1. Corporate Finance

2. What is Finance?
Finance is defined as the management of money and includes activities such as investing, borrowing, lending, budgeting, saving, and forecasting.
There are three main types of finance:
(1) personal,
(2) corporate, and
(3) public/government.

3. What is Corporate Finance ?
Corporate finance is an area of finance that deals with:
sources of funding,
the 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.
The primary goal of corporate finance is to maximize or increase shareholder value.
Correspondingly, corporate finance comprises two main sub-disciplines.
Capital budgeting is concerned with the setting of criteria about which value-adding projects should receive investment funding, and whether to finance that investment with equity or debt capital. 
Working capital management is the management of the company's monetary funds that deal with the short-term operating balance of current assets and current liabilities; the focus here is on managing cash, inventories, and short-term borrowing and lending (such as the terms on credit extended to customers).
The terms corporate finance and corporate financier are also associated with investment banking. The typical role of an investment bank is to evaluate the company's financial needs and raise the appropriate type of capital that best fits those needs.
Thus, the terms "corporate finance" and "corporate financier" may be associated with transactions in which capital is raised in order to create, develop, grow or acquire businesses.
Recent legal and regulatory developments in the U.S. will likely alter the makeup of the group of arrangers and financiers willing to arrange and provide financing for certain highly leveraged transactions.

4. Financial decision model for Corporate Finance

5. The scope of Corporate Finance

6. Corporate Finance
“Corporate Finance is the area of finance dealing with the sources of funding and the capital structure of corporations and the actions that managers take to increase the value of the firm to the shareholders, as well as the tools and analysis used to allocate financial resources.” - Wikipedia
Corporate Finance is the management of financial resources of a business entity. Corporate Finance is not only concerned with financing decision, but also with investment and current management decisions.
Corporate Finance is about..
 • The management of finance differs according to the organization - Small family run firms - Large companies
 • Authority – Responsibility relationship among people involved in finance functions in an organization
• Division of work
• Helps avoid confusions on roles and responsibilities of employees, duplication and overlapping of activities

7. Vice President - Finance
Also referred to as deputy director or vice – president for finance, treasurer, controller and other managers working under them
Planning and Budgeting Resource Allocation - Operating, Monitoring and Safeguarding Evaluating and Reporting
Also known as collection of funds approach, it confines the finance functions to the procurement funds only and ignores the use of funds. Comprehensive and universally accepted approach with the procurement of funds and it’s effective utilization.
Investment Decision
Financing Decision
Working Capital Decision
Dividend Decision

8. Incidence finance function
Incidental finance functions are performed for the effective execution of executive finance functions which doesn’t require specialized skills. Clerical in nature, this involves a lot of paper work, cover procedures and systems.
Goal is an observable and measurable end result having one or more objectives to be achieved within a more or less fixed timeframe.
 • Amount and share of national income which is paid to the owners of business
• A situation where output exceeds input, that is the value created by the use of resources is more than the total of the input resources
• Investment, financing and dividend policy decisions of a firm should be oriented to the maximization of profits
• A yardstick by which economic performance can be judged

9. CORPORATE FINANCE AND RELATED DISCIPLINE
• Studies individual firms operating within the economy
• Solves problems related to individual firms
• Finance related principles: demand & supply analysis, profit maximization strategies, pricing theories, marginal analysis, etc
• Business operations within the economy
• To understand the economic frame work
• Aware of the consequences of different level of economic activities
• Recognizes and understands the effect of monitory policy on cost and availability of funds
• Systematic and comprehensive recording of financial transactions pertaining to a business
• Financial manager recasts the statement prepared by accountant and generates additional data and makes decision on analysis
• Finance draws heavily on mathematics and quantitative techniques.
• Useful in complex problem solving
AGENCY /ˈeɪdʒ(ə)nsi/ “A relation, created either by express or implied contract or by law, whereby one party (called the principal or constituent) delegates the transaction of some lawful business or the authority to do certain acts for him or in relation to his rights or property, with more or less discretionary power, to another person (called the agent, attorney, proxy, or delegate) who undertakes to manage the affair and render him an account thereof.” - Black’s Law Dictionary

