concepts overview
Chapter 1
Preliminary concepts
Concepts Overview
The important concepts discussed in Chapter 1 were:
1.1
The main objective underlying corporate financial decisions is to maximise the value of the company, which in turn maximises shareholder wealth. This involves the optimal use of scarce resources. Fisher’s Separation theorem formally links the concepts covered in the chapter to provide a single decision rule for a firm’s investment decisions. This decision rule is that management’s role is to maximise the present value of the firm’s investments in productive assets. Corporate managers face three important decisions in their attempt to maximise shareholder wealth. These decisions are: investment decisions, financing decisions and dividend decisions.
The investment decision relates to the manner in which funds raised in capital markets are employed in productive activities. The objective of such investments is to generate future cash flows, thus providing a ‘return’ to investors. The capital budgeting or project evaluation function is the process by which the investment decision is undertaken.
The financing decision relates to the mix of funding obtained from capital markets; that is, the mix of debt and equity issued by the firm to fund its operations.
The dividend decision relates to the form in which the returns generated by the firm are passed on to equity holders.
The nature of financial assets is simply a claim to a series of cash flows against some economic unit. Only something that produces cash flows, or that you can sell to produce a cash flow in the future, is a financial asset. This is opposed to real assets which are those that can be put to productive use to generate returns; for example, machinery and equipment.
The flow of funds through the capital market and its relationship to corporate finance begins with investors. Investors make consumption and investment decisions. They decide
Preliminary concepts
Concepts Overview
The important concepts discussed in Chapter 1 were:
1.1
The main objective underlying corporate financial decisions is to maximise the value of the company, which in turn maximises shareholder wealth. This involves the optimal use of scarce resources. Fisher’s Separation theorem formally links the concepts covered in the chapter to provide a single decision rule for a firm’s investment decisions. This decision rule is that management’s role is to maximise the present value of the firm’s investments in productive assets. Corporate managers face three important decisions in their attempt to maximise shareholder wealth. These decisions are: investment decisions, financing decisions and dividend decisions.
The investment decision relates to the manner in which funds raised in capital markets are employed in productive activities. The objective of such investments is to generate future cash flows, thus providing a ‘return’ to investors. The capital budgeting or project evaluation function is the process by which the investment decision is undertaken.
The financing decision relates to the mix of funding obtained from capital markets; that is, the mix of debt and equity issued by the firm to fund its operations.
The dividend decision relates to the form in which the returns generated by the firm are passed on to equity holders.
The nature of financial assets is simply a claim to a series of cash flows against some economic unit. Only something that produces cash flows, or that you can sell to produce a cash flow in the future, is a financial asset. This is opposed to real assets which are those that can be put to productive use to generate returns; for example, machinery and equipment.
The flow of funds through the capital market and its relationship to corporate finance begins with investors. Investors make consumption and investment decisions. They decide