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561 (FIN) - CF Kazi MD. Muhaiminul Islam
561 (FIN) - CF Kazi MD. Muhaiminul Islam
Presentation on-
1. Role of Corporate Finance in Business
2. Corporate Financial Planning and Business Development
3. Mergers and acquisitions- Definition, Types, Reasons, Process
4. Share valuation- Definitions, Approach, Methods
5. Bond valuation- Definitions, Features, Bond pricing
Date: 05.02.2021
The area of finance dealing with the sources of funding and the capital
structure of corporations.
Every decision that a business makes has financial implications and many
decision which affect the finance of a business is a corporate finance decision
The primary goal is to maximize or increase shareholder value
Corporate Finance
Corporate finance is based on two fundamental rules. All tools and techniques of
corporate finance are mere ways and means of implementing these rules.
Rule # 1: Money today is worth more than money tomorrow
Things to consider
Inflation, Opportunity Costs
Rule # 2: Risk free money is worth more than risky money
Things to consider
Return of risky Capital
Return on less risky Capital
Raising capital
Managing risk
Role of Decision making
Research and development
Corporate
Effective functioning
Finance in Growth and diversification
Business Meeting contingencies
Short-term and long-term goals
Replacement of assets
Raising Capital
There are several ways to raise capital. But all comes at a certain cost.
Several options for organizations to raises capital from-
Debt Capital
Equity capital
Preferred stock
Decision Functions of Corporate
Finance
Financing Decision
Decision to select the source of the fund and determine the capital structure
Investment Decision
Decision is to deploy the funds in a manner that it yields the maximum returns for its
shareholders
Dividend decision
Relate to the distribution of profits earned by the organization.
Liquidity decision
Current assets management that affects a firm’s liquidity is yet another important
finances function
Focus of Corporate Finance: Maximizing the value of a Business
Agency Problem
Agency problem is a conflict of interest inherent in any relationship
where one party is expected to act in the best interest of another.
The faster the firm grows external financing will be needed. The extent of
external financing will be related to the asset intensity of the firm, the
profitability of the firm and the debt/equity and dividend policies of the firm.
Definition
Types
Reasons
Process
Topic: 3
A merger is the combination of two companies
into one where one is being absorbed by the
other. In other words, when two or more
companies are consolidated into one company.
Definition of
Merger In Finance, Merger is an act or process of
purchasing equity shares (ownership shares) of
one or more companies by a single existing
company.
Acquisition
Acquisition is the process through which one company takes over the
controlling of another company.
In an acquisition, a company takes at least 50% ownership of another
company, and takes controls over it.
The company under consideration by another organization for an
acquisition is sometimes referred to as the target.
As part of the exchange, the acquiring company often purchases the
target company's stock and other assets, which allows the acquiring
company to make decisions regarding the newly acquired assets
without the approval of the target company’s shareholders.
Acquisitions can be paid for in cash, in the acquiring company's stock
or a combination of both.
Merger vs. Acquisition
Ways of Mergers & Acquisitions
by purchasing assets
by purchasing common shares
by exchange of shares for assets
by exchanging shares for shares
Types of Merger
Merger and
Acquisition
Market Product
Horizontal Vertical Conglomerate
extension extension
Horizontal Merger
A merger between two businesses that are not related to each other.
The two companies are in completely different industries or in
different geographical areas.
Conglomerate merger is helpful for companies to extend their
corporate territories, to gain synergy, expand their product range,
etc.
This type of merger is mostly seen in large corporation
In 1995, Disney purchased American Broadcasting Company (ABC),
gaining entry into ABC’s national television realm, as well as ESPN’s
extensive sports coverage.
Economies of Scale
Synergy
Operating Economics
Definitions
Approach
Methods
Topic: 4
What is Share valuation
Asset approach
Income approach
Market approach
Types of Share valuation methods
Asset based
Income based
Types of Share valuation methods
(Contd)
Market based
Earning yield
Expected rate of earning = x 100
Value per share = paid up equity capital
Dividend yield
Expected rate of dividend = x 100
Demand and supply
Bank rate
Market players
Dividend announcements
Factors Management profile
Single period
Valuation
Multi Period
Valuation
Dividend Discount Model (DDM)
Dividend discount model (Zero growth)
Cash flow pattern of zero growth stock is like perpetuity. If we assume that
the dividend payments will remain constant then the formula could be
written as:
DDM- (Unlimited
constant growth)
This model assumes that the dividend payments are growing each year at a
constant rate of “g” for limited time
DDM- Mixed Growth
This model assumes that the company and its dividend payments grow much
faster than the economy for a certain period at the beginning and then settles
to a constant growth rate.
Example: Suppose that Sun Corporation’s dividends this year is Rs. 1.20 per
share and that dividends will grow at 10% per year for the next three years,
followed by a 6% annual growth rate. The appropriate discount rate for
Corporation’s common stock is 12%.
DDM- Mixed Growth
Bond valuation-
Definitions
Features
Bond pricing
Topic: 5
What are Bonds?
Features of
Bond Time to Maturity
Each bond can be characterized by several
factors. These include:
Face Value
Characteristics of Coupon Rate
Bond Coupon
Maturity
Call Provisions
Put Provisions
Sinking Fund Provisions
Face Value
The rate of interest the bond issuer will pay on the face value of the
bond, expressed as a percentage.
A bond’s coupon is the dollar value of the periodic interest payment
promised to bondholders; this equals the coupon rate times the face
value of the bond.
Many bonds contain a provision that enables the issuer to buy the
bond back from the bondholder at a pre-specified price prior to
maturity. This price is known as the call price. A bond containing a
call provision is said to be callable.
Some bonds contain a provision that enables the buyer to sell the
bond back to the issuer at a pre-specified price prior to maturity. This
price is known as the put price. A bond containing such a provision is
said to be putable.
Sinking Fund Provisions
Some bonds are issued with a provision that requires the issuer to
repurchase a fixed percentage of the outstanding bonds each year,
regardless of the level of interest rates.
A sinking fund reduces the possibility of default; default occurs when
a bond issuer is unable to make promised payments in a timely
manner.
A sinking fund reduces credit risk to bond holders.
Bond Pricing
𝑇
𝐶 𝐹
𝑃=∑ +
𝑡 =1 (1+ 𝑦 ) ( 1+ 𝑦 )𝑇
𝑡
A zero-coupon bond does not make any coupon payments; instead, it
is sold to investors at a discount from face value. The difference
between the price paid for the bond and the face value, known as
a capital gain, is the return to the investor.
The pricing formula for a zero coupon bond is:
P=
In order to be consistent with coupon-bearing bonds, where coupons
are typically made on a semi-annual basis, the yield will be divided by
2, and the number of periods will be multiplied by 2.
Pricing Zero Coupon Bond (Contd.)
As an example, suppose that a one-year zero-coupon bond is issued
with a face value of $1,000. The discount rate for this bond is 8%.
What is the market price of this bond? Coupons are made on a semi-
annual basis.
=$924.56