10. AGENCY PROBLEM
• A problem in determining managerial accountability that arises when delegating authority to managers
• Conflict of interest between the principal and the agent, or the shareholder and the manager
• Shareholders are at information disadvantage as compared to the managers • It takes considerable time to see the effectiveness of decisions managers can make
• Very difficult to evaluate how well the agent has performed because the agent possesses an information advantage over the principal
• In theory, managers should at in the best interest of the shareholders
• In practice, managers may maximize their own wealth (in the form o f high salaries and perks) at the cost of shareholders
• Buy other companies to expand power, venturing onto fraud, manipulate financial figures to optimize bonuses and stock price related options, etc

11. DEVELOPMENT OF CORPORATE FINANCE
1800 • Corporate Finance as a part of Economics
1900 • Rapid industrialization- new business, expansions, mergers- in the USA and Europe
• Shortage of capital due to the absence of capital market
• Distrust in financial statements resulting in lack of investors
• Birth of finance as a separate discipline 1930 THE GREAT DEPRESSION
• Failure in real market transmits to capital market
• Attention shifts from legal control to bankruptcy, reorganization and regulation of capital market
1940 • Due to market downfall, focus is shifted from expansion and modernization to survival of firms
• Amendments in company’s regulations and setting of accounting standards
• Advanced through development of mathematical tools to cash, accounts receivables and fixed assets management Investor’s increased confidence in financial statements 1950
• Quantitative method of analyzing financial problems
• Development of various financial theories
• Efficiency and regulation of financial markets 21st Century THE DIGITAL ERA
• Technological advancement • Focus on value maximization
• Globalization of business • Increased use of information and communication technology
• Multinational companies

12. Role of The Financial Manager
Firms Financial Financial operations manager markets :
(1) Cash raised from investors
(2) Cash invested in firm
(3) Cash generated by operations
(4a) Cash reinvested
(4b) Cash returned to investors

13. Aim and role of Financial Manager
 While accountancy plays an important role within corporate finance, the fundamental problem addressed by corporate finance is economic, i.e. how best to allocate the scarce resource of capital. Aim of Financial Manager is the optimal allocation of the scarce resources available to them. 
Financial managers are responsible for making decisions about raising funds (the financing decision), allocating funds (the investment decision) and how much to distribute to shareholders (the dividend decision). 
The high level of interdependence existing between these decision areas should be appreciated by financial managers when making decisions. Can you think how these decisions may be inter-related?

14. Role of The Financial Manager
Role of The Financial Manager Maximisation of a company’s ordinary share price is used as a surrogate objective to that of maximisation of shareholder wealth. 
 Ownership vs. ManagementDifference in Information Different Objectives Stock prices and returns  Managers vs. Issues of shares and stockholders other securities  Top mgmt vs. operating Dividends mgmt Financing  Stockholders vs. banks and lenders 
Agency & Corporate Governance Managers do not always act in the best interest of their shareholders, giving rise to what is called the ‘agency’ problem. 
Agency & Corporate Governance Shareholders including institutions and Creditors private individuals including banks, suppliers and bond holders THE COMPANY Management Employees Customers Diagram showing the agency relationships that exist between the various stakeholders of a company 
Agency & Corporate Governance Agency is most likely to be a problem when there is a divergence of ownership and control, when the goals of management differ from those of shareholders and when asymmetry of information exists. 
Agency & Corporate Governance An example of how the agency problem can manifest itself within a company is where managers diversify to reduce the overall risk of the company, thereby safeguarding their job prospects. Shareholders could achieve this themselves by diversification. 
Agency & Corporate Governance Monitoring and performance-related benefits are two potential ways to optimise managerial behavior and encourage ‘goal congruence’. 

