COURSE TITLE:
Corporate Finance
COURSE CODE:
(FIN 722)
PROFESSOR:
Muzaffar Hashmi
1
Recommended Books
 Fundamental of Corporate Finance (7th Edition)
By: Richard A Brealey, Stewart C Myers
 Principle of Corporate Finance (4th Edition)
By: Richard A Brealey, Stewart C Myers
 Essential of Corporate Finance
By: Stephen A Ross, Randolph W
Westerfield, Bradford D Jordan
Corporate Finance
Scheme of Studies:
• MODULE # 1 : OVERVIEW OF CORPORATE FINANCE
• MODULE # 2 : VALUATIONS OF FINANCIAL INSTRUMENTS LIKE
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STOCKS SHARES & BONDS
MODULE # 3 : CAPITAL BUDGETING
MODULE # 4 : RISK STRATEGIES & MANAGEMENT
MODULE # 5: COST OF CAPITAL
MODULE # 6 : SHORT TERM FINANCE & CAPITAL STRUCTURE
MODULE # 7 : SPECIAL TOPICS – MERGERS & ACQUISITIONS
MODULE # 8 : INTERNATIONAL OPERATIONS
Lecture 1: Module # 1: Introduction to Corp Finance
TO START A BUSINESS - THREE
QUESTIONS ARISES:
• 1. What type of assets do we needs?
• 2. Where the money will come from to buy
these particular assets?
• 3. Day to day or Routine financial expenses,
how to meet them?
4
Lecture 1: Module # 1: Introduction to Corp Finance
QUESTION # 1: SELECTION OF ASSETS:
CAPITAL BUDGETING
•CB is defined as process of planning, analyzing and
acquiring of capital.
5
Lecture 1: Module # 1: Introduction to Corp Finance
• CB decisions are irreversible in nature
• SWOT Analysis :
– S – Strength
– W – Weakness
– O – Opportunities
– T – Threats
• CB targeted towards potential opportunities
Lecture 1: Module # 1: Introduction to Corp Finance
• Opportunities of a Business Entity depends on
nature of intended business
• Example: Air line Industry wants to add an
aircraft that generate more Cash Flows. (i.e.
Opportunity and acquire an asset Plane)
Cargo Company - Trawlers
7
Lecture 1: Module # 1: Introduction to Corp Finance
Points keep in view by Financial Manager & CB
• Size of Investment
• Risk
• Timing
• Evaluating Size, timing of CF and Risk associated with
CF is essence of CB
8
Lecture 1: Module # 1: Introduction to Corp Finance
QUESTION # 2:Where to get money from to
Finance Investment?
Ans: CAPITAL & ITS STRUCTURE
• Two ways to finance an Investment:
– Owner’s Equity
– Loans or External Sources
9
Lecture 1: Module # 1: Introduction to Corp Finance
Terminology in Capital Raising
IPO’s
– IPO’s stands for Initial Public Offerings
– Company launch their shares in market
– Offer general Public
– Share allotted on Draw
Lecture 1: Module # 1: Introduction to Corp Finance
QUESTION # 3
• How to manage routine financial activities?
• Working Capital Basically Interaction between Current
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•
Assets & Current Liabilities
Working Capital needs to meet financial expenses
Current Assets - Current Liabilities = WC
OPERATING CYCLE
Cash Flow from Customers used to
Pay Off Vendors
Vendors
Raw Material
Finished Goods
Sales to Customer
Cash from Customers
Cash Payment
from Customers
Difference between Operating Cycle and Cash Conversion
Cycle (Cash Cycle)
Operating Cycle:
Operating cycle for a firm is the average number of days that the firm takes to convert its raw
material into finished goods for sale and getting cash proceeds from debtors.
Formula for operating cycle is:
Operating cycle = Average days of inventory (stock holding period) + Average receivable
processing period (in days)
Cash Conversion Cycle:
It is also termed as net operating cycle or simply the cash cycle. It starts from conversion of
raw material into finished goods for sales and collection of cash from debtors to payback to
their creditors/ suppliers.
Cash Conversion cycle = Average days of inventory (stock holding period) + Average
receivable days – Average payable processing period (in days)
Note: Cash conversion cycle is always shorter than the operating cycle because here average
payable days are subtracted form operating cycle.
