1. Corporate Finance & Financial Modelling
AFIN 209
Miss Faith Moono Simwami

2. 06/02/2017

3. CLASSROOM EXPECTATIONS
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CLASSROOM EXPECTATIONS
Attendance
Communication
Feedback
Course Assessment
Course Work Requirements
Cell Phones
Preparation – notes, calculators etc…

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Objectives
Understand the nature and role of Financial Management.
Understand the general Financial Environment and the Operation of Financial Systems.
To develop the student’s ability to apply the tools of Financial Analysis and Interpret Results.
To develop a working knowledge and understanding of the theoretical framework and analytical techniques involved in:
Financing, Investment and Dividend Decisions
Working Capital Management

5. Assessment Criteria FULL & PART TIME
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Assessment Criteria FULL & PART TIME
Assignment 10%
Class test 10%
Mid-Term Exam 20%
Final Exam 60%

6. Recommended Reading Ross et al.: Corporate Finance 9th Edition
9/19/2018
Ross et al.: Corporate Finance 9th Edition
Pierre Vernimmen, Pascal Quiry et al.: Corporate Finance - Theory and Practice, 4th Edition
Brealey, Myers & Myers: Principles of Corporate Finance
J. Weston & E. Brigham: Essentials of Managerial Finance
Ivo Welch: Corporate Finance: An Introduction
John Wiley & Sons: Corporate Finance: Theory & Practice
Van Harne: Finance Management & Policy
Brigham & Cluster: Finance Management

7. SYLLABUS AN OVERVIEW OF CORPORATE FINANCE AND FINANCIAL MODELLING
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SYLLABUS
AN OVERVIEW OF CORPORATE FINANCE AND FINANCIAL MODELLING
FINANCIAL MARKETS
FOREIGN EXCHANGE MARKET
SOURCES OF FINANCE
THE TIME VALUE OF MONEY
BOND VALUATION
STOCK VALUATION
COST OF CAPITAL
CAPITAL BUDGETTING
RISK AND RETURN
WORKING CAPITAL MANAGEMENT
EFFICIENT MARKET HYPOTHESIS THEORY
DIVIDEND POLICY
LONG TERM SOURCES OF FINANCE
INTERNATIONAL TRADE AND FINANCE
Note: Additional sections may be added throughout the semester as advised by your Lecturer.

8. Why Are You Taking Corporate Finance?
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To prepare you for the Workplace of tomorrow.
To give you the capacity to Understand the theory and Apply, in Real world situations
To broaden your expectations of financial knowledge and Skills (i.e. Interpret financials, use Excel, write Financial reports etc…)
To introduce you to Financial Terminology and concepts in Team Communication.
To develop the student’s cross-functional capabilities.
To develop the student’s Critical Thinking & Analytical Skills
To broaden one’s potential for varied Career Prospects.

9. Corporate Finance As a Career
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Corporate Finance As a Career
Compliance Officer
Treasurer
Controller
Consultant
SME – Finance Manager
Financial Analyst
Investment Officer
Credit Analyst
Business Analyst
Lecturer!!!

10. Chapter 1 Will teach you to explain the following:
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What is Corporate Finance?
The Goal of the Firm
Corporate Governance
Organization of the Financial
Management Function

11. What is Corporate Finance?
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What is Corporate Finance?
Generally defined as the activities involved in managing cash flows (money) in a business environment.

12. The 5 Basic Corporate Finance Functions
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The 5 Basic Corporate Finance Functions
Financial Management
Financing (Raising Capital)
Risk Management
Capital Budgeting
Corporate Governance

13. Financing(Raising Capital)
Financial Management
Managing firms’ internal cash flows and its mix of debt and equity financing, both to maximize the value of the debt and equity claims on firms’ and to ensure that companies can pay off their obligations when they come due.
Risk Management
Managing firms ’exposures to all types of risk, both insurable and uninsurable,
in order to maintain optimum risk return trade-off s and thereby maximize
shareholder value.
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Financing(Raising Capital)
Raising capital to support companies’ operations and investment programs.
Corporate Governance
Developing ownership and corporate governance structures for companies that ensure that managers behave ethically and make decisions that
benefit shareholders.
Capital Budgeting
Selecting the best projects in which to invest the resources of the firm, based on each project’s perceived risk and expected return.

14. The Three KEY Decisions in Financial Management
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The Three KEY Decisions in Financial Management
Investment Decisions
Financing Decisions
Dividend Decisions

15. Most important of the three decisions
Investment Decisions
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Most important of the three decisions
What is the optimal firm size?
What specific assets should be acquired?
What assets (if any) should be reduced or eliminated?
These are decisions that have to do with the firm deciding on what investments it wishes to make. It also includes determining what assets to invest in. The decision making process involves selecting viable projects by applying investment appraisal techniques depending on the nature of the business the firm is involved in (E.g. Mining, retail, manufacturing or tourism.
The Hurdle Rate – reflects the riskiness of the investment and the mix of debt and equity used to fund it.
The Return – reflects the magnitude and timing of the cashflows as well as various associated risks.

