An Introduction to Advance Corporate Finance 1
Description: An Introduction to Advance Corporate Finance 1 What Advance Corporate Finance is? Corporate finance is the area of finance dealing with the: Sources of funding Capital structure of corporations, the actions that managers take to increase
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slide1. An Introduction to Advance Corporate Finance 1<br>
slide2. What Advance Corporate Finance is? Corporate finance is the area of finance dealing with the:
Sources of funding
Capital structure of 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. 2<br>
slide3. What Traditional Financial Management /Corporate Finance is ? 3 Investment Decisions
Financing Decisions
Dividend Decisions<br>
slide4. 1-4 Why Study Corporate Finance? Marketing
Budgets, marketing research, marketing financial products
Accounting
Dual accounting and finance function, preparation of financial statements
Management
Strategic thinking, job performance, profitability
Personal finance
Budgeting, retirement planning, college planning, day-to-day cash flow issues<br>
slide5. 1-5 Corporate Finance = Business Finance Some important questions that are answered using finance
What long-term investments should the firm take on?: Investment Decisions
Where will we get the long-term financing to pay for the investments?: Financing/Capital Structure Decisions
How will we manage the everyday financial activities of the firm?: Working Capital Decisions.<br>
slide6. 1-6 Role of Financial Manager Finance Managers try to answer some, or all, of these questions
The top financial manager within a firm is usually the Chief Financial Officer (CFO)
Treasurer – oversees cash management, credit management, capital expenditures, and financial planning
Controller – oversees taxes, cost accounting, financial accounting, and data processing<br>
slide7. 1-7 Corporate Organization Chart Figure 1.1<br>
slide8. 1-8 Corporate Finance Decisions Capital budgeting
What long-term investments or projects should the business take on?
Capital structure
How should we pay for our assets?
Should we use debt or equity?
Working capital management
How do we manage the day-to-day finances of the firm? Return to Quick Quiz<br>
slide9. Goals/Objectives of a Firm Profit Maximisation
Wealth Maximisation 9<br>
slide10. 1. Profit Maximisation Acc. to this approach, only those actions should be performed which increase the profits and those decrease profits are to be avoided.
It means select assets/decisions which are profitable and reject those which decrease cash flow. 10<br>
slide11. Arguments in favour of Profit Maximisation Main aim is to earn profit.
Profit is the parameter of efficiency.
Profit reduces uncertainty.
Profit is the main source of finance.
Insures social welfare. 11<br>
slide12. Arguments against Profit Maximisation It leads to exploitation of workers and consumers.
It creates immoral practices such as corrupt, unfair trade practices
What kind of profit. Short/Long, not mentioned.
Ignores time value of money and risk factors. 12<br>
slide13. 2. Wealth Maximisation (Value Creation) Wealth means (1) Shareholders Wealth and (2) Wealth of the persons who are involved in business concern.
The wealth of the owners is reflected in market price of the shares. So wealth maximisation means maximisation of the market price of the shares.
We can also say that Wealth maximisation/Value Creation is the extension of the Profit maximisation approach. 13<br>
slide14. Arguments in Favour It is superior to Profit maximisation philosophy.
It insures economic interest of the society.
It considers time value of money and risk factors.
It provides efficient allocation of resources. 14<br>
slide15. Arguments against It is nothing but the other name of profit maximisation
Good idea but not suitable in all circumstances
Management enjoys certain benefits. 15<br>
slide16. Agency Problem 16<br>
slide17. Agency Problem Agency problem is the likelihood that managers may place personal goals ahead of corporate goals.
A characteristic feature of corporate enterprises is the separation between ownership and management.
