firm obtains
and manages the long-term financing it needs to support its long term investments. The
financial manager needs to consider how much it should borrow (debt and equity) and
what the least expensive sources of funds are. In addition to that, he/she need to decide
exactly how and where to raise the money.
Liquidity — the availability of cash. Having sufficient cash to meet your obligations.
Working capital management
Working capital — a firm’s short-term assets and liabilities.
Managing the firm’s working capital is a day-to-day activity which ensures that the firm
has sufficient resources to continue its operations and avoid costly interruptions. The
financial manager should answer questions like:
• How much cash and inventory should we keep on hand?
• Should we sell on credit, and if so, what terms will we offer, and to whom will we extend
• How will we obtain any needed short-term financing?
Who makes the decisions? The Financial Manager
A striking feature of large corporations is that the owners (shareholders) are not usually
directly involved in making business decisions, especially on a day-to-day basis. Instead,
the corporation employs managers to represent the owners’ interests and make decisions
on their behalf. In a large corporation the financial manager would be in charge of
answering the three questions raised earlier.
The financial management function is usually associated with a top officer of the firm,
such as a finance director (FD) or chief financial officer (CFO).
Typical company reporting structure
Below is a simplified organisational chart that highlights the finance activity in a large firm.



BUSINESS FINANCE (MAN2089) Lecture Notes

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