16. Financing Decisions What is the best type of financing?
These are decisions regarding, how the investment(s) selected will be financed. Firms have three options regarding where they source finances. They can source them internally by using retained earnings, borrowing from the debt capital market or issuing stocks (ordinary shares).
The decision to use a specific source of finance is determined by the period of investment (long- term of short-term), use of funds for either capital investment or working capital requirements and desired capital structure for a given firm. That is, the balance between equity and debt used in financing the assets of the firm.
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What is the best type of financing?
What is the best financing mix?
How will the funds be physically acquired?
The Optimal mix of debt and equity maximizes firm value.
The Right Kind of debt matches the tenor of your assets.

17. Dividend Decisions
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These decisions involve determining a dividend policy for the firm which describes how the returns from the investment are distributed to shareholders as dividends. The policy describes when and how much of the profits are distributed as dividends including the mode of payment.
As the finance manager performs these functions the overriding goal is to ensure that the firm’s value is maximized.
What is the best dividend policy (e.g. dividend-payout ratio)?
How much cash you can return depends upon current & potential investment opportunities
How you chose to return cash to the owners will depend whether they prefer dividends or buybacks

18. What is the Goal of the Firm?
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Possible goals:
Avoid bankruptcy and financial distress
Minimize costs
Maximize sales
Maximize profits
The best goal of a publicly traded firm:
Maximize share price (Maximization of Shareholder Wealth)
Value creation occurs when we maximize the share price for current shareholders.

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Why Traditional Corporate Financial Theory Focuses on Maximizing Stockholder Wealth
Stock prices are easily observable and constantly updated (unlike other performance measures)
Stock prices reflect the wisdom of decisions, short and long term and instantaneously
The objective of stock price performance provides theory on:
Allocation of resources across scarce uses
How to finance these investments
How much to pay in dividends

20. Strengths of Shareholder Wealth Maximization
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Takes account of:
Current and future profits
The timing, duration, and risk of profits
Dividend policy and
All other relevant factors.
Share price serves as a barometer for business performance.

21. Shortcomings of Profit Maximization ( Maximizing earnings after taxes )
Problems
Could increase current profits while harming firm (e.g., defer maintenance)
Ignores changes in the risk level of the firm(Ignores risk)
Does not fully consider cash flow timing

22. The Modern Corporation
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Modern Corporation
Shareholders
Management
There exists a SEPARATION between owners and managers.

23. Management acts as an agent for the owners (shareholders) of the firm.
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Role of Management
Management acts as an agent for the owners (shareholders) of the firm.
An agent is an individual authorized by another person, called the principal, to act in the latter’s behalf.

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The Agency Problem
This is defined as a potential conflict of interest between the principals (shareholders) and the agents (managers).This is created when managers act in contrast to the expectations of the shareholders regarding the objective of wealth maximization. It is necessary for shareholders to put in place incentives to ensure that managers maximize shareholder wealth.
One agency problem is that managers can use corporate funds for non-value maximizing purposes.

25. Managerial Incentives to Maximize Shareholder Wealth
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To ensure that managers act in line with shareholder expectation agency costs are incurred by firms. These costs take several forms:
Expenditure to monitor managerial actions. E.G external audits
Expenditure to structure the organization so that the possibility of undesirable managerial behavior will be limited.

26. Mechanism Applied to Force Managers to Act in the Shareholders Best Interest Include
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The threat of being fired.
The threat of take over which takes the form a hostile takeover.
When a new firm takes over another company, managers are usually replaced by these appointed by the new board. Management would want to avoid a takeover for fear of losing their jobs to competition.
Structured managerial incentives,
Which include executive share options, where executive, are given an opportunity to buy share in the future at some discounted price and performance shares awarded on the basis of performance using some criteria.

27. Corporate Social Responsibility
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Wealth maximization does not preclude the firm from being socially responsible at the corporate level.
Assume we view the firm as producing both private and social goods.
Then shareholder wealth maximization remains the appropriate goal in governing the firm.

28. Corporate Governance
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Corporate governance: represents the system by which corporations are managed and controlled.
Includes shareholders, board of directors, and senior management.
Then shareholder wealth maximization remains the appropriate goal in governing the firm.
Corporate governance is the system that is used to overcome problems associated with the separation of managers and owners (hence, the need to understand different forms of business).
Core attributes: Delineation of the rights of shareholders and other core stakeholders;
Clearly defined manager and director governance responsibilities to stakeholders;
Identifiable and measurable accountabilities for the performance of the responsibilities;
Fairness and equitable treatment in all dealings between managers, directors, and shareholders; and
Complete transparency and accuracy in disclosures regarding operations, performance, risk, and financial position.

