INTRODUCTION OFCORPORATION FINANCE

Final Presentation

Muti ur Rehman Khan LodhiArshad Hussain Mengal

Students of MBAIqra University, Quetta Campus

April, 2010

ACKNOWLEDGEMENT

We would like to show our gratitude to our Honorable teacher Mr. Hassan Shahzad, whose great efforts in the term of teaching us Business Finance were very fruitful and knowledgeable for us. We really got precious techniques and knowledge that would be very helpful for future courses as well as in professional life.

What is Corporate Finance?

Corporate finance is a segment of finance which deals with the decisions taken by the corporation.

The primal objective of corporate finance is the maximization of corporate value by minimizing corporate risks.

In the study of corporate finance it is important to analyze the long term, short term decisions that are taken in the corporate sector.

Simply…

Corporate or business finance is all about raising and allocation of funds for increasing profit. Senior management chalks out long-term plan for fulfilling future objectives.

Value of the company's stock is a very important issue for the management because it is directly related to the wealth of the share-holders of the company.

We Conclude About Corporate Finance

Corporate finance and accounting professionals are responsible for managing a business's money, forecasting where it will come from, knowing where it is, and helping its managers decide how to spend it in ways that will ensure the greatest return. 

Two Basic Functions of Corporate Finance

ACQUISITION OF RESOURCES

ALLOCATION OF RESOURCES

Acquisition of Resources

Acquisition of resource means fund generation at lowest possible cost.

Equity --- It includes proceeds obtained from stock selling, retained earnings, and investment returns.

Liability --- It includes bank loans, warranties of products and payable account.

Allocation of Resources

Investment of funds for profit maximization motive.

Fixed Asset --- Land, Machinery, buildings, etc.

Current Asset --- Inventory, cash, receivable accounts, etc.

Functions of Corporate Finance

Raising of Capital or Financing Budgeting of Capital Corporate Governance Financial management Risk Management

Functions of Corporate Finance (Contd)

These functions are interrelated and interdependent. For example, in order to launch a project they need to raise capital. So, budgeting of capital and financing are interdependent.

Decision making of the corporate finance is basically of two types based on the time period for the same, namely, Long term and Short term.

Long Term Decisions

It is basically concerned with the capital investment decisions such as viability assessment of the project, financing it through equity or debt, pay dividend or reinvest out of the profit.

Long term Corporate finance which are generally related to fixed assets and capital structure are called Capital Investment Decisions. Senior managements always target to maximize the value of the firm by investing in positive NPV (Net Present Value) projects.

Short Term Decisions

These are also known as working capital management which tries to strike a balance between current assets and fixed assets.

Notice One Thing…

Corporate finance is slightly different from the accounting one. This can be understood by the help of the following example :- A Steel firm sells steel to a car manufacturer at

$100 per ounce (suppose) but has not received the payment for the same. Let the Steel firm's cost of production be $90.

Now, according to the accounting rule the profit will be calculated as $(100-90) = $10 per ounce.

But according to Corporate Finance the calculation specifications will be :-

Inflow of Cash = 0 Outflow of Cash = (90)

Financing Decisions

There are two ways in which any business can raise financing. It can use the

Owner’s funds (equity)Or

It can borrow money (debt)

Financing Decisions (Contd)

The financing decision examines whether the firm’s existing mix of debt and equity is the right one or not.

Firms also have to pick from a variety of different financing choices – short term versus long term debt, fixed rate versus floating rate debt- and determine what type of financing is best suited for them.

Investment Decisions

In making this decision, firms have to grapple with two basic issues. The first is the rate of return that they

need to make on an investment, given its risk, for it to be a good investment.

The second is how to measure returns on investments, especially when the cash flows on these investments are different from accounting earnings and vary over time.

Dividend Decisions

After firms make investments with their chosen financing mix, the investments generate cash flows. When the cash flows come in, firms will have to make decisions on how much of these cash flows will be invested back into the business and how much returned to the owners of the business.

1. 2. 3…

Investment, financing and dividend decisions made by businesses affect the values of these businesses.

In valuation, we attempt to tie inputs into valuation models into basic corporate finance decisions. If the objective in corporate finance is to maximize firm value, good investment, financing and dividend decisions should increase value. Bad decisions should decrease value.

Raising of Capital or Finance Raising finance is a complex process. Business

management need to assess several alternatives and then negotiate terms which are acceptable to the finance provider.

Finance/Capital can be raised through:- Existing shareholders and directors funds Family and friends Clearing banks (overdrafts, short or medium term

loans) Factoring and invoice discounting Hire purchase and leasing Merchant banks (medium to longer term loans) Venture capital

Budgeting of Capital(A Limited Resource)

One duty of a financial manager is to choose investments with satisfactory cash flows and rates of return. Therefore, a financial manager must be able to decide whether an investment is worthy and be able to choose intelligently between two or more alternatives. To do this, a sound procedure to evaluate, compare, and select projects is needed.

Budgeting of Capital (Contd)

Capital budgeting is investment decision making as to whether a project is worth undertaking. Capital budgeting is basically concerned with the justification of capital expenditures

Investment Appraisal/Capital Budgeting Discounting Compounding Annuity Ordinary Annuity Annuity Due Perpetuity

Financial Analysis

Traditional Techniques Pay Back Period

Expected number of years required to recover a project’s cost.

Accounting Rate of Return (ARR) Average Annual Profit

Average Investment

Financial Analysis(Contd)

Discounting Cash flow techniques Net Present Value (NPV)

Relevant Cash Flow Working Capital Inflation Taxation Depreciation

Internal Rate of Return (IRR) a + A x(b-a)

A-B

Thanking You For Your Patience…