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An overview of Corporate Finance by Binam Ghimire

An overview of Corporate Finance by Binam Ghimire. Learning Objectives. Concept, Scope and Significance Key Decisions in Corporate Finance Agency problem Appreciate Business Ethics and social Responsibilities. Finance: What is it?. Finance as a resource Finance as a discipline

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An overview of Corporate Finance by Binam Ghimire

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  1. An overview of Corporate Finance by Binam Ghimire

  2. Learning Objectives • Concept, Scope and Significance • Key Decisions in Corporate Finance • Agency problem • Appreciate Business Ethics and social Responsibilities

  3. Finance: What is it? • Finance as a resource • Finance as a discipline • Monetary means of financing assets of an entity • Collection and allocation of resources

  4. Specialised areas of finance • Personal

  5. Specialised areas of finance • Public

  6. Specialised areas of finance • Securities and investment Source: London Evening Standard, 18 May 2011

  7. Specialised areas of finance • Institutional Source: The Telegraph, 29th July 2011

  8. Specialised areas of finance • International Finance Table from Bringham and Huston (2002, p. 7) £, $, €, ¥, %

  9. Corporate Finance • ?

  10. The Corporate Firm ? ? ?

  11. Sole Proprietorship • Business is owned and run by one person • Typically have few, if any, employees • Advantages: Easy to create • Disadvantages: Unlimited personal liability, No separation between the firm and the owner, Limited life, Difficult to transfer ownership

  12. Partnership • Similar to a sole proprietorship, but with more than one owner • Income is taxed at the personal level • All partners have unlimited personal liability • The partnership ends with the death or withdrawal of any single partner • General and limited partner

  13. The Corporation • AKA: JSC, PLC, LLC, Corporation,

  14. The Corporation • A legal entity • separate from its owners • Has many of the legal powers individuals have such as the ability to enter into contracts, own assets, and borrow money …

  15. Source: www.bizstats.com

  16. The Corporation • Several advantages: Limited liability, ease of ownership transfer and unlimited life. These give the corporation an enhanced ability to raise cash, However • Starting is more complicated than others: Articles of associations and a set of bylaws, and one great disadvantage is • _ _ _ _ _ e _ _ x_ _ _ _ n

  17. Corporate Finance: Concept • Corporate finance: Finance for the corporate or beyond? • limited to management of funds? • Sell - Cash - Value

  18. Corporate Finance: concept • Corporate Finance deals with: • Determining value of a Corporate Entity • Adding Value to a Corporate Entity • The Value of X is what X is worth now at time t. • Making the best decision when that decision involves a consideration or an opportunity cost and the cost of consideration may be higher or lower given time t • This is part of strategy

  19. Corporate Finance: the concept Strategy is how an organization • achieves her long term objectives • through re-configuration of her resources in response to a changing external business environment • to achieve competitive advantage • in order to satisfy stakeholder’s objectives

  20. Corporate Finance: the concept Corporate Finance is the: • The Reconfiguration of Resources • The study of the external changing Business Environment • Definition of what stakeholder’s Financial objectives are • Gaining of competitive advantage

  21. The Three Key Corporate Finance Decisions • Investment Decisions concerned with whether to undertake capital expenditure projects or not • Financing Decisions concerned with the collection of funds from appropriate sources • Managerial Decisions concerned with dividend, working capital and other decisions at management level

  22. Investment Decisions • The Investment Decisions of a Firm are taken using the various investment appraisal techniques which we will study • This techniques are tools which work well if applied properly • They have various decision criteria's and can be very effective if used by the right kind of managers • While they can cause a loss of corporate value if used wrongly

  23. Investment Decisions • The process of making and managing expenditures on long-lived assets: Capital budgeting/ Investment appraisal

  24. Financing Decision • The Financing Decision if informed by the Target Capital Structure desired by the firm • The cost of capital the firm has to bear • The sources of finance available to her

  25. Financing Decision • The sources of finance available can be current and long term • Long term debt and equity falls in capital structure • Cost of capital explains about the cost associated with such components of debt and equity capital

  26. Managerial Decisions • How large should the firm grow? • How Much Dividend Should be Paid and How Much profit should be retained for growth? • How fast should this growth be? • How should the firm manage its receivables and payables? e.g. Should the firm grant credit to a customer?

