o Deciding on appropriate discount rate o Calculating present values above 3 components o Accepting all projects with positive NPV 7.1.3. Risk and uncertainty Limitations are that it does not take risk into account Risk = any deviation from expected outcome Uncertainty = unable to id certain variables and unable to assess likelihood of their occurrence Sensitivity analysis take risk into account 8. Financing Entails making decisions about: o Types of finance o Sources of finance 8.1. Financial markets At any point a financial system consists of those that have a surplus of money and those withshortage Growing business requires funds for new investment or to expand production Financial markets is a channel where “savers” make their money available to those who have ashortage thereof Financial institutions act as intermediaries – financial intermediation It is process where financial inst pool money and make it available to business The saver who invests in a business is called financer Financer receives an assets or financial claims in exchange for his money Financial claims can be: o Saving and Cheque call accounts o Fixed deposits o Debentures o Ordinary preferred shares Shares referred to as financial securities 8.2. Primary and secondary markets New issues a financial claims are referred to as issues on the primary market Trading of securities after they have been issued takes place in secondary market Saver who needs money can trade claim of secondary market JSE eg of secondary market Tradability of securities ensure that savers continue to invest 8.2.1. Money and capital markets Money market is market for financial instruments with a short term maturity Funds are borrowed and lent overnight or for months Funds required for long term investment are raised and traded by investors on capital market 8.2.2. Types of institutions Financial institutions: o Deposit taking institutions SA reserve bank Land and agricultural bank
Corporation for public deposits Private sector banks Post office savings bank o Non-deposit taking institutions Public sector – public investment commissioners Private sector – life assurers, pension and provident fund, short term insurers,trusts institutions – industrial development corporation 8.3. term financing Trade credit Accruals Bank overdrafts Factoring 8.3.1. Trade credit Mainly in term of supplied credit Supplier does not take payment when prod are purchased To ensure payment supplier after offer rebate for early payment Has the following advantages: o It is readily available for business that pay regularly o It is informal o More flexible than other forms of short term fianancing 8.3.2. Accruals Most common expenses accrued is wages and taxes Accrued tax is also from of financing Accruals have no associated cost 8.3.3. Bank overdrafts Arrangement with bank that allows business to make payments from Cheque account in excess of balance of account Purpose is to bridge gap between cash income and cash expenses Usually reviewed annually Interest charged daily It is repayable on demand – bank can cancel at any time Flexible form of short term financing 8.3.4. Debtor finance Consist of factoring and invoice discounting Sale of debtors to a debt financing company – invoicing discounting This company then converts credit sales into cash sales injecting funds that were tied up as working capital Factoring = financier also undertakes to collect debt The financier to whom the debt is sold = factor 2 types: o Non-resource factoring o Resource factoring Non resource factoring – factor buys debtors outright and bears the risk of bad debts Resource factoring – seller guarantees that debts are recoverable Factoring has the following advantages: