Corporate FinanceCorporate Finance

What is Corporate FinanceWhat is Corporate Finance

Is the Study of ways to answer the Is the Study of ways to answer the following 3 questionsfollowing 3 questions::

1) What long term investments should you 1) What long term investments should you take ontake on

2) Where will you get the long term financing 2) Where will you get the long term financing to pay for your investment?to pay for your investment?

3) How will you manage your everyday 3) How will you manage your everyday financial activities such as collecting from financial activities such as collecting from customers and paying suppliers customers and paying suppliers

Financial Management DecisionsFinancial Management Decisions

Capital BudgetingCapital Budgeting

Capital StructureCapital Structure

Working Capital ManagementWorking Capital Management

Forms of Business OrganizationForms of Business Organization

Sole ProprietorshipSole Proprietorship PartnershipPartnership CorporationCorporation

The goal of Financial ManagementThe goal of Financial Management

Possible goals: - Possible goals: - SurviveSurvive

- Avoid financial distress & bankruptcy- Avoid financial distress & bankruptcy

- Beat the competition- Beat the competition

- Maximize sales or market share- Maximize sales or market share

- Minimize costs- Minimize costs

- Maximize profits- Maximize profits

- Maintain steady earnings growth- Maintain steady earnings growth

The goal of financial management is to maximize the The goal of financial management is to maximize the current value per share of the existing stockcurrent value per share of the existing stock

Sarbanes - oxley

Agency problem & control of the Agency problem & control of the corporationcorporation

- Agency relationshipsAgency relationships- Management goalsManagement goals- Do managers act in the stockholder’s Do managers act in the stockholder’s

interests?interests?- Managerial compensationManagerial compensation- Control of the firmControl of the firm

Financial Markets & the CorporationFinancial Markets & the Corporation

Cash Flows to & from the FirmCash Flows to & from the FirmPrimary versus secondary marketsPrimary versus secondary markets

- Primary Markets- Primary Markets

- Secondary markets- Secondary markets

- Dealer versus Auction markets- Dealer versus Auction markets

- Trading in Corporate securities- Trading in Corporate securities

- Listing- Listing

Financial Statements, Taxes, & Cash FlowsFinancial Statements, Taxes, & Cash Flows

The Balance SheetThe Balance SheetThe Net working CapitalThe Net working CapitalLiquidityLiquidityDebt versus EquityDebt versus EquityMarket value versus book value Market value versus book value

The Income StatementGAAP & the Income statementGAAP & the Income statementNon cash itemsNon cash itemsTime & CostsTime & Costs

TaxesTaxesCorporateCorporateAverage versus Marginal Tax RatesAverage versus Marginal Tax Rates

Cash FlowCash Flow from AssetsCash Flow from AssetsOperating Cash flowOperating Cash flowCapital SpendingCapital SpendingChange in Net Working CapitalChange in Net Working Capital

Qs) Based on the following information for Qs) Based on the following information for Sunderam Corporation, prepare an Sunderam Corporation, prepare an income statement for 2007 & 2008. income statement for 2007 & 2008. Calculate cash flow to creditors, & cash Calculate cash flow to creditors, & cash flow to stock holders for 2008. Use a 30 % flow to stock holders for 2008. Use a 30 % tax rate throughout.tax rate throughout.

2007 20082007 2008Sales 4205 4550Sales 4205 4550Cost of goods sold 2425 2640Cost of goods sold 2425 2640Depreciation 790 960Depreciation 790 960Interest 185 200Interest 185 200Dividends 230 255Dividends 230 255Current Assets 2210 2500Current Assets 2210 2500Net fixed Assets 7360 7700Net fixed Assets 7360 7700Current Liabilities 1010 1280Current Liabilities 1010 1280Long term debt 3110 2100Long term debt 3110 2100

Working with Financial Statement

Cash flow & Financial Statements:Cash flow & Financial Statements:Sources &Uses of CashThe statement of cash flows

Standardized financial StatementsCommon size statements - Common size Balance sheet

- Common size income statement

- Common – size statements of cash flows

Common –Base year Financial statementsRatio AnalysisRatio Analysis

Qs) The Balance sheet of ABC Ltd is Qs) The Balance sheet of ABC Ltd is given: Calculate the changes in the given: Calculate the changes in the various accounts & where ever applicable, various accounts & where ever applicable, identify the change as a source or use of identify the change as a source or use of cash. Did the company become more or cash. Did the company become more or less liquid during the year?less liquid during the year?

Long-term Financial planning & growthLong-term Financial planning & growth

Effective long-range planning-Effective long-range planning- The firm’s needed investment in new assetsThe firm’s needed investment in new assets The degree of financial leverage the firm chooses to The degree of financial leverage the firm chooses to

employemploy The amount of cash the firm thinks is necessary and The amount of cash the firm thinks is necessary and

appropriate to pay shareholdersappropriate to pay shareholders The amount of liquidity & working capital the firm needs The amount of liquidity & working capital the firm needs

on an ongoing basis on an ongoing basis

What is Financial Planning?What is Financial Planning?

Growth as a financial Management GoalGrowth as a financial Management GoalDimensions of Financial PlanningDimensions of Financial PlanningWhat can planning accomplish?What can planning accomplish?

- Examining Interactions- Examining Interactions

- Exploring Options- Exploring Options

- Avoiding Options- Avoiding Options

- Ensuring Feasibility & internal Consistency - Ensuring Feasibility & internal Consistency

Financial Planning Models

Ingredients of a financial Planning Model:Ingredients of a financial Planning Model:Sales ForecastSales ForecastPro Forma StatementsPro Forma StatementsAsset RequirementsAsset RequirementsFinancial requirementsFinancial requirementsThe plugThe plugEconomic AssumptionsEconomic Assumptions

Financial Policy & GrowthFinancial Policy & Growth

Internal growth RateInternal growth Rate The sustainable growth rateThe sustainable growth rate Determinants of GrowthDeterminants of Growth - Profit Margin- Profit Margin - Dividend Policy- Dividend Policy - Financial policy- Financial policy - Total Asset Turnover- Total Asset Turnover If a firm does not wish to sell new equity and its profit If a firm does not wish to sell new equity and its profit

margin, dividend policy, financial policy, & total margin, dividend policy, financial policy, & total asset turnover are all fixed, then there is only one asset turnover are all fixed, then there is only one possible growth rate . possible growth rate .