CORPORATE FINANCE

By M.K
 Recommended Books

• Fundamental of Corporate Finance

(7th Edition)
By: Richard A Brealey & Steward C Myers

• Principles of Corporate Finance (4th

Edition)
By: Richard A Brealey & Steward C Myers
 Recommended Books

• Essentials of Corporate Finance

By: Stephen A Ross, Randolph W Westerfield
Bradford D Jorden
 Scheme Of Studies

• MODULE # 1
• OVERVIEW OF CORPORATE FINANCE

• MODULE # 2
• VALUATIONS OF FINANCIAL
INSTRUMENTS LIKE STOCK SHARES &
BONDS
 Scheme Of Studies

• MODULE # 3
• CAPITAL BUDGETING

• MODULE # 4
• RISK STRATEGIES AND MANAGEMENT
 Scheme Of Studies

• MODULE # 5
• COST OF CAPITAL

• MODULE # 6
• SHORT TERM FINANCE & CAPITAL
STRUCTURE
 Scheme Of Studies

• MODULE # 7
• SPECIAL TOPICS- MERGERS &
ACQUISITIONS

• MODULE # 8
• INTERNATIONAL OPERATIONS
OVERVIEW
WHAT FINANCE IS ALL ABOUT

• Finance is such an important part of modern life that

almost everyone can benefit from understanding it better.
What you may find surprising is that the financial
problems facing PepsiCo or Microsoft are not really
different from those facing an average investor, small
business owner, entrepreneur, or family.
Conti,,

• On the most basic level, these problems are about

how to allocate money. The choices are many:
Money can be borrowed, saved, or lent. Money
can be invested into projects. Projects can be
undertaken with partners or with the aid of
lenders. Projects can be avoided altogether if they
do not appear to be valuable enough. Finance is
about how best to decide among these and other
investment alternatives—and this textbook will
explain how.
 Corporate Finance

• Corporate finance is an area of finance that

deals with sources of funding, the capital
structure of the corporations, the actions that
managers take to increase the value of the firm
to the shareholders, and the tools and analysis
used to allocate financial resources.
 Corporate Finance

• Corporate finance is the division of finance

that deals with financing, capital structuring,
and investment decisions. Corporate finance is
primarily concerned with maximizing
shareholders value through long and short-
term financial planning and the
implementation of various strategies.
 Corporate Finance

• Corporate finance is the study of planning,

evaluating and drawing decisions in the course
of business. Let’s take a simple example to
determine the scope of our subject. This would
cover around 85% to 90% of scheme of
studies of corporate finance.
 Corporate Finance

• Suppose you intend to kick start a business.

Three up-front questions that hit our top of the
head are:
 Corporate Finance

1. What type of investments do we need? In

other words, what type of assets will be
required to support the intended business?
2. Where the money will come from? Sources
of investments to be determined in black and
white.
3. How we will finance our day to day
monetary matters like purchase of raw
materials and payment of salaries etc?
 Corporate Finance

• To answer these question let’s explore them

individually for twin purpose: to know what is
corporate finance and secondly, to determine
the scope of the subject.
• Referring to question # 1 – Types of
investment or assets needed in the business:
• The answer to this question can be found by
defining Capital Budgeting process.
 Capital Budgeting:

• It involves planning, analyzing and acquiring

capital assets like Plant and Machinery or Land or
Building. These investments take ample amount
of resources and therefore, these decisions are
irreversible in nature. That in turn means that once
the decision is implemented it would incur heavy
losses if we want to un-do it subsequently.
Therefore, making investment in capital assets is a
very risky process and must be handled with care
and skill.
 SWOT analysis

• SWOT analysis is also very helpful in capital

budgeting process.
• SWOT stands for:
• Strengths
• Weaknesses
• Opportunities
• Threats
 SWOT analysis

