An Introduction to Advance Corporate Finance 1

Transcript:An Introduction to Advance Corporate Finance 1:
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 the Value of the firm to the shareholders, and the tools and analysis used to allocate financial resources. 2 What Traditional Financial Management /Corporate Finance is ? 3 Investment Decisions Financing Decisions Dividend Decisions 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 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. 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 1-7 Corporate Organization Chart Figure 1.1 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 Goals/Objectives of a Firm Profit Maximisation Wealth Maximisation 9 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 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 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 2. Wealth Maximisation (Value Creation) Wealth means (1) Shareholders Wealth and (2)