Introduction of Corporate
Finance
Madam Zakiah Hassan
28 February 2012
prepared by Madam Zakiah Hassan 28
February 2012
1
Upon completing this chapter
• The primary goal of the firm
• The determinants of the value of a firm
• The meaning and implication of agency
problems in a corporation
• Types of business organization and features
• Role and function of the financial manager
• Relationship between finance and other
business disciplines
prepared by Madam Zakiah Hassan 28
February 2012
2
What is Finance
• Is the study of the acquisition and investment
of cash for the purpose of enhancing value
and wealth.
• Various of finance areas – investment, publics
finance, financial institutional and market,
corporate finance
prepared by Madam Zakiah Hassan 28
February 2012
3
What is corporate finance
• Imagine that you were to start your own
business. No matter what types of business,
you will begin to ask various questions in
some form or another.
prepared by Madam Zakiah Hassan 28
February 2012
4
What is corporate finance
• What long term investments should you take on?
That is, what lines of business will you be in?
therefore what sorts of buildings, machinery, and
equipment will you need?
• Where will you get the L/T financing to pay for
your investment? Will you borrow the money or
bring in other owners by selling or issuing shares
to the public?
• How will you manage your everyday financial
activities such as collecting monies/debt from
customers and paying suppliers?
prepared by Madam Zakiah Hassan 28 February 2012
5
Who is financial manager
• Primary responsibility for acquire fund (cash)
needed by firm and directing those funds into
projects that will maximize the value of firm
prepared by Madam Zakiah Hassan 28
February 2012
6
Financial Manager
• Will a particular investment be successful?
• Where the funds come from to finance the
investment?
• Does the firm have adequate cash or access to
cash – through bank borrowing agreements,
for example – to meet its daily operating
needs?
• Which customers should be offered credit,
and how much should they be offered?
prepared by Madam Zakiah Hassan 28
February 2012
7
Functions of FM
• Overall responsibility – managing overall affairs of
the corporation.
• Summarized as :
– Analysis and planning (understand corporation’s
current financial condition and plan for future in
different economics scenarios.)
– Asset management (how much the co’s liquid
resources should be held in cash)
– Financial structure management (amount of S/T & L/T
debt impact on the liquidity of co. )
prepared by Madam Zakiah Hassan 28
February 2012
8
Agency problem
• Main goal of firm – max of shareholder wealth,
but in reality the agency problem may interfere
with the implementation of this goal.
• Mean : a results from the separation of
management and the ownership of the firm.
• Ex : large firm may be run by professional
managers who have little or no ownership in the
firm. Because of separate decision makers and
owners, managers may make decisions that are
not line with the goal of max s/holders wealth.
prepared by Madam Zakiah Hassan 28
February 2012
9
Agency problems
• Agency Problems
– Agency Relationships
• Principals
• Agent
– Stockholders and Creditors
– Stockholders and Managers
• Agency Problems and Costs
prepared by Madam Zakiah Hassan 28
February 2012
10
Is maximizing profits the same as
maximizing shareholder wealth?
prepared by Madam Zakiah Hassan 28
February 2012
11
Goals of firm
Efficient FM requires the existence of goal of the
co.
* Profit maximization (stresses the efficient use
of capital resources) – assumes away many the
complexities of the real world and PM is
inadequate for handling many finance decisions.
prepared by Madam Zakiah Hassan 28
February 2012
12
Goals of firm
• Shareholder wealth
- Means maximizing the present value of all future
benefits to be received by the owners of the
company.
- Who the owners of company  shareholders of
the company.
- Maximization of the market value of the existing
shareholders common stock because the effects
of all financial decision are thereby included.
prepared by Madam Zakiah Hassan 28
February 2012
13
Forms of business organization
• Sole proprietorship
• Partnership
• Corporation
• Limited liability companies
(table of forms of business)
prepared by Madam Zakiah Hassan 28
February 2012
14
Sole proprietorship & partnership
• Advantages
– Ease of formation
– Subject to few regulations
– No corporate income taxes
• Disadvantages
– Difficult to raise capital
– Unlimited liability
– Limited life
prepared by Madam Zakiah Hassan 28
February 2012
15
Corporation
• Advantages
– Unlimited life
– Easy transfer of ownership
– Limited liability
– Ease of raising capital
• Disadvantages
– Double taxation
– Cost of set-up and report filing
prepared by Madam Zakiah Hassan 28
February 2012
16
Financial management & Other
Disciplines
• Accounting
Financial managers are primarily concerned with a firm’s cash
flow
• Economics
• Microeconomics
– Financial managers use the concepts of setting marginal cost
equal to marginal revenue when making long-term
investment decisions and when managing working capital
• Macroeconomics
– Financial managers should recognize and understand how
monetary and fiscal policies affect the economy and the cost
of funds and the availability of credit
prepared by Madam Zakiah Hassan 28
February 2012
17
prepared by Madam Zakiah Hassan 28
February 2012
18
Career Opportunities in Finance








