1.

An Overview of Corporate Finance

Understand what finance means and its relationship to economics and
accounting.

Describe the managerial finance function and the role of financial manager

 Finance can be defined as the art and science of managing money.

 Virtually all individuals and organization earn or raise money and spend
or invest money.

 Finance is concerned with

 process,

 institutions,

 markets, and

 instruments, involved in the transfer of money among individuals,

business and governments.

The managerial finance function

 Size of the firm determines the importance of the managerial
finance function.
 In a small firm, the accounting department can handle the
managerial finance function.
 As firms grow, separate finance function evolves under the CEO.
 Under the CFO are, the treasurer and the controller.

 THE TREASURER/ THE CHIEF FINANCIAL MANAGER is
responsible for financial activities such as:
 Financial planning

 Fund raising

 Making capital expenditure decisions,

 managing cash

 Managing credit activities

 Managing pension fund

 Managing foreign exchange

The controller (the chief accountant) handles the accounting

activities such as:
 Financial accounting,

 cost accounting,

 tax management

 The treasurer focuses more on external activities, the controller

focuses more on internal activities broth
The relationship of FM to economics
 Field of finance is closely related to economics.
 The financial manager must:
Understand the economic framework and be alert to economic
activities and policies.

 Be able to use economic theories as guidelines for efficient

business operation. Example:
 supply and demand analysis
 Profit maximization strategies
 Cost – benefit analysis.

The relationship of FM to Accounting

 The treasurer’s and the controller’s activities are closely
related.
 There are two basic differences b/ n finance and accounting
1. Related to emphasis on cash flows:
2. With regard to decision making:

1. RELATED TO EMPHASIS ON CASH FLOWS:

 The accountants primary function is preparing financial
statements based on accrual basis of accounting.
 The financial manager’s primary emphasis is on cash flows.
 The f/manager is concerned with maintaining the firm’s solvency
by preparing cash budget to satisfy the firm’s obligation and to
acquire assets.
 The financial manager uses the cash basis to recognize revenues
and expenses.
 The accountant may report profit for the period on accrual basis,
 But the financial manager may face negative net cash flows as
he/she is concerned with actual cash flows.

2. With regard to decision making:

 Accountants devote most of their attention to the collection and
presentation of financial data.
 Financial managers evaluate f/statements, develop other data, and
make decisions.
2. Financial Planning and Short –term Finance
3. Capital Budgeting
4. RISK AND RETURN
5. Valuation of Securities
6. Cost of Capital