  27. The Role of The Financial Manager

  28. OrganisationalChart of a Typical Corporation

  29. (2) (1) 4 5 (3) Firm's Financial operations Investors Manager Real assets

  30. Financial Manager’s Roles • 5. Cash returned to investors • 3. Cash generated by the firm’s operations • 2. Cash invested in the firm’s operations • 1. Cash raised by selling financial assets to investors • 4. Cash reinvested

  31. Goals of a firm • Profit Maximisation vs. Wealth Maximisation • Accounting concept • Zero dividend • Time value of benefits • Quality of benefits • Modern business environment • Who are the shareholders? • Conflict of interest among stakeholders of a firm

  32. The Three Different Views of the Firm • The Investment Vehicle Model of the Firm • The Accounting Model of the Firm • Set of Contracts Model of the Firm

  33. Financial Markets The Firm The World Investors Investment Decisions Exchange of Money and Financial Assets Financing Decisions Exchange of Money and Real Assets Financial Intermediaries The Investment Vehicle Model of the Firm Three Main Areas of Finance: Corporate Financial Management Financial Markets and Intermediaries Investments

  34. The Investment Decision The Financing Decision Current Liabilities Accounts Payable Current Debt Current Assets Cash Marketable Securities Accounts Receivable Inventory Net Working Capital =CA - CL Long-Term Liabilities Long-Term Bank Debt Bonds Total Fixed Assets Tangible Fixed Assets Intangible Fixed Assets Shareholder’s Equity Common Stock Retained Earnings The Accounting Model of the Firm

  35. Banks Bondholders Customers Employees Governments Environment Common Stockholders Preferred Stockholders Communities Society Creditors Suppliers Managers Set of Contracts Model of the Firm

  36. Managers and Owners • The Wall Street Journal Survey of CEO Compensation • http://www.businessinsider.com/25-most-overpaid-ceos-2010-10#18-news-corp-rupert-murdoch-8

  37. Agency Problem: Responsibility for the financial manager • Agency Theory • Michael C. Jensen and William H. Meckling propounded this theory in 1976 • Principal and Agent • Management and Shareholders, Creditors and shareholders

  38. Agency Problem: Responsibility for the financial manager • Manager owns less than 100% of the company • Agency Problem • Agency Cost (Monitoring, Structuring and opportunity costs)

  39. Agency Problem

  40. Agency Problem/cost: How to reduce? • Managerial compensation plan (e.g. performance stock) • Direct Intervention by shareholders • Threat of firing • Threat of takeover (e.g. hostile takeover, M&A)

  41. Stakeholder Theory

  42. Business Ethics • Ethics: The study of right and wrong “in action” • Making a business decision can involve ethical dilemmas

  43. An Ethical Dilemma? • Choice to be made • Implicates competing values, rights, & goals • Potential harm to decision maker? • Potential harm to others? • “Ripple effect:” long-term, far reaching implications of decision to be made.

  44. How to Resolve Ethical Dilemmas in Business • Identify relevant facts • Identify relevant issue(s) • Identify primary stakeholders • Identify possible solutions • Evaluate each possible solution • Compare and assess consequences • Decide on solution • Take action

  45. Additional Approaches to Ethical Decision Making • Five Question Approach (Tucker) • Moral Standards Approach (Velasquez) • Pastin’s Approach

  46. Practical Approaches to Ethics • Five Question Approach (Tucker) • Evaluate each alternative on: • Profitability (shareholders) • Legality (society at large) • Fairness • Impact on the rights of stakeholders • Impact on sustainable development (environment)

  47. Practical Approaches to Ethics • Tuckers Five Questions • Is it profitable? • Is it fair? • Is it legal? • Is it right? • Is it sustainable?

  48. Practical Approaches to Ethics • Moral Standards Approach (Velasquez) • Is the decision: • Of net benefit to society • Fair to all stakeholders (fair distribution of benefits and burdens) • Consistent with each person’s rights

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