Corporate Corporate FinanceFinance

Financial Role Financial Role

Better Product at low PricesBetter Product at low Prices High remunerationsHigh remunerations Development of Development of

Managers/EmployeesManagers/Employees Maximize return to InvestorsMaximize return to Investors Contributes in well being of Contributes in well being of

economy. economy.

Basic Areas Of FinanceBasic Areas Of Finance

Corporate FinanceCorporate Finance Investment Investment Financial Institutions Financial Institutions International Finance International Finance

Domain of Corporate Domain of Corporate FinanceFinance

AcquisitionAcquisition

Use of capital Use of capital

Value maximization Value maximization

Why Study Finance? Why Study Finance?

Marketing and FinanceMarketing and Finance Marketers have to work with budgets Marketers have to work with budgets Need to get greatest payoffs from Need to get greatest payoffs from

marketing expenditures and programs - marketing expenditures and programs - Cost and Benefit analysis of projects Cost and Benefit analysis of projects

- So finance is vital for - So finance is vital for Marