“ ‫”من طلب العال سهر الليالي‬
Principles of corporate
finance
211FIN
INSTRUCTOR: SIHEMSMIDA
Second term1436
1- 2
Contents of course
Module1: Introduction to corporate finance
Module2: Time value of money, present
value and opportunity cost
Module3: Making investment decisions
Module4: Financial analysis
Module5: Financial planning
Module6: Funding sources
principles of
corporate
finance
Chapter 1
Introduction to Corporate
Finance
Lecturer
Sihem Smida
1- 4
Chapter Objectives
 Understand the basic idea of corporate finance.
 Discuss the three main decisions facing financial
managers.
 Understand the importance of cash flows in financial
decision making.
 Know the financial implications of the three forms of
business organization.
 Outline the various types of financial markets.
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What is Corporate Finance
Corporate finance is the area of finance dealing
with monetary decisions that business
enterprises make and the analysis used to make
these decisions.
 The primary goal of corporate finance is to
maximize shareholder value (wealth).
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Important decisions in Finance
 Corporate finance attempts to find the answers to the following
questions:
– What investments should the business take on?
THE INVESTMENT DECISION
– How can finance be obtained to pay for the required
investments?
THE FINANCE DECISION
– Should dividends be paid? If so, how much?
THE DIVIDEND DECISION
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The Financial Manager
Financial managers try to answer some or all
of these questions.
The top financial manager within a firm is
usually the General Manager–Finance.
– Financial Manager: oversees (supervises) cash
management, credit management, capital
expenditures and financial planning.
– Accountant: oversees taxes, cost accounting and
financial accounting .
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Role of The Financial Manager
(2)
(1)
Financial
manager
Firm's
operations
(4a)
(4b)
(3)
(1) Cash raised from investors
(2) Cash invested in firm
(3) Cash generated by operations
(4a) Cash reinvested
(4b) Cash returned to investors
Financial
markets
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The Investment Decision
Corporate management seeks to maximize
the value of the firm by investing in projects
which yield a positive net present value
(profit) when valued using an appropriate
discount rate in consideration of risk.
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The Investment Decision
Capital investment decisions are long-term
and short-term corporate decisions
• Short term decisions deal with the short-term
balance of current assets and current liabilities
• Long-term corporate finance decisions relating to
fixed assets and capital structure.
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Capital structure
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Capital budgeting
Management must allocate limited
resources between competing opportunities
(projects) in a process known as capital
budgeting.
Capital budgeting is the process of
determining which real investment projects
should be accepted and given an allocation
of funds from the firm.
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Finance decision
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 to raise the money.
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Sources of financing
Achieving the goals of corporate finance
requires that any corporate investment be
financed appropriately.
The sources of financing are, generically,
capital self-generated by the firm and
capital from external funders, obtained by
issuing new debt and equity (example: loans
and bonds)
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Internal Sources of Finance and Growth
 ‘Organic growth’ – growth generated through the
development and expansion of the business itself.
Can be achieved through:
 Generating increasing sales – increasing revenue
to impact on overall profit levels
 Use of retained profit – used to reinvest in the
business
 Sale of assets – can be a double edged sword –
reduces capacity?
External Sources of Finance
 Long Term – may be paid back after
many years or not at all!
 Short Term – used to cover
fluctuations in cash flow
 ‘Inorganic Growth’ – growth
generated by acquisition
The existence of capital markets enable firms to raise
long term loans and share capital.
Copyright: Photolibrary Group
1- 16
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Long Term
 Shares (Shareholders are part owners of a company)
– Ordinary Shares (Equities):
•
•
•
•
Ordinary shareholders have voting rights
Dividend can vary
Last to be paid back in event of collapse
Share price varies with trade on stock exchange
– Preference Shares:
• Paid before ordinary shareholders
• Fixed rate of return
• Cumulative preference shareholders – have right to dividend carried over to next year in
event of non-payment
– New Share Issues – arranged by merchant or investment banks
– Rights Issue – existing shareholders given right to buy new shares at discounted
rate
– Bonus or Scrip Issue – change to the share structure – increases number of shares
and reduces value but market capitalisation stays the same
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Long term
 Loans (Represent creditors to the company – not owners)
– Debentures – fixed rate of return, first to be paid
– Bank loans and mortgages – suitable for small to medium sized
firms where property or some other asset acts as security for the
loan
– Merchant or Investment Banks – act on behalf of clients to
organise and underwrite raising finance
– Government/EU – may offer loans in certain circumstances
• Grants
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Short Term
 Bank loans – necessity of paying interest on the payment, repayment periods
from 1 year upwards but generally no longer than 5 or 10 years at most
 Overdraft facilities – the right to be able to withdraw funds you do not
currently have
– Provides flexibility for a firm
– Interest only paid on the amount overdrawn
– Overdraft limit – the maximum amount allowed to be drawn - the firm
does not have to use all of this limit
 Trade credit – Careful management of trade credit can help ease cash flow –
usually between 28 and 90 days to pay
 Factoring – the sale of debt to a specialist firm who secures payment and
charges a commission for the service.
 Leasing – provides the opportunity to secure the use of capital without
ownership – effectively a hire agreement