introduction of corporate finance

prepared by Madam Zakiah Hassan 28 February 2012

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Introduction of Corporate Finance

Madam Zakiah Hassan28 February 2012


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Upon completing this chapter

• The primary goal of the firm • The determinants of the value of a firm • The meaning and implication of agency

problems in a corporation • Types of business organization and features • Role and function of the financial manager • Relationship between finance and other

business disciplines


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What is Finance

• Is the study of the acquisition and investment of cash for the purpose of enhancing value and wealth.

• Various of finance areas – investment, publics finance, financial institutional and market, corporate finance


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What is corporate finance

• Imagine that you were to start your own business. No matter what types of business, you will begin to ask various questions in some form or another.

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What is corporate finance

• What long term investments should you take on? That is, what lines of business will you be in? therefore what sorts of buildings, machinery, and equipment will you need?

• Where will you get the L/T financing to pay for your investment? Will you borrow the money or bring in other owners by selling or issuing shares to the public?

• How will you manage your everyday financial activities such as collecting monies/debt from customers and paying suppliers?



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Who is financial manager

• Primary responsibility for acquire fund (cash) needed by firm and directing those funds into projects that will maximize the value of firm


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Financial Manager

• Will a particular investment be successful? • Where the funds come from to finance the

investment?• Does the firm have adequate cash or access to

cash – through bank borrowing agreements, for example – to meet its daily operating needs?

• Which customers should be offered credit, and how much should they be offered?


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Functions of FM

• Overall responsibility – managing overall affairs of the corporation.

• Summarized as : – Analysis and planning (understand corporation’s

current financial condition and plan for future in different economics scenarios.)

– Asset management (how much the co’s liquid resources should be held in cash)

– Financial structure management (amount of S/T & L/T debt impact on the liquidity of co. )


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Agency problem

• Main goal of firm – max of shareholder wealth, but in reality the agency problem may interfere with the implementation of this goal.

• Mean : a results from the separation of management and the ownership of the firm.

• Ex : large firm may be run by professional managers who have little or no ownership in the firm. Because of separate decision makers and owners, managers may make decisions that are not line with the goal of max s/holders wealth.


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Agency problems

• Agency Problems– Agency Relationships

• Principals• Agent

– Stockholders and Creditors– Stockholders and Managers

• Agency Problems and Costs


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Is maximizing profits the same as maximizing shareholder wealth?


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Goals of firm

Efficient FM requires the existence of goal of the co.

* Profit maximization (stresses the efficient use of capital resources) – assumes away many the complexities of the real world and PM is inadequate for handling many finance decisions.


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Goals of firm

• Shareholder wealth - Means maximizing the present value of all future

benefits to be received by the owners of the company.

- Who the owners of company shareholders of the company.

- Maximization of the market value of the existing shareholders common stock because the effects of all financial decision are thereby included.


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Forms of business organization

• Sole proprietorship• Partnership• Corporation • Limited liability companies(table of forms of business)


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Sole proprietorship & partnership

• Advantages– Ease of formation– Subject to few regulations– No corporate income taxes

• Disadvantages– Difficult to raise capital– Unlimited liability– Limited life


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Corporation

• Advantages– Unlimited life– Easy transfer of ownership– Limited liability– Ease of raising capital

• Disadvantages– Double taxation– Cost of set-up and report filing


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Financial management & Other Disciplines

• Accounting Financial managers are primarily concerned with a firm’s cash flow

• Economics • Microeconomics

– Financial managers use the concepts of setting marginal cost equal to marginal revenue when making long-term investment decisions and when managing working capital

• Macroeconomics– Financial managers should recognize and understand how

monetary and fiscal policies affect the economy and the cost of funds and the availability of credit


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Career Opportunities in Finance Corporate Finance Commercial Banks Securities Brokers Investment Banks Mutual Funds Pension Funds Real Estate Companies Insurance Companies


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Organizations Financial Executives Institute Institute of Chartered Financial Analysts Financial Management Association

Certifications Certified in Financial Management (CFM) Certified Financial Planner (CFP) Chartered Financial Analyst (CF) Certified Treasury Professional (CTP)

Professional Finance Affiliations and Certifications


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Terminologies

• Stakeholder – customers, employees, suppliers, communities


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1. The primary objective of the firm is

(a) Shareholder wealth maximization(b) Social respnsibility(c ) long run survival (d) Profit maximization


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2. The limitation of the profit maximization goal include :

(a) Lacks a time dimension (b) Fails to consider risk(c) The profit is ambiguous (unclear) (d) All of the above


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3. The two most important discplines on which financial management relies are :

(a) Accounting and production(b) Accounting and marketing(c) Economics and marketing(d) Accounting and economics


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4. ___arise from the divergent objectives between owners and managers

(a) Shareholder relationships(b) Stakeholder problems(c) Creditor problems(d) Agency problems


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5. Agency costs include all of the following except :

(a) Expenditures to monitor management’s actions

(b) Providing stock as part of management’s compensation

(c) Flotation costs(d) Bonding expenditures


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6. The success of a firm is linked to its stakeholders. This group includes :

(a) Community neighbors(b) Suppliers(c) Employees(d) All the above


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7. ___deals with economic decisions of individuals, households, and firms.

(a) Economics accounting (b) Microeconomics(c) Blue chip econometrics (d) Macroeconomics


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8. ___equals the number of shares outstanding times the market price per share

(a) Book value (b) Stakeholder wealth(c) Total shareholder wealth(d) Economic value


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• END OF CHAPTER • THANKS

introduction of corporate finance

Documents

publics finance

investment of cash

value of firm

financial manager relationship

everyday financial activities

fund cash

adequate cash

particular investment