MBA 4 E

CORPORATE FINANCE
GROUP MEMBERS


 Muhammad Rizwan Zafar

 Sohail Raza
What is Corporate
Finance?
 Every decision that a business makes has
financial implications, and any decision which
affects the finances of a business is a
corporate finance decision.

 Everything that a business does fits under the
roof of corporate finance.

 Understanding and being able to analyze
corporate decisions is important

Corporate Finance
Corporate Finance addresses the
following three questions:
1.What long-term investments
should the firm engage in?
3.How can the firm raise money
for the required
investments?
5.How much short-term cash
flow does a company need
to pay its bills?
© Professor Ho - Mou Corporate 1-4
The Three Major Decisions
in Corporate Finance
 The investment decision

 Why are managers asked to make choices
amongst potential investments?



 What makes for a good investment?



The Balance-Sheet Model
of the Firm
The Capital Budgeting Decision
(Investment Decision) C u rre n t
Lia b ilitie s
C u rre n t A sse ts

Lo n g -Te rm D e b t

Fixe d A sse ts What long-

1 Ta n g ib le term
investments S h a re h o ld e rs’
2 In ta n g ib le should the E q u ity
firm engage
in?
The Three Major Decisions
in Corporate Finance
 The financing decision


 Where do firms raise/acquire the funds for
value-creating investments?


 What mix of owner’s money (equity) or

borrowed money(debt) should the firm
use?


The Balance-Sheet Model
of the Firm
The Capital Structure Decision
Current
(Financing
Decision) Liabilities
Current Assets

Long-Term Debt

How can the

firm raise the
money for the
Fixed Assets required
1 Tangible investments?
Shareholders’
2 Intangible Equity
The Three Major Decisions
in Corporate Finance
 The dividend decision

 How much of a firm’s funds should be
reinvested in the business and how much
should be returned to the owners?
Principles of Corporate
Finance
 Invest in projects that yield a return greater than
the minimum acceptable hurdle rate with
adjustments for project riskiness.

 Choose a financing mix that minimizes the hurdle
rate.

 If there are not enough investments that earn the
hurdle rate, return the cash to stockholders.

 These decision criteria will be consistent with
the objective of the firm: Maximize the
Value of the Firm
Financial Markets

 Primary Market
 When a corporation issues securities,
cash flows from investors to the firm.
 Usually an underwriter is involved
 Secondary Markets
 Involve the sale of “used” securities
from one investor to another.
 Securities may be exchange traded or
trade over-the-counter in a dealer
market.
The Firm and the Financial
Markets
Firm Firm issues securities (A) Financial
markets
Invests
in assets Retained
cash flows (F)
(B)
Short-term debt
Current assets Cash flow Dividends and Long-term debt
Fixed assets from firm (C) debt payments
(E)
Equity shares

Taxes (D)

The cash flows from

Ultimately, the firm
must be a cash the firm must exceed
generating activity. Government the cash flows from
the financial
markets.
Capital Structure

A firm’s capital structure is the

specific mix of debt and equity
used to finance the firm’s
operations.

 Decisions need to be made on both
the financing mix and how and
where to raise the money.

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Working Capital
Management
 Howmuch cash and inventory
should be kept on hand?

 Shouldcredit terms be extended? If
so, what are the conditions?

 Howis short-term financing
acquired?

14
Corporate Forms of
Business Organisation
The three different legal forms of
business
organization are:

 sole proprietorship

 partnership

 company

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Sole Proprietorship

 Owned by one person.

 Least regulated form of organization.
 Owner keeps all the profits but
assumes unlimited liability for the
business’s debts.
 Life of the business is limited to the
owner’s life span.
 Amount of equity raised is limited to
owner’s personal wealth.
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Partnership

 The business is formed by two or more

owners.
 All partners share in profits and losses
of the business and have unlimited
liability for debts.
 Easy and inexpensive form of
organisation.
 Partnership dissolves if one partner
sells out or dies.
 Amount of equity raised is limited to
the combined personal wealth of the 17
Company

A business created as a distinct legal

entity composed of one of more
individuals or entities.
 Most complex and expensive form of
organization.
 Shareholders and management are
usually separated.
 Ownership can be readily transferred
 Life of a company is not limited.
 Owners (shareholders) have limited
liability.
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 Survival
 Avoid financial distress and
bankruptcy
 Beat the competition
 Maximize sales or market share
 Minimize costs
 Maximize profits
 Maintain steady earnings growth

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The Firm’s Objective

 The goal of financial management is

to maximize shareholders’ wealth.

 Shareholders’ wealth can be
measured as the current value per
share of existing shares.


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Agency Relationships

 Theagency relationship is the

relationship between the
shareholders (owners) and the
management of a firm.

 Theagency problem is the possibility
of conflict of interests between
these two parties.

 Agency costs refer to the direct and
indirect costs arising from this
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Corporate Governance and
Managerial Decisions

 Managers making decisions that are

consistent with the firm objective
of firm value maximization is
predicated on the assumption that
managers will act in the best
interest of shareholders

 Corporategovernance addresses the
relationships between the various
stakeholders in the firm
 Q&A…….

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