Lecture 1: Module # 1: Introduction to Corp Finance
Working Capital Policies
• Level of Inventory Investment
• Credit extension policy
Lecture 1: Module # 1: Introduction to Corp Finance
Types of Business
• Sole Proprietor
Un-Incorporated Business
• Partnership
• Limited Liability Business:
– Private Company
– Public Un-listed Company
Lecture 1: Module # 1: Introduction to Corp Finance
Limited Liability Business & Markets
Types of Markets:
• Primary Market
• Secondary Market
Lecture 1: Module # 1: Introduction to Corp Finance
Primary Markets
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•
•
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Original Sale of Securities and shares
No tangible Shape
General Public offerings
Private placements
IPO’s in Primary Market
Lecture 1: Module # 1: Introduction to Corp Finance
Secondary Markets
• Subsequent to first sale or Subsequent to
original sale.
• Trading of Securities & Shares
• Tangible Markets
• Example stock Exchange
Lecture 1: Module # 1: Introduction to Corp Finance
FINANCIAL STATEMENTS &
CORPORATE FINANCE
•THREE BASIC STATEMENTS
BALANCE SHEET
INCOME STATEMENT
CASH FLOW STATEMENT
Lecture 1: Module # 1: Introduction to Corp Finance
BALANCE SHEET
• Is a Statement of resources controlled by the business
entity and obligations on a specific date.
Lecture 1: Module # 1: Introduction to Corp Finance
Contents of Balance Sheet
• Assets = Fixed (tangible & intangible)& current
assets
• Liabilities = Long Term Liability + Current Or
Short Term Liability
• Equity = shareholders’ contribution + earnings
Lecture 1: Module # 1: Introduction to Corp Finance
Fixed Assets:
• Earning assets
• Fixed Assets e.g. Plant, Machinery, Vehicles etc
Current Assets:
• Inventory, Prepayments, Cash & Bank Balance,
Short Term Investment etc
Lecture 1: Module # 1: Introduction to Corp Finance
Balance Sheet Format
• Format of B/S in Pakistan is Governed by
International Financial Reporting Standard or
International Accounting Standard
• B/S construction is Non-liquid or Illiquid Asset
is at top
Lecture 1: Module # 1: Introduction to Corp Finance
Two Conventions for B/S Construction
• 1st as in Pakistan IAS or IFRS
• 2nd Convention GAAP (General Accepted
Accounting Principle) applicable in United
States
• GAAP – In B/S top item is highly liquid asset
i.e. cash or near money
Lecture 1: Module # 1: Introduction to Corp Finance
Current Liabilities ingredients
• Creditor, Accrued Liabilities, Short Term Finances
• Current Assets - Current liabilities equal Working
Capital
Lecture 1: Module # 1: Introduction to Corp Finance
Liquidity
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Conversion into cash without losing its value.
Timing
Loss of value
Example: Bonds
Lecture 1: Module # 1: Introduction to Corp Finance
Equity & Long Term Liabilities
• Equity
– Paid up Capital
– Reserves
– Profit & Loss
• Long Term Liabilities
– Loans OR Financial Leverage
BALANCE SHEET
AS AT 30 JUNE 2003
NOTES
OPERATING ASSETS
Fixed assets (at cost less accumulated depreciation)
DEFERRED COST
LONG TERM DEPOSITS (against Lease)
2003
RUPEES
2002
RUPEES
3
125,138,737
109,101,363
4
12,653,681
2,930,337
140,722,755
18,514,377
827,737
128,443,477
7,347,476
22,628,137
2,149,858
11,215,891
19,231,731
3,211,998
7
8
26,089,950
107,524
58,322,945
17,450,008
110,421
51,220,049
9
(6,794,240)
(8,004,000)
(6,760,139)
(30,831,550)
(2,821,322)
(19,270,244)
(44,786,359)
CURRENT ASSETS
Stores & spares
Stocks
-doTrade debtors
Advances, deposits, prepayments and
other receiveables
Cash and bank balances
CURRENT LIABILITIES
Current maturity portion of lease liability
Current maturity portion of Long Term Loans
Short term borrowings
Creditors, accruals and other liabilities
5
6
10
11
TOTAL ASSETS LESS CURRENT LIABILITIES
LONG TERM LIABILITIES
Deferred Income
Due to directors and relatives
Provident fund trust and gratuity payable
Long term loans
Dealers&Distributors securities
Long term portion of leasehold assets
146,655,771
(1,692,510)
(37,056,700)
12
(926,457)
13 (27,828,000)
14 (23,871,350)
(12,710,887)
(104,085,904)
TOTAL NET ASSETS
REPRESENTED BY :
Share capital (5,980,000)
Profit & (loss) account
Surplus on revaluation of fixed assets
Share deposit money
42,569,867
15
112,785,601
(21,693,585)
(926,457)
(47,500,000)
(19,398,600)
(1,936,847)
(91,455,489)
21,330,112
59,800,000
39,800,000
(27,457,311) (29,697,066)
8,227,178
8,227,178
2,000,000
3,000,000
42,569,867
21,330,112