Thus, with the objective of survival, management would aim at satisfying instead of maximizing shareholder’s wealth. 17<br>
slide18. Stakeholders in an Organization/Business 18 Owners
Employees
Financers
Govt. Authorities
Society<br>
slide19. What individually they Expect? 19 Owners: Profit Maximisation, Growth
Employees: Increase in salary, incentives
Financers: Timely payment of interest and Principal
Govt. Authorities: Timely payment of taxes
Society: CSR, Welfare
When all are selfish and demanding, conflict is naturally to arise.<br>
slide20. Prevention of Agency Problem The agency problem can be prevented by:
Market Forces
Agency Costs
Market Forces:
It is of two types:
Behaviour of security market participants
Hostile Takeovers 20<br>
slide21. Cont’d…. Behaviour of security market participants:
The participants include institutional investors(mutual funds, insurance etc.) actively participate in management. They use their voting rights to replace more competent management.
Hostile takeovers:
It is the acquisition of the firm by another firm that is not supported by management. The constant threat of takeover motivate management to work for maximising owner’s wealth. 21<br>
slide22. Agency Costs These are the costs borne by shareholders to prevent agency problem as to maximise owners wealth.
They have to incur 4 types of costs:
Monitoring
Bonding
Opportunity
Structuring 22<br>
slide23. Monitoring Expenditures and Bonding Expenditures 1. Monitoring the activities of the management to prevent satisfying and maximising owner’ wealth.
It relates to the payment for audit and control procedures to ensure that management is working for maximising owner’s wealth.
2. Bonding protects the owners from the consequences of dishonest acts by management/managers.
The firm pays to obtain a fidelity bond from a third party bonding company to compensate for financials loses due to dishonest acts. 23<br>
slide24. Opportunity cost & Structuring expenditure 3. Opportunity costs are those which results from the inability of the firm to respond to new opportunities.
Due to organisational structure, hierarchy etc. the management faces difficulties in seizing profitable investment opportunities.
4. Structuring expenditure relates to structuring managerial compensation to maximise owner’s wealth. 24<br>
slide25. Cont’d… It is of two types:
Incentive Plans
Performance Plans
Incentive Plans:
They tie management compensation to sare price.
The most widely used plan is stock options which allows management to acquire shares at special prices. Higher price will result in larger management compensation. 25<br>
slide26. Cont’d…. Performance Plans:
These plans compensate management on the basis of its proven performances.
Performance shares are given to management for meeting the stated goals
Another type, cash bonuses – cash payments are given for achievement of the stated performance goals. 26<br>
slide27. 27<br>
slide2. What Advance Corporate Finance is? Corporate finance is the area of finance dealing with the:
Sources of funding
Capital structure of 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. 2<br>
slide3. What Traditional Financial Management /Corporate Finance is ? 3 Investment Decisions
Financing Decisions
Dividend Decisions<br>
slide4. 1-4 Why Study Corporate Finance? Marketing
Budgets, marketing research, marketing financial products
Accounting
Dual accounting and finance function, preparation of financial statements
Management
Strategic thinking, job performance, profitability
Personal finance
Budgeting, retirement planning, college planning, day-to-day cash flow issues<br>
slide5. 1-5 Corporate Finance = Business Finance Some important questions that are answered using finance
What long-term investments should the firm take on?: Investment Decisions
Where will we get the long-term financing to pay for the investments?: Financing/Capital Structure Decisions
How will we manage the everyday financial activities of the firm?: Working Capital Decisions.<br>
slide6. 1-6 Role of Financial Manager Finance Managers try to answer some, or all, of these questions
The top financial manager within a firm is usually the Chief Financial Officer (CFO)
Treasurer – oversees cash management, credit management, capital expenditures, and financial planning
Controller – oversees taxes, cost accounting, financial accounting, and data processing<br>
slide7. 1-7 Corporate Organization Chart Figure 1.1<br>
slide8. 1-8 Corporate Finance Decisions Capital budgeting
What long-term investments or projects should the business take on?
Capital structure
How should we pay for our assets?
Should we use debt or equity?
Working capital management
How do we manage the day-to-day finances of the firm? Return to Quick Quiz<br>
slide9. Goals/Objectives of a Firm Profit Maximisation
Wealth Maximisation 9<br>
slide10. 1. Profit Maximisation Acc. to this approach, only those actions should be performed which increase the profits and those decrease profits are to be avoided.
