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Corporate Finance
What is Corporate Finance
 Is

the Study of ways to answer the
following 3 questions:
1) What long term investments should you
take on
2) Where will you get the long term financing
to pay for your investment?
3) How will you manage your everyday
financial activities such as collecting from
customers and paying suppliers
Financial Management Decisions
 Capital

Budgeting

 Capital

Structure

 Working

Capital Management
Forms of Business Organization
 Sole

Proprietorship
 Partnership
 Corporation
The goal of Financial Management
Possible goals: - Survive
- Avoid financial distress & bankruptcy
- Beat the competition
- Maximize sales or market share
- Minimize costs
- Maximize profits
- Maintain steady earnings growth
The goal of financial management is to maximize the
current value per share of the existing stock
Sarbanes - oxley
 Agency
-

problem & control of the
corporation
Agency relationships
Management goals
Do managers act in the stockholder’s
interests?
Managerial compensation
Control of the firm
Financial Markets & the Corporation
 Cash

Flows to & from the Firm
 Primary versus secondary markets
- Primary Markets
- Secondary markets
- Dealer versus Auction markets
- Trading in Corporate securities
- Listing
Financial Statements, Taxes, & Cash Flows
The Balance Sheet
 The Net working Capital
 Liquidity
 Debt versus Equity
 Market value versus book value
The Income Statement
 GAAP

& the Income statement
 Non cash items
 Time & Costs

Taxes
Corporate
Average versus Marginal Tax Rates
Cash Flow
 Cash

Flow from Assets
 Operating Cash flow
 Capital Spending
 Change in Net Working Capital
 Qs)

Based on the following information for
Sunderam Corporation, prepare an
income statement for 2007 & 2008.
Calculate cash flow to creditors, & cash
flow to stock holders for 2008. Use a 30 %
tax rate throughout.
Sales
Cost of goods sold
Depreciation
Interest
Dividends
Current Assets
Net fixed Assets
Current Liabilities
Long term debt

2007
4205
2425
790
185
230
2210
7360
1010
3110

2008
4550
2640
960
200
255
2500
7700
1280
2100
Working with Financial Statement
Cash flow & Financial Statements:
 Sources &Uses of Cash
 The statement of cash flows

Standardized financial Statements
Common size statements
- Common size Balance sheet
- Common size income statement
- Common – size statements of cash flows
Common –Base year Financial statements
 Ratio

Analysis
 Qs)

The Balance sheet of ABC Ltd is
given: Calculate the changes in the
various accounts & where ever applicable,
identify the change as a source or use of
cash. Did the company become more or
less liquid during the year?
Long-term Financial planning & growth
Effective long-range planning






The firm’s needed investment in new assets
The degree of financial leverage the firm chooses to
employ
The amount of cash the firm thinks is necessary and
appropriate to pay shareholders
The amount of liquidity & working capital the firm needs
on an ongoing basis
What is Financial Planning?
 Growth

as a financial Management Goal
 Dimensions of Financial Planning
 What can planning accomplish?
- Examining Interactions
- Exploring Options
- Avoiding Options
- Ensuring Feasibility & internal Consistency
Financial Planning Models
Ingredients of a financial Planning Model:
 Sales Forecast
 Pro Forma Statements
 Asset Requirements
 Financial requirements
 The plug
 Economic Assumptions
Financial Policy & Growth
 Internal

growth Rate
 The sustainable growth rate
 Determinants of Growth
- Profit Margin
- Dividend Policy
- Financial policy
- Total Asset Turnover
If a firm does not wish to sell new equity and its profit
margin, dividend policy, financial policy, & total
asset turnover are all fixed, then there is only one
possible growth rate .

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Corporate finance

  • 2. What is Corporate Finance  Is the Study of ways to answer the following 3 questions: 1) What long term investments should you take on 2) Where will you get the long term financing to pay for your investment? 3) How will you manage your everyday financial activities such as collecting from customers and paying suppliers
  • 3. Financial Management Decisions  Capital Budgeting  Capital Structure  Working Capital Management
  • 4. Forms of Business Organization  Sole Proprietorship  Partnership  Corporation
  • 5. The goal of Financial Management Possible goals: - Survive - Avoid financial distress & bankruptcy - Beat the competition - Maximize sales or market share - Minimize costs - Maximize profits - Maintain steady earnings growth The goal of financial management is to maximize the current value per share of the existing stock
  • 6. Sarbanes - oxley  Agency - problem & control of the corporation Agency relationships Management goals Do managers act in the stockholder’s interests? Managerial compensation Control of the firm
  • 7. Financial Markets & the Corporation  Cash Flows to & from the Firm  Primary versus secondary markets - Primary Markets - Secondary markets - Dealer versus Auction markets - Trading in Corporate securities - Listing
  • 8. Financial Statements, Taxes, & Cash Flows The Balance Sheet  The Net working Capital  Liquidity  Debt versus Equity  Market value versus book value
  • 9. The Income Statement  GAAP & the Income statement  Non cash items  Time & Costs Taxes Corporate Average versus Marginal Tax Rates
  • 10. Cash Flow  Cash Flow from Assets  Operating Cash flow  Capital Spending  Change in Net Working Capital
  • 11.  Qs) Based on the following information for Sunderam Corporation, prepare an income statement for 2007 & 2008. Calculate cash flow to creditors, & cash flow to stock holders for 2008. Use a 30 % tax rate throughout.
  • 12. Sales Cost of goods sold Depreciation Interest Dividends Current Assets Net fixed Assets Current Liabilities Long term debt 2007 4205 2425 790 185 230 2210 7360 1010 3110 2008 4550 2640 960 200 255 2500 7700 1280 2100
  • 13. Working with Financial Statement Cash flow & Financial Statements:  Sources &Uses of Cash  The statement of cash flows Standardized financial Statements Common size statements - Common size Balance sheet - Common size income statement - Common – size statements of cash flows
  • 14. Common –Base year Financial statements  Ratio Analysis
  • 15.  Qs) The Balance sheet of ABC Ltd is given: Calculate the changes in the various accounts & where ever applicable, identify the change as a source or use of cash. Did the company become more or less liquid during the year?
  • 16. Long-term Financial planning & growth Effective long-range planning    The firm’s needed investment in new assets The degree of financial leverage the firm chooses to employ The amount of cash the firm thinks is necessary and appropriate to pay shareholders The amount of liquidity & working capital the firm needs on an ongoing basis
  • 17. What is Financial Planning?  Growth as a financial Management Goal  Dimensions of Financial Planning  What can planning accomplish? - Examining Interactions - Exploring Options - Avoiding Options - Ensuring Feasibility & internal Consistency
  • 18. Financial Planning Models Ingredients of a financial Planning Model:  Sales Forecast  Pro Forma Statements  Asset Requirements  Financial requirements  The plug  Economic Assumptions
  • 19. Financial Policy & Growth  Internal growth Rate  The sustainable growth rate  Determinants of Growth - Profit Margin - Dividend Policy - Financial policy - Total Asset Turnover If a firm does not wish to sell new equity and its profit margin, dividend policy, financial policy, & total asset turnover are all fixed, then there is only one possible growth rate .