CORPORATE FINANCE and personale management of .ppt

Corporate Finance

1. CORPORATE FINANCE

2. What is Corporate Finance?
Corporate Finance addresses the following
three questions:
1.How should the firm raise funds for the
selected investments?
2.How should short-term assets be managed and
financed?

3. Balance Sheet Model of the Firm
Current
Assets
Fixed Assets
1 Tgible
2 Intangible
Total Value of Assets:
Shareholders’
Equity
Current
Liabilities
Long-Term
Debt
Total Firm Value to Investors:

4. The Capital Budgeting Decision
Current
Assets
Fixed Assets
1 Tangle
2 Intangible
Shareholders’
Equity
Current
Liabilities
Long-Term
Debt
What long-term
investments
should the firm
choose?

5. Relates to Capital Budgeting Decisions
Techniques:
(i) Traditional- Payback Period, Accounting
Rate (ii) Modern- Net
Present value Method,
Internal Rate of Return,
Profitability Index, etc.
Long Term Decision

6. Capital Structure
The value of the firm can be
thought of as a pie.
The goal of the manager is
to increase the size of the
pie.
viewed as how best to slice
the pie.
If how you slice the pie affects the size of the
pie, then the capital structure decision matters.
50%
Debt
50%
Equity
25%
Debt
75%
Equity
70%
Debt
30%
Equity

7. The Capital Structure Decision
How should the
firm raise funds
for the selected
investments?
Current
Assets
Fixed Assets
2 Intangible
Shareholders’
Equity
Current
Liabilities
Long-Term
Debt

8. •Decision relation to Funding of the Projects
• Sources
-Short Term (trade credit, bank overdraft,etc.)
(i) Owners Funds ( Equity/Preference Share
Capital, Retained
Earnings)
(ii) External Funds( Debentures, Long Term
Loans, etc.)
Capital Structure Decision

9. Short-Term Asset Management
How should
short-term assets
be managed and
financed?
Net
Working
Capital
Shareholders’
Equity
Current
Liabilities
Long-Term
Debt
Current
Assets
Fixed Assets
1 Tanble
2 Intangible

10. The Financial Manager
The Financial Manager’s primary goal is to
increase the value of the firm by:
1. Selecting value creating projects
2. Making decisions

11. EMERGING ROLE OF THE
FINANCIAL MANAGER IN INDIA
The key challenges for the financial manager appear to
be in the following areas:
• Investment planning and resource allocation
• Financial structure
• Mergers,
• Working capital management
• Risk management
• Corporate governance
• Investor relations

12. RELATIONSHIP OF FINANCE TO ACCOUNTING
• Accounting is concerned with score keeping, whereas
finance is aimed at value maximising.
• The accountant prepares the accounting reports based
on the accrual method. The focus of the financial
manager is on
• Accounting deals primarily with the past. Finance is
concerned mainly with the future.

13. Hypothetical Organization Chart
Chairman of the Board and
Chief Executive Officer (CEO)
President and Chief
Operating Officer (COO)
Vice President and
Chief Financial Officer (CFO)
Treasurer Controller
Cash Manager
Capital Expenditures
Credit Manager
Financial Planning
Tax Manager
Financial Accounting
Cost Accounting
Data Processing
Board of Directors

14. Cash flow
from firm (C)
The Firm and the Financial Markets
T
a
x
e
s
(
D
)
Government
Retained
cash flows (F)
Invests
in assets
(B)
Dividends and
debt payments (E)
Current assets
Fixed assets
Short-term debt
Long-term debt
Equity shares
Ultimately, the firm
must be a cash
generating activity.
The cash flows from
the firm must exceed
the cash flows from
the financial markets.
Invests in assets
(B)
Current and Fixed
Assets
Firm Firm issues securities (A)
Short tem debt
Long term debt
Equity shares
Financial
markets

15. The Corporate Firm
•The corporate form of business is the
standard method for solving the problems
encountered in raising large amounts of cash.
•However, businesses can take other forms.

16. Forms of Business Organization
•The Sole Proprietorship
•The Partnership
•The Corporation

17. The Goal of Financial Management
•What is the correct goal?
–Maximize profit?
–Minimize costs?
–Maximize market share?
–Maximize shareholder wealth?

18. The Agency Problem
•Agency relationship
–Principal hires an agent to represent his/her
interest
–Stockholders (principals) hire managers (agents) to
run the company
•Agency problem
–Conflict of interest between principal and agent

19. Financial Markets
•Primary Market
–Issuance of a security for the first time
•Secondary Markets
–Buying and selling of previously issued securities
–Securities may be traded in either a dealer or
auction market