Chap 7,10,12-14

Chap 4 Business strategy

Chap 11 Macro - Micro

Chap 7: Business Finance

1. Role of business finance

Primary objective: Increase shareholders’ wealth
A business is financed by:
- Owners: Equity ⇔ drawings / dividends
- Lenders: Debt ⇔ interest
- Combination of both

From Risk Returns

Equity Owners Lower: Lower

. Receive interest/capital back first
. Secured by fixed/floating charges
. Lower rate of return

Debt Lenders Higher Higher

Using for:
- Immediate ⇔ wages & day-to-day expenses
- Short-term ⇔ payables
- Medium-term ⇔ inventory & receivables, tax
- Long-term ⇔ NCA

Short-term Long-term
Risk . renewal risk . fluctuation risk
. interest rate risk . liquidity risk
Risk Aggressive Average Defensive
appetite business business business
Risk
High Average Low
Return

2. Banking system
Financial intermediation:
Benefits:
- Small savings => Larger loan packages
- Short-term savings => Long-term loans
- Reduce search costs
- Reduce risk
(do khoản tiết kiệm của một người sẽ được rót vào nhiều khoản đầu tư nên rủi ro sẽ dàn
trải => thấp hơn)
 Banks:
Retail banks Commercial & i
(clearing banks)

Operating Loans: - Arranging and underwriting

- Advice on strategic issues (
- Providing instruments for he
(by forward exch
- Opening and dealing in Cap

Payment services:
. Fast payments
. BACS
. CHAPS
. Cheques

UK . dominated by a small number of large banking groups

. all affected by Bank of England - BOE which has 2 main roles:
- Monetary stability
BOE lends money to the banking sector at base rate (by Mone
is set to meet a target on inflation (by Chancellor of the Excheq
The most well-known base rate is the London Inter Bank Offere
- Financial stability
Financial Policy Committee – FPC
Primary obj: reduce systemic risks
(e.g. reliance of bank and building society in financial crisis 200
Second obj: support economic policy
FSA broke up -> FRA n FCA
FRA: part of BOE, supervises Banks, Building societies, Cr
Investment firms. Have 2 obj:
. Safety and soundness of firms  focus on harm that firms
. Protection to policyholders

FCA: independent, supervise asset managers, independen

. Effective competition
. Well-function markets
. Well-conduct financial services firms, e.g. prevent market
 Money transmission:
Faster payment scheme in-day service
£1-250,000
Phone / internet
Electronic Funds Transfer EFT at
(EFT) point of sale
(EFTPOS)

Bank Automated Clearing system
(BACS)
Clearing House Automated
Payment System (CHAPS)
Society for Worldwide Interbank
Financial Telecommunication
(SWIFT)
Payment gateways
Digital e-commerce platform
General Clearing - cheques
An EFT deals with salaries, direct debits
In-day service
Electronic bank-to-bank
In-day service
Only in UK; using Sterling
Exchanges messages between Banks and Financial institutions
=> connect domestic and foreign banks
Payment authorization (via payment gateway) when shopping online
i.e. PayPal
Short delay between clearing and drawn money

Bank – Customer contractual relationship:

1. Receivable ⇔ Payable (Debtor – Creditor)
Deposit: B is debtor, C is creditor
Overdraft: C is debtor, B is creditor
* B will refund for any unauthorized payment unless the customer is negligent (eg, not keep
password secure)
* B only stop contract with C with reasonable notice
* No specific legal duty on C to check their bank statements
2. Bailee – Bailor
B keep C’s property for storage in safe deposit
3. Agent – Principal
B acts on behalf of C, i.e., execute payment & receiving
4. Mortgagee – Mortgagor
B asks C t0.o thế chấp tài sản to secure for a loan

3. Money market
Definition: Main traders
The money markets are a - bas
wholesale market that provides financial - government (BOE)
institutions with a means of borrowing and - local authorities
investing to deal with short-term - brokers
fluctuations in their own assets and - intermediaries
liabilities.
Instruments:
- Treasury bills (Trái phiếu chính phủ):
. issued by Debt management Office of HM Treasury
. for public from £500,000+, 1-6 months
. highly secure and liquid but low return
. convertible to cash by selling to discount market
- Gilts (Trái phiếu chính phủ của UK)
. issued by Debt Management Office
. longer term than Treasury bill, 5-50 years
. rates based on money market rates
- Deposits (tiền gửi tiết kiệm)
. overnight – 5 years
. higher return than Treasury bills
- Certificates of deposit – CDs (chứng chỉ tiền gửi)
. issued by Commercial banks
. fixed rate and term between 1 month – 5 years
. can be sold earlier than majority in CD market
- Commercial paper - IOUs
. issued by large companies
. held or sold to 3rd parties before majority
Inter-bank market
Definition:
Inter-bank market is a market for very short-term borrowing, often overnight, between banks. It is used
to smooth fluctuations in the banks’ receipts and payments. The main interest rate charged in this market
is the LIBOR. The individual banks then use this rate in order to determine the interest rate that they will
offer to their customers.
4. Capital market
Definition:
The national and international markets in which a business may obtain the finance it needs
for its short-term and long-term plans.
- National stock markets
. includes Main market and Alternative Investment Market – AIM
. Primary market: for new, I.e. new share issues
Second market: for already
. Professional Securities Market – PSM: raise capital form professional investors
- Banking system:
. retail market: for individuals/small businesses
. wholesale market: large companies
- Bond markets: for very large companies & very large money
- Leasing: important source for a variety of businesses
- Debt factoring: for smaller businesses
- International markets: for larger companies with different currencies, very large money
5. Equity finance
1, Retained earnings (profit)
2, Right issues of shares
Definition: issue of new shares for cash, (first) to existing shareholders in proportion to their
existing holdings – pre-emption rights
 - issue costs: ~4% for £2m raised,  when the sum raised 
- shareholder reactions: dễ dẫn đến tình trạng bán tháo, giảm giá trị của shares
- control:
- unlisted companies: find rights issues difficult to use, because shareholders can’t buy due to
insufficient funds as well as can’t sell as the shares are not popular.
3, New issues of shares
- Placings: offer first to institutional investors through issuing house
. benefits: lower transaction costs
. drawbacks: low market efficiency
- Public offers:
MOST COMMON

- Pricing:
. Underwriting: institutions will buy any securities left but takes high cost
. Offer for sale by tender (đấu thầu): only 1 price either:
At highest price, all tenders ≥ will be allotted
At lower price, all tenders ≤ will receive a proportion of shares =>  concentration of shares
6. Debt finance
7. Financing Growing business
8. Financing Exports
9. Green finance