,Contents
Chapter 1: The Role of Managerial Finance........................................................................................................................................................................... 2
Chapter 3: Financial Statements and Analysis ..................................................................................................................................................................... 6
Chapter 4: Cash Flow and Financial Planning ..........................................................................................................................................................................10
Chapter 5: Time Value of Money (TVM) .............................................................................................................................................................................. 14
Chapter 7: Share Valuation .................................................................................................................................................................................................................... 19
Chapter 8: Risk and Return ................................................................................................................................................................................................................ 24
Chapter 9: The Cost of Capital ........................................................................................................................................................................................................ 29
Chapter 10: Capital Budgeting Techniques ............................................................................................................................................................................. 34
Chapter 13: Leverage and Capital Structure ..................................................................................................................................................................... 39
Chapter 15: Working Capital and Current Asset Management .................................................................................................................... 44
1
,Chapter 1: The Role of Managerial Finance
1.1 Introduction
Managerial finance forms the backbone of every business decision involving money. It focuses on how
organisations acquire, allocate, and manage financial resources to achieve one central goal — maximising
shareholder wealth.
The chapter introduces the purpose of finance, its relationship with accounting and economics, and the
ethical and governance considerations that guide financial managers.
1.2 What Is Finance?
Finance is defined as the art and science of managing money.
It involves:
• Obtaining funds (through equity, debt, or internal cash flow)
• Investing those funds efficiently
• Ensuring liquidity and profitability balance
Finance exists in three interrelated areas:
1. Financial Markets and Institutions – where money is traded and allocated.
2. Investments – where funds are committed to assets or securities to earn returns.
3. Managerial Finance – the corporate side, which manages a firm’s financial decisions day-to-day.
1.3 The Role of Managerial Finance
Managerial finance combines economic reasoning and accounting information to:
• Plan and control company resources, ensuring profitability and solvency.
• Make strategic investment decisions (capital budgeting, mergers, expansion).
• Manage risk, funding sources, and shareholder expectations.
Managerial finance is distinct because it focuses on forward-looking financial decisions, not merely
recording historical transactions.
Key tasks of a financial manager include:
• Investment decisions (where to allocate resources)
• Financing decisions (how to fund operations)
• Dividend decisions (how much profit to return to shareholders)
2
, 1.4 Relationship with Economics and Accounting
Finance + Economics:
Economic theory provides tools like supply and demand, marginal analysis, and risk-return trade-offs.
Financial managers use these to determine optimal pricing, production, and investment levels.
Finance + Accounting:
Accounting provides historical data and financial statements. Finance interprets this data to forecast
future performance, determine value, and support decision-making.
Accounting Finance
Focuses on recording past performance Focuses on future decisions
Uses accrual basis Uses cash flow basis
Measures profit Measures value and return
1.5 Legal Forms of Business in South Africa
From the textbook and STADIO guide , the main forms include:
1. Sole Proprietorship
o Owned and managed by one individual.
o Advantages: Simple to form, low regulatory burden, owner keeps all profits.
o Disadvantages: Unlimited personal liability, limited access to capital.
2. Partnership
o Two or more owners sharing profits and responsibilities.
o Advantages: More capital, shared expertise.
o Disadvantages: Unlimited liability for general partners, potential disputes.
3. Private Company (Pty) Ltd
o Separate legal entity (Companies Act 71 of 2008).
o Limited liability for shareholders, shares not publicly traded.
o Common for small-to-medium enterprises.
4. Public Company (Ltd)
o Shares traded on the JSE.
o Subject to stricter governance, auditing, and disclosure regulations.
5. Non-Profit Companies (NPCs)
o Operate for public or community benefit, not for profit distribution.
1.6 The Goal of the Firm
The primary goal of managerial finance is to maximise the wealth of shareholders, reflected in the
market value of the company’s shares.
3
Chapter 1: The Role of Managerial Finance........................................................................................................................................................................... 2
Chapter 3: Financial Statements and Analysis ..................................................................................................................................................................... 6
Chapter 4: Cash Flow and Financial Planning ..........................................................................................................................................................................10
Chapter 5: Time Value of Money (TVM) .............................................................................................................................................................................. 14
Chapter 7: Share Valuation .................................................................................................................................................................................................................... 19
Chapter 8: Risk and Return ................................................................................................................................................................................................................ 24
Chapter 9: The Cost of Capital ........................................................................................................................................................................................................ 29
Chapter 10: Capital Budgeting Techniques ............................................................................................................................................................................. 34
Chapter 13: Leverage and Capital Structure ..................................................................................................................................................................... 39
Chapter 15: Working Capital and Current Asset Management .................................................................................................................... 44
1
,Chapter 1: The Role of Managerial Finance
1.1 Introduction
Managerial finance forms the backbone of every business decision involving money. It focuses on how
organisations acquire, allocate, and manage financial resources to achieve one central goal — maximising
shareholder wealth.
The chapter introduces the purpose of finance, its relationship with accounting and economics, and the
ethical and governance considerations that guide financial managers.
1.2 What Is Finance?
Finance is defined as the art and science of managing money.
It involves:
• Obtaining funds (through equity, debt, or internal cash flow)
• Investing those funds efficiently
• Ensuring liquidity and profitability balance
Finance exists in three interrelated areas:
1. Financial Markets and Institutions – where money is traded and allocated.
2. Investments – where funds are committed to assets or securities to earn returns.
3. Managerial Finance – the corporate side, which manages a firm’s financial decisions day-to-day.
1.3 The Role of Managerial Finance
Managerial finance combines economic reasoning and accounting information to:
• Plan and control company resources, ensuring profitability and solvency.
• Make strategic investment decisions (capital budgeting, mergers, expansion).
• Manage risk, funding sources, and shareholder expectations.
Managerial finance is distinct because it focuses on forward-looking financial decisions, not merely
recording historical transactions.
Key tasks of a financial manager include:
• Investment decisions (where to allocate resources)
• Financing decisions (how to fund operations)
• Dividend decisions (how much profit to return to shareholders)
2
, 1.4 Relationship with Economics and Accounting
Finance + Economics:
Economic theory provides tools like supply and demand, marginal analysis, and risk-return trade-offs.
Financial managers use these to determine optimal pricing, production, and investment levels.
Finance + Accounting:
Accounting provides historical data and financial statements. Finance interprets this data to forecast
future performance, determine value, and support decision-making.
Accounting Finance
Focuses on recording past performance Focuses on future decisions
Uses accrual basis Uses cash flow basis
Measures profit Measures value and return
1.5 Legal Forms of Business in South Africa
From the textbook and STADIO guide , the main forms include:
1. Sole Proprietorship
o Owned and managed by one individual.
o Advantages: Simple to form, low regulatory burden, owner keeps all profits.
o Disadvantages: Unlimited personal liability, limited access to capital.
2. Partnership
o Two or more owners sharing profits and responsibilities.
o Advantages: More capital, shared expertise.
o Disadvantages: Unlimited liability for general partners, potential disputes.
3. Private Company (Pty) Ltd
o Separate legal entity (Companies Act 71 of 2008).
o Limited liability for shareholders, shares not publicly traded.
o Common for small-to-medium enterprises.
4. Public Company (Ltd)
o Shares traded on the JSE.
o Subject to stricter governance, auditing, and disclosure regulations.
5. Non-Profit Companies (NPCs)
o Operate for public or community benefit, not for profit distribution.
1.6 The Goal of the Firm
The primary goal of managerial finance is to maximise the wealth of shareholders, reflected in the
market value of the company’s shares.
3