15. Agency & Corporate Governance
Due to difficulties associated with monitoring, incentives such as performance- related pay and executive share options can be a more practical way of encouraging goal congruence. 
Institutional shareholders now own approximately 60 per cent of all UK ordinary share capital. Recently, they have brought pressure to bear on companies who do not comply with corporate governance standards. 
The problem of corporate governance has received a lot of attention following a number of high profile corporate collapses and a plethora of self-serving executive remuneration packages. In the UK, we have the example of Transport and Banking 
UK corporate governance systems have traditionally stressed internal controls and financial reporting rather than external legislation. 
Corporate governance in the UK was addressed by the 1992 Cadbury Report and its Code of Best Practice, and the 1995 Greenbury Report. 
A financial manager can maximise a company’s market value by making good investment, financing and dividend decisions.

16. Time Value of Money
Time value of money is relevant to both Companies and Investors
In wider context, Anyone expecting to pay or receive money over a period of time.
Time value of money refers to the facts that Value of money changes over time. 
Imagine that your friend offers you either RM1,000 today or RM1,000 in one year’s time. Faced with this choice, you will (hopefully) prefer to take RM1,000 today. The question is to ask that why do you prefer RM1,000 today? 
Time Value of Money Solution: There are three major factors
Time: If you have the money now, you can spend it now. It is human nature to want things now rather than wait for them. Alternatively, if you do not want to spend money now, you can invest it, so that in one year’s time you will have RM1,000 plus any investment income earned.
Inflation: RM1,000 spent now will buy more goods & services that RM1,000 spent in one year’s time because inflation undermines the purchasing power of your money.
Risk: If you take RM1,000 now you definitely have the money in your possession.
The alternative of the promise of RM1,000 in a year’s time carries the risk that the payment may be less that RM1,000 or may not be paid at all.

17. Compounding and Discounting
This is the way to determine the future value of a sum of money invested now. FV = C0(1+i)n Where: FV = Future Value C0 = Sum deposited now i = Interest Rate n = number of years until the cash flow occurs Example: Rs. 20 deposited for five years at an annual interest rate of 6% will have future value of: FV = 20 x (1+.06)5 = Rs 
Compounding takes us forward from current value of an investment to its future value. 
Discounting :
This is the way to determine the present value of future cash flows. PV = FV / (1+i)n Where: FV = Future Value PV = Present Value i = Interest Rate n = number of years until the cash flow occurs Example: Investor choice between receiving Rs.1000 now & Rs.1200 in one year’s time. Annual Interest rate is 10%. PV = 1200 / ( )1 = Rs.1091 Alternatively, PV of Rs.1000 into a FV FV = 1000 x ( )1 = Rs.1110 
Discounting takes us backward from future value of a cash flow to its present value. 
 Corporate Objectives
The objective should be to make decisions that maximise the value of the company for its owners. Financial Objective of Corporate Finance is stated as  “Maximisation of shareholder wealth”. Shareholder receive their wealth through increase in value of their shares, in the form of Dividends, Capital Gains, Shareholder wealth will be maximised by maximising the value of dividends and capital gains that shareholders receive over time.

18. Exercise 1 PHONE COMPANY INVESTMENT EVALUATION 
Two Hungarian companies: ìAî and ìBî recognised the importance of the new generation mobile communicators and independently from each-other decided to invest in the development. Investment last for 1 year costs 800 Million HUF in both cares and guarantees the production for 5 years.
The expected results of firm ìAî can be seen in the Table below:
Year Sold piece Sales million HUF Cash costs million HUF Net cash flow million HUF
5 12,
Total:
The results of firm ìBî is, as below: 
Y ear Sold piece Sales million HUF Cash costs million HUF Net cash flow million HUF
The discount rate applied consists of: - base rate: 6 % - time premium: 1 % - risk premium, consists of: - country risk: 6 % - industry risk:7 % - no individual risk difference is calculated Questions: 1. What are the respective NPV-s ? 2. What is the key of success for the company X? 3. What is the reason of failure for the company Y? 4. What should be done to remove the failure factor(s)?