Introduction of Corporate Finance

1. Introduction of Corporate Finance Madam ZakiahHassan 28 February 2012 prepared by Madam Zakiah Hassan 28 February 2012

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. Is maximizing profits the same as maximizing shareholder wealth? prepared by Madam Zakiah Hassan 28 February 2012

12. 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

13. 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

14. Forms of business organization • Sole proprietorship • Partnership • Corporation • Limited liability companies (table of forms of business) prepared by Madam Zakiah Hassan 28 February 2012

15. 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

16. 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

17. 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

18. prepared by Madam Zakiah Hassan 28 February 2012

19. 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

20. 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

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22. Terminologies • Stakeholder – customers, employees, suppliers, communities prepared by Madam Zakiah Hassan 28 February 2012

23. 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

24. 2. The limitation of the profit maximization goal include : • Lacks a time dimension • Fails to consider risk • The profit is ambiguous (unclear) • All of the above prepared by Madam Zakiah Hassan 28 February 2012

25. 3. The two most important discplines on which financial management relies are : • Accounting and production • Accounting and marketing • Economics and marketing • Accounting and economics prepared by Madam Zakiah Hassan 28 February 2012

26. 4. ___arise from the divergent objectives between owners and managers • Shareholder relationships • Stakeholder problems • Creditor problems • Agency problems prepared by Madam Zakiah Hassan 28 February 2012

27. 5. Agency costs include all of the following except : • Expenditures to monitor management’s actions • Providing stock as part of management’s compensation • Flotation costs • Bonding expenditures prepared by Madam Zakiah Hassan 28 February 2012

28. 6. The success of a firm is linked to its stakeholders. This group includes : • Community neighbors • Suppliers • Employees • All the above prepared by Madam Zakiah Hassan 28 February 2012

29. 7. ___deals with economic decisions of individuals, households, and firms. • Economics accounting • Microeconomics • Blue chip econometrics • Macroeconomics prepared by Madam Zakiah Hassan 28 February 2012

30. 8. ___equals the number of shares outstanding times the market price per share • Book value • Stakeholder wealth • Total shareholder wealth • Economic value prepared by Madam Zakiah Hassan 28 February 2012

31. END OF CHAPTER • THANKS prepared by Madam Zakiah Hassan 28 February 2012