Corporate Finance
Commercial Banks
Securities Brokers
Investment Banks
Mutual Funds
Pension Funds
Real Estate Companies
Insurance Companies
prepared by Madam Zakiah Hassan 28
February 2012
19
Professional Finance Affiliations and
Certifications

Organizations




Financial Executives Institute
Institute of Chartered Financial Analysts
Financial Management Association
Certifications




Certified in Financial Management (CFM)
Certified Financial Planner (CFP)
Chartered Financial Analyst (CF)
Certified Treasury Professional (CTP)
prepared by Madam Zakiah Hassan 28
February 2012
20
prepared by Madam Zakiah Hassan 28
February 2012
21
Terminologies
• Stakeholder – customers, employees,
suppliers, communities
prepared by Madam Zakiah Hassan 28
February 2012
22
1. The primary objective of the firm is
(a) Shareholder wealth maximization
(b) Social respnsibility
(c ) long run survival
(d) Profit maximization
prepared by Madam Zakiah Hassan 28
February 2012
23
2. The limitation of the
maximization goal include :
profit
(a) Lacks a time dimension
(b) Fails to consider risk
(c) The profit is ambiguous (unclear)
(d) All of the above
prepared by Madam Zakiah Hassan 28
February 2012
24
3. The two most important discplines
on which financial management relies
are :
(a) Accounting and production
(b) Accounting and marketing
(c) Economics and marketing
(d) Accounting and economics
prepared by Madam Zakiah Hassan 28
February 2012
25
4. ___arise from the divergent
objectives between owners and
managers
(a) Shareholder relationships
(b) Stakeholder problems
(c) Creditor problems
(d) Agency problems
prepared by Madam Zakiah Hassan 28
February 2012
26
5. Agency costs include all of the
following except :
(a) Expenditures to monitor management’s
actions
(b) Providing stock as part of management’s
compensation
(c) Flotation costs
(d) Bonding expenditures
prepared by Madam Zakiah Hassan 28
February 2012
27
6. The success of a firm is linked to its
stakeholders. This group includes :
(a) Community neighbors
(b) Suppliers
(c) Employees
(d) All the above
prepared by Madam Zakiah Hassan 28
February 2012
28
7. ___deals with economic decisions of
individuals, households, and firms.
(a) Economics accounting
(b) Microeconomics
(c) Blue chip econometrics
(d) Macroeconomics
prepared by Madam Zakiah Hassan 28
February 2012
29
8. ___equals the number of shares
outstanding times the market price
per share
(a) Book value
(b) Stakeholder wealth
(c) Total shareholder wealth
(d) Economic value
prepared by Madam Zakiah Hassan 28
February 2012
30
• END OF CHAPTER
• THANKS
prepared by Madam Zakiah Hassan 28
February 2012
31