Lecture Business finance (9/e) - Chapter 2: Consumption, investment and the capital market

Chapter 2 Consumption, Investment and the Capital Market Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance 9e by Peirson, Brown, Easton, Howard and Pinder 2–1 Prepared by Dr Buly Cardak Learning Objectives • Explain how a company’s managers can, in principle, make financial decisions that will be supported by all shareholders. • Explain how the existence of a capital market makes this result possible. • Identify the company’s optimal investment/dividend policy under conditions of certainty. Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance 9e by Peirson, Brown, Easton, Howard and Pinder 2–2 Prepared by Dr Buly Cardak Fisher’s Separation Theorem: A Simplified Example • The foundation for many fundamental results of finance theory: – Addresses the question of how management deals with diverse preferences for dividends and investment in a company with more than one shareholder. • Assumptions – Certainty. – Frictionless capital markets. – Interest rate for borrowers equals interest rate for lenders. Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance 9e by Peirson, Brown, Easton, Howard and Pinder 2–3 Prepared by Dr Buly Cardak Fisher’s Separation Theorem: A Simplified Example (cont.) • Implication of theorem – A company can make dividend/investment decisions that are in the best interests of all shareholders, regardless of differences in the preferences of individual shareholders. Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance 9e by Peirson, Brown, Easton, Howard and Pinder 2–4 Prepared by Dr Buly Cardak Fisher’s Separation Theorem: A Simplified Example (cont.) • Simple example (without a capital market) Assume: – A company has only two shareholders (‘A’ and ‘B’), who hold equal shares of $800 each. – Project Small involves $500 outlay now and cashflow of $570 later. – Project Upgrade requires outlay of additional $200 and incremental cash flow of $220. – Project Upgrade can only be undertaken together with Project Small, forming Project Large. Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance 9e by Peirson, Brown, Easton, Howard and Pinder 2–5 Prepared by Dr Buly Cardak ... - tailieumienphi.vn