02 Introduction to Corporate Finance 04

8/8/2019 02 Introduction to Corporate Finance 04

http://slidepdf.com/reader/full/02-introduction-to-corporate-finance-04 1/17

Slide no. 1

September 30, 2010

Author: Dilip Thosar

FLAME FSBJune 2010 CF : Corporate Finance

Introduction

A wise man should have money in his head, but not in his heart ~JonathanSwift

This planet has - or rather had - a problem, which was this: most of the people

living on it were unhappy for pretty much of the time. Many solutions were

suggested for this problem, but most of these were largely concerned with the

movements of small green pieces of paper, which is odd because on the whole

it wasn't the small green pieces of paper that were unhappy ~Douglas Adams

Corporate Finance

Introduction

FLAMEFSB

Pune

August 2010

In God Alone We Trust

Everyone Else Pays Cash

The MatrixLoves Cash « « Do You LoveThe Matrix ?

`

`



Slide no. 2

September 30, 2010



Introduction

Individual, Firm, Business Firm as an Asset

Purpose of a business (firm)

± Create wealth for the owner on a sustained basis Wealth Generation:

± Money begets money

± Generate more value (cash) than used Capital

Return on Capital

Value of a Firm



Slide no. 3

September 30, 2010



Introduction

Types of Firms

Business requires ± Capital and Labour

± Technology and Management

Types of Firm based on

± Way of raising capital (primary stakes) ± Liability of Owners to firm¶s business obligations

Four major types in Indian context:

± Proprietorship, Partnership , Pvt. Ltd., Public Ltd.

Impact

± Life of firm compared to life of owners

± Transferability of ownership of firm



Slide no. 4

September 30, 2010


FLAME FSBJune 2010 CF : Corporate FinanceIntroduction

Proprietorship

Cheapest to start and run ± No formal charter, few government regulations

No Corporate Income tax.

Unlimited Liability of business obligations. ± Business and personal assets are same

Life limited by life of sole proprietor

Equity limited to proprietor¶s personal wealth



Slide no. 5

September 30, 2010



Partnership

Share work, cash put in and returns Forms of Partnerships

± General Partnership Unlimited liability on general partner

Formal or oral agreement ± Limited Partnership

At least one general partner (with unlimited liability)

Limited partners do not participate in operations

Key features ± Inexpensive and easy to form, terminates on

death of a general partner, personal taxation



Slide no. 6

September 30, 2010



Limited Liability (Pvt. And Public) Corporation ("united in one body," from Latin corporatus, corporare. corpus =body. etymonline.com)

Limited Liability of owners : Shares, Equity

Transferability of ownership : Trading, Listing

Natural Person: Citizen of the State of Incorporation

Articles of Association, Memorandum of Association

Intended Life of Corporation (eg. SPVs)

Authorized Capital, classes of shares

Board Of Directors

Country of Incorporation Disclosures, AGMs,Control Systems

Difference between Private and Public Limited



Slide no. 7

September 30, 2010



Attach, peg to mark land (stake one¶s claim )

Owner (Shareholder): ± value of risking capital ownership

Creditors ± return on credit

Employees ± job security, remuneration, ego

Customers ± quality, price, their business

Partners ± united we stand, specialization

Government ± taxes, legalities, firm as citizen

Board Of Directors ± Trusted Direct Agents

Management ± Paid executioners

Stakeholders of a firm



Slide no. 8

September 30, 2010



Owner and Runner of Business Manager is an ³Agent´ of the

Shareholders Entrusted with Capital to and an

objective to maximize wealth(increase~earnings)

Earnings belong to stakeholders, notthe Company nor its Managers

For the Professional Manager andthe Corporate entity, Business is azero sum game but with a clear goalof maximizing the assets (liability toshareholders automatically increasecommensurately).



Slide no. 9

September 30, 2010



Agency Theory And Implications

Firm as a set of contracts The equity contract

± Principal-agent relationship

± Separation of ownership (shareholders) and

control (board or management) Residual Loss: shareholder¶s wealth lost due

to divergent behavious of management

Agency costs ± Monitoring costs : Auditors, reporting

± Cost of Control systems: SOX



Slide no. 10

September 30, 2010



Corporate wealth ± that on which management has effective control

± Corporate Wealth Shareholders¶ wealth

Goals of managers ± Survival of organization: raise resources to keep organization going

± Independence and self sufficiency: raise resources in such a way asto ensure maximum wealth available to self for control and individualgain

Corporate Growth and Shareholder¶s wealth ± For growth, corporate wealth, not shareholders¶ : debt leverage

± Other stakeholders apart from owners, especially debtholders

± Shareholders control management and hence behaviour

Management must try to maximize shareholders¶ wealth,Management must try to maximize shareholders¶ wealth,and in the process, attempt to increase the corporateand in the process, attempt to increase the corporatewealthwealth

Goals of Corporate Management



Slide no. 11

September 30, 2010



Few activities of corporate finance

Banking Treasury

Foreign Exchange

Legal

Taxation

Payroll

Accounting

Ethics Mandatory disclosures and reporting

Management reporting



Slide no. 12

September 30, 2010



The 4 Major Finance Decisions

LIABILITIES ASS

FIXED LIABILITIES FIXED ASSETS

Equity Land

Debt Building

Retained Earnings Plant/ Machinery

CURR ENT LIABILITIES CURR ENTASSETS

Creditors Debtors

Bills Payable Cash

FinancingInvestment

Working Capital

Profits

Profit Distribution



Slide no. 13

September 30, 2010



The 4 Major Finance Decisions The Investment Decision

± What long-term investment (assets and operations) strategy shouldcompany adopt?

± Choose amongst potential investments (projects).

The Financing Decision ± How should cash be raised for required for investments required?

± Where to raise funds for value-creating investments?

± What should be the proportion of equity and debt? The Working Capital Decision

± To have just enough funds available for operations as required

± How much short term cash-flows does company need to pay its daily bills?

± How should cash be made available to pay the short term cashrequirements?

The Dividend Decision ± How much of a firm¶s funds should be reinvested in the business, how muchshould be buffered as cash reserves and how much should be returned tothe owners?

± How should earnings be distributed among shareholders.



Slide no. 14

September 30, 2010



Finance Decisions in Cash

1. Raise Cash by selling Securities toInvestors

2. Invest Cash in Assets and firm¶s operations

3. Generate Cash by firms operations4. Reinvest Cash in the firm¶s operations

5. Return Part of Cash to Investors



Slide no. 15

September 30, 2010



What is in it for future managers

Goal: Maximize the Value of the Firm Companies are Professionally Managed

Every function has Organizational Linkage

with Finance Business Value of every function measured

in Money terms using Finance techniques



Slide no. 16

September 30, 2010



Case Buildup: Startup Company

Groups of 5. Decide to start a startup. Define the ownership structure

Define the formula for sharing of returns

What documents need to be raised? What registrations need to be done?



Slide no. 17

September 30, 2010




April 2010

Questions?

Documents

02 Introduction to Corporate Finance 04