• Strengths are connected to Opportunities and in order

to tap the lucrative opportunities you need to make
capital investment, which must be handled with due
care and skill ensuring effective decision making.
This means that type of assets to be acquired depends
on the nature, need and resources of business besides
some other factors. For example, a large airline
industry would acquire bigger plane than a smaller
airline which may opt for a relatively cheaper plane.
Conti,,,

• Taking up the second question in line, that is,

“where the money will come from?”
• Broadly speaking there are two potential
sources for making investments. The first
sources emerge from the contributions of
sponsors or directors who commence the
business. This portion of investment is called
Capital or Equity contribution.
Conti,,,

• The other source of investment is from loans

and various financial instruments and markets.
Banks provide long term and short loans to the
business world and this has been the most
important source of business finance and is
being used widely.
Conti,,

• Other source of external financing is issuance

of bonds and securities in primary and
secondary markets. This process is known as
Capital Structure Decisions in which it is
determined that how much of the total cost
shall be financed by Equity contribution and
Loans.
Conti,,

Moving to third and last question:

• To finance day to day financial needs is in fact
an issue that fall within the ambit of Working
Capital policies. Following are the typical
questions in this context:
• What would be our purchases level for raw
materials?
• Do we need to import or are locally available?
Conti,,

• How much finances will be needed to procure

raw materials?
• What are our customers or markets?
• How many days credit to be extended to
customer and taken from creditor?
 • FINANCIAL STATEMENTS &
CORPORATE FINANCE WITH SOME
IMPORTANT CONCEPTS:
Conti,,

There are basically three financial statements

that every business entity runs periodically. It
includes:
• Balance Sheet
• Income Statement
• Cash Flow
 Balance Sheet:

This is a statement of resources controlled by

and obligations to settle by an entity as on a
specified date. The format of Financial
Statements is governed by International
Financial Reporting Standard in Pakistan.
However, in US these are governed by the
provisions of Generally Accepted Accounting
Principles (GAAP).
 Balance Sheet:

Balance Sheet Contents are:

• Fixed Assets
• Current Assets
• Current Liabilities
• Long Term Liabilities
● Capital & Reserves
 Balance Sheet:

• Assets (both fixed and current) are placed in

balance sheet in the order of less liquid or
illiquid to liquid. This means that current
assets are more liquid than fixed assets. Then
question arises “what is liquidity?” or “what is
a liquid asset?”
 Balance Sheet:

• An asset that can be converted to cash quickly

and without loss of value is liquid asset. For
example, prize bond is not a currency but you
can get the face or par value of a prize bond
when you sell the bond to any one. But this is
not the case when you want to sell your
motorcycle or car. Therefore, car or motor
cycle is not a liquid asset but prize bond or
gold are highly liquid.
 Balance Sheet:

• Current Assets and Current Liabilities when

clubbed together, give birth to another concept
known as working capital.
 Current assets

• Current assets are those that form part of the

circulating capital of a business. They are
replaced frequently or converted into cash
during the course of trading. The most
common current assets are stocks, trade
debtors, and cash.
 Current liabilities

• Current liabilities are those short-term

liabilities which are intended to be constantly
replaced in the normal course of trading
activity. Current liabilities typically comprise:
trade creditors, accruals and bank overdrafts.
• There is another concept of Cash Cycle
associated with working capital. Take a
compact example to understand.
 Current liabilities

• You acquire goods or raw materials from

vendors on credit. It takes time (say in days) to
process or transform raw materials to finished
goods, which are sold to customers on credit.
Customers or Debtors are allowed a time
period (in days) to settle or pay their bills and
money received from debtors is used to pay off
creditor, who provided goods on credit.
 Current liabilities

• . Let’s assume you allowed your customers 30

days to pay for goods you sold to them on credit.
And on the other hand you sought 35 days
cushion from creditors to pay off purchases of
raw materials. In this simple example you were
still able to use money for 5 days before paying
to creditors. This means the operating cycle is
positive. Other concepts from financial
statements shall be taken up in the next hand out.