Business Finance Business Finance

1 BusinessFinanceEddie McLaneyNow in its 8th edition, Business Finance is an essential introduction to financial decision making in businesses. Taking a user s perspective it explores the type of investments a Business should make and how they should be financed, and successfully blends the theoretical, analytical and practical aspects of Finance and investment. This new edition of Business Finance has a real-world flavour, exploring the theories surrounding financial decision making and relating these theories to what happens in the real world.

2 Key Features l an extensive range of real-world examples l solid theoretical underpinning in an easily accessible form l excellent blend of theory and practice offering a comprehensive insight into the decision making process within Finance and investment l exploration into, and explanation of, any divergence between theory and practice l comprehensive coverage of the latest international issues l improved pedagogy, including an accessible four-colour design l fully updated supplements for lecturers (featuring cases with solutions, progress tests, tutorial questions and powerpoints) and students (revision questions, multiple choice questions and weblinks) Business Finance is suitable for undergraduates in accounting and Finance and for those on Finance and financial management courses.

3 It is also appropriate for postgraduate students with an option in accounting and Finance and will be highly useful for professional accounting students. Eddie McLaney is Visiting Fellow in Accounting and Finance at the University of EditionBusiness FinanceEddie McLaneyTheory and Practice8th EditionBusiness Finance8th image ALAMYT heory and PracticeEddie McLaneyFor additional material visit: 12/12/08 10:35:48 Business FINANCET heory and PracticeVisit the Business Finance , eighth edition, Companion Website /atrillmclaneyto find valuable studentlearningmaterial including: Learning outcomesfor each chapter.

4 Multiple choice questionsto test your learning. Extensive linksto valuable resources on the web. An online glossaryto explain key 11/19/08 9:45 Page i We work with leading authors to develop the strongesteducational materials in Business and Finance , bringingcutting-edge thinking and best learning practice to a global a range of well-known imprints, includingFinancial Times Prentice Hall, we craft high quality printand electronic publications that help readers tounderstand and apply their content, whether studyingor at find out more about the complete range of ourpublishing, please visit us on the World Wide Web 11/19/08 9.

5 45 Page ii Business FINANCET heory and PracticeEddie McLaneyEighth 11/19/08 9:46 Page iii Pearson Education LimitedEdinburgh GateHarlowEssex CM20 2 JEEnglandand Associated Companies throughout the worldVisit us on the World Wide Web published 1986 Macdonald & Evans LimitedSecond edition published 1991 Published as Business Finance for Decision Makers by Pitman Publishing, a division of Longman Group UK LtdThird edition published 1994 Published as Business Finance for Decision Makersby Pitman Publishing.

6 A division of Longman Group UK LtdFourth edition published 1997 Pitman Publishing, a division of Pearson Professional LimitedFifth edition published 2000 Pearson Education LtdSixth edition published 2003 Pearson Education LtdSeventh edition published 2006 Pearson Education LtdEighth edition published 2009 Pearson Education Ltd E. J. McLaney 1986, 1991 Longman Group UK Limited 1994 Pearson Professional Limited 1997 Pearson Education Limited 2000, 2009 The right of Eddie McLaney to be identified as author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act rights reserved.

7 No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6 10 Kirby Street, London EC1N trademarks used herein are the property of their respective owners. The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such : 978-0-273-71768-3 British Library Cataloguing-in-Publication DataA catalogue record for this book is available from the British LibraryLibrary of Congress Cataloging-in-Publication DataMcLaney, E.

8 Finance : theory and practice / Eddie McLaney. 8th bibliographical references and 978 0 273 71768 31. Business enterprises Finance . 2. Business enterprises Finance Problems, exercises, Corporations Finance . 4. Corporations Finance Problems, exercises, etc. I. dc2220080434211098765432111 10 09 Typeset in Palatino by 35 Printed and bound by Rotolito Lombarda, ItalyThe publisher s policy is to use paper manufactured from sustainable 11/19/08 9:46 Page iv vGuided tour of the bookxiiPrefacexvPlan of the bookxviiPart 1 The Business Finance environment1 The role of Business Risk and Business The relationship between Business Finance and The organisation of businesses the limited Corporate governance and the role of Long-term financing of Private equity funds16 Summary17 Further reading18 Relevant websites18 Review questions182 A framework for financial decision Financial decision Business

9 Conflicts of interest: shareholders versus managers the agency Financing, investment and Theory and practice31 Summary32 Further reading32 Review questions33 Problem33 Appendix: Formal derivation of the separation 11/19/08 9:46 Page Contentsvi3 Financial (accounting) statements and their The financial Definitions and conventions of Problems with using accounting information for decision Creative Ratio Using accounting ratios to predict financial failure66 Summary67 Further reading68 Relevant websites68 Review questions68 Problems69 Appendix.

10 Jackson plc s income statement and balance sheet for 200775 Part 2 Investment decisions4 Investment appraisal Net present Internal rate of Payback Accounting (unadjusted) rate of Investment appraisal methods used in practice99 Summary104 Further reading105 Review questions106 Problems1065 Practical aspects of investment Cash flows or accounting flows? Do cash flows really occur at year ends? Which cash flows? An example of an investment 11/19/08 9.