It means select assets/decisions which are profitable and reject those which decrease cash flow. 10<br>
slide11. Arguments in favour of Profit Maximisation Main aim is to earn profit.
Profit is the parameter of efficiency.
Profit reduces uncertainty.
Profit is the main source of finance.
Insures social welfare. 11<br>
slide12. Arguments against Profit Maximisation It leads to exploitation of workers and consumers.
It creates immoral practices such as corrupt, unfair trade practices
What kind of profit. Short/Long, not mentioned.
Ignores time value of money and risk factors. 12<br>
slide13. 2. Wealth Maximisation (Value Creation) Wealth means (1) Shareholders Wealth and (2) Wealth of the persons who are involved in business concern.
The wealth of the owners is reflected in market price of the shares. So wealth maximisation means maximisation of the market price of the shares.
We can also say that Wealth maximisation/Value Creation is the extension of the Profit maximisation approach. 13<br>
slide14. Arguments in Favour It is superior to Profit maximisation philosophy.
It insures economic interest of the society.
It considers time value of money and risk factors.
It provides efficient allocation of resources. 14<br>
slide15. Arguments against It is nothing but the other name of profit maximisation
Good idea but not suitable in all circumstances
Management enjoys certain benefits. 15<br>
slide16. Agency Problem 16<br>
slide17. Agency Problem Agency problem is the likelihood that managers may place personal goals ahead of corporate goals.
A characteristic feature of corporate enterprises is the separation between ownership and management.
Thus, with the objective of survival, management would aim at satisfying instead of maximizing shareholder’s wealth. 17<br>
slide18. Stakeholders in an Organization/Business 18 Owners
Employees
Financers
Govt. Authorities
Society<br>
slide19. What individually they Expect? 19 Owners: Profit Maximisation, Growth
Employees: Increase in salary, incentives
Financers: Timely payment of interest and Principal
Govt. Authorities: Timely payment of taxes
Society: CSR, Welfare
When all are selfish and demanding, conflict is naturally to arise.<br>
slide20. Prevention of Agency Problem The agency problem can be prevented by:
Market Forces
Agency Costs
Market Forces:
It is of two types:
Behaviour of security market participants
Hostile Takeovers 20<br>
slide21. Cont’d…. Behaviour of security market participants:
The participants include institutional investors(mutual funds, insurance etc.) actively participate in management. They use their voting rights to replace more competent management.
Hostile takeovers:
It is the acquisition of the firm by another firm that is not supported by management. The constant threat of takeover motivate management to work for maximising owner’s wealth. 21<br>
slide22. Agency Costs These are the costs borne by shareholders to prevent agency problem as to maximise owners wealth.
They have to incur 4 types of costs:
Monitoring
Bonding
Opportunity
Structuring 22<br>
slide23. Monitoring Expenditures and Bonding Expenditures 1. Monitoring the activities of the management to prevent satisfying and maximising owner’ wealth.
It relates to the payment for audit and control procedures to ensure that management is working for maximising owner’s wealth.
2. Bonding protects the owners from the consequences of dishonest acts by management/managers.
The firm pays to obtain a fidelity bond from a third party bonding company to compensate for financials loses due to dishonest acts. 23<br>
slide24. Opportunity cost & Structuring expenditure 3. Opportunity costs are those which results from the inability of the firm to respond to new opportunities.
Due to organisational structure, hierarchy etc. the management faces difficulties in seizing profitable investment opportunities.
4. Structuring expenditure relates to structuring managerial compensation to maximise owner’s wealth. 24<br>
slide25. Cont’d… It is of two types:
Incentive Plans
Performance Plans
Incentive Plans:
They tie management compensation to sare price.
The most widely used plan is stock options which allows management to acquire shares at special prices. Higher price will result in larger management compensation. 25<br>
slide26. Cont’d…. Performance Plans:
These plans compensate management on the basis of its proven performances.
Performance shares are given to management for meeting the stated goals
Another type, cash bonuses – cash payments are given for achievement of the stated performance goals. 26<br>
slide27. 27<br>