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BUSINESS FINANCE Theory and Practice
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This book attempts to deal with financing and investment decision making, with particular
focus on the private sector of the UK economy. Its approach is to set out the theories
that surround each area of financial decision making and relate these to what
appears to happen in practice. Where theory and practice diverge, the book tries to
reconcile and explain the differences. It also attempts to assess the practical usefulness
of some of the theories that do not seem to be applied widely in practice.
Although the focus of the book is on the UK private sector, the theories and practices
examined are, for the main part, equally valid in the context of the private sector
of all the world’s countries. Also, much of the content of the book is relevant to many
parts of the public sector, both in the UK and overseas.
Most of the organisations to which the subject matter of this book relates will be
limited companies or groups of companies, though some may be partnerships, cooperatives
or other forms. For simplicity, the word ‘business’ has been used as a general
term for a business entity, reference being made to specific legal forms only where the
issue under discussion relates specifically to a particular form.
The book attempts to make the subject as accessible as possible to readers coming
to business finance for the first time. Unnecessarily technical language has been
avoided as much as possible, and the issues are described in a narrative form as well
as in more formal statements. The more technical terms are highlighted in blue when
they are first mentioned and these are included in the glossary at the end of the book.
Detailed proofs of theoretical propositions have generally been placed in appendices
to the relevant chapters. Readers should not take this to mean that these proofs are
particularly difficult to follow. The objective was to make the book as readable as possible,
and it was felt that sometimes formal proofs can disturb the flow if they are
included in the main body of the text.
Although the topics in the book are interrelated, the book has been divided into sections.
Chapters 1 to 3 are concerned with setting the scene, Chapters 4 to 7 with investment
decisions, and Chapters 8 to 12 with financing decision areas, leaving Chapters
13 to 16 to deal with hybrid matters.
Some reviewers have made the point that the subject of Chapter 9 (capital market
efficiency) pervades all aspects of business finance and should, therefore, be dealt with
in an introductory chapter. After some consideration it was decided to retain the same
chapter order as in the previous editions. The logic for this is that a complete understanding
of capital market efficiency requires knowledge that does not appear until
Chapter 8. A very brief introduction to capital market efficiency appears at the beginning
of Chapter 7, which is the first chapter in which capital market efficiency needs
to be specifically referred to. It is felt that the chapter ordering provides a reasonable
compromise and one that makes life as straightforward as possible for the reader.
In making revisions for this eighth edition, the opportunity has been taken to make
the book more readable and understandable. Most of the practical examples have been updated and expanded. Where possible, examples of practice in particular businesses
are given. This should make the book more focused on the real business world. More
recent research evidence has been included, including that relating to the practical
frailties of the capital asset pricing model. The opportunity has been taken to reflect
the effects that adoption of International Financial Reporting Standards has had on the
financial reports of most large businesses in many parts of the world, including the
UK. The most obvious changes have been in the terminology used and the way that
financial statements are set out. This edition also discusses the role and importance of
private equity funds. Securitisation has been introduced, as well as its link to US subprime
mortgage loans.
Nothing in this book requires any great mathematical ability on the part of the
reader. Although not essential, some basic understanding of correlation, statistical
probabilities and differential calculus would be helpful. Any reader who feels that it
might be necessary to brush up on these topics could refer to Bancroft and O’Sullivan
(2000). This reference and each of the others given in the chapters are listed alphabetically
at the end of the book.
At the end of each chapter there are six review questions. These are designed to
enable readers to assess how well they can recall key points from the chapter.
Suggested answers to these are contained in Appendix 3, at the end of the book. Also
at the end of most chapters are up to nine problems. These are questions designed to
test readers’ understanding of the contents of the chapters and to give some practice
in working through questions. The problems are graded either as ‘basic’, that is, fairly
straightforward questions, or as ‘more advanced’, that is, they may contain a few practical
complications. Those problems marked with an asterisk (about half of the total)
have suggested answers in Appendix 4 at the end of the book. Suggested answers to
the remaining problems are contained in the Instructor’s Manual, which is available as
an accompaniment to this text.
The book is directed at those who are studying business finance as part of an undergraduate
course, for example a degree or Higher National Diploma in business studies.
It is also directed at postgraduate, post-experience students who are either
following a university course or seeking a qualification such as the Certified Diploma
in Accounting and Finance. It should also prove useful to those studying for the professional
examinations of the accounting bodies.
Eddie McLaney
September 2008
Eddie McLaney - Personal Name
EIGHTH EDITION
978-0-273-71768-3
NONE
Banking And Finance
English
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