29. Board of Directors Typical responsibilities: Set company-wide policy;
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Typical responsibilities:
Set company-wide policy;
Advise the CEO (chief executive officer) and other senior executives;
Hire, fire, and set the compensation of the CEO;
Review and approve strategy, significant investments, and acquisitions; and
Oversee operating plans, capital budgets, and financial reports to common shareholders.

30. Forms of Business Organizations
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The form of business will dictate, in part, the relationship between the owners of the business and management.
The degree of separation may be minimal (e.g., sole proprietorship), or significant (e.g., large corporation).
When there is a separation between owners and managers, there is a potential for agency problems, which may affect the value of the business.
We will examine three business forms: the sole proprietorship, the partnership, and the corporation.

31. THE THREE BASIC FORMS OF BUSINESS ORGANIZATION
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Sole Proprietorships
Partnerships (general and limited)
Corporations

32. The Business Environment
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Sole Proprietorship – A business form for which there is one owner. This single owner has unlimited liability for all debts of the firm.
Oldest & Most numerous form of business organization.
Business income is accounted for on your personal income tax form.

33. Sole Proprietorship Advantages Disadvantages Easiest to start
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Advantages
Easiest to start
Least regulated
Single owner keeps all the profits
Single tax filing on individual form
Disadvantages
Unlimited liability
Hard to raise additional capital
Transfer of ownership difficulties
Limited to life of owner
There is often little separation between the owner and the manager(s) of the business; often, one in the same. Therefore, there is not much of an opportunity for a conflict of interest between the owner and manager(s)

34. Partnership
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Partnership – A business form in which two or more individuals act as owners.
Business income is accounted for on each partner’s personal income tax form.
The partnership is a natural extension from the sole proprietorship, with more than one owner.
The owners often are managers of the business, with a partnership agreement, so there is little separation between owners and managers. Hence, there are few opportunities for conflicts of interest among partners and management.

35. Types of Partnerships
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General Partnership – all partners have unlimited liability and are liable for all obligations of the partnership.
Limited partnership – limited partners have liability limited to their capital contribution (investors only). At least one general partner is required and all general partners have unlimited liability.

36. Partnership Advantages Disadvantages Can be simple
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Advantages
Can be simple
Low setup cost, higher than sole proprietorship
Relatively quick setup
Limited liability for limited partners
Disadvantages
Unlimited liability for the general partner
Difficult to raise additional capital, but easier than sole proprietorship
Transfer of ownership difficulties

37. Corporation
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Corporation – A business form legally separate from its owners.
An artificial entity that can own assets and incur liabilities.
For example, a corporation can enter into contracts.
Corporations account for most business revenue around the world.
Business income is accounted for on the income tax form of the corporation.
The corporation is a legal entity, with major decisions made by the board of directors.
The members of the board of directors are elected by shareholders.
The board of directors monitor the company’s management on behalf of the shareholders.
Because of this agency relationship, there are potential conflicts between the agents (the management and the members of the board of directors) and the owners (the shareholders).

38. Corporation Disadvantages Advantages
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Disadvantages
Corporations are more highly regulated than are partnerships or sole proprietorships.
Separation of owners and managers.
There are costs to this agency relationship arising from conflicts of interest.
Double taxation
More difficult to establish
More expensive to set up and maintain
Advantages
Easier to raise large quantities of capital
Grant ownership stakes (that is, issue stock) or borrow (that is, issue bonds).
Owners need not know how to run the business.
The corporation hires experts to manage the business.
Limited liability
Easy transfer of ownership
Unlimited life

39. Forms of business and conflicts of interest
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41. Summary
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Corporate governance is the system of principles, policies, procedures, and clearly defined responsibilities and accountabilities.
The objectives of a corporate governance system are (1) to eliminate or mitigate conflicts of interest among stakeholders, particularly between managers and shareholders, and (2) to ensure that the assets of the company are used efficiently and productively and in the best interests of the investors and other stakeholders.
The failure of a company to establish an effective system of corporate governance represents a major operational risk to the company and its investors.
8. Summary

42. Summary (continued)
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The specific sources of conflict in corporate agency relationships are manager-shareholder.
The responsibilities of board members, both individually and as a group, are to establish corporate values and effective governance structures for the company.
8. Summary (continued)

43. Summary (continued)
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Companies committed to corporate governance often provide a statement of corporate governance policies. Analysts should assess:
the code of ethics; statements of the oversight, monitoring, and review responsibilities of directors;
statements of management’s responsibilities with respect to information and access of directors to internal company functions;
reports of directors’ examinations, evaluations, and findings;
board and committee self-assessments; management self-assessments; and
training policies for directors.
Weak corporate governance systems give rise to risks including accounting risk, asset risk, liability risk, and strategic policy risk.
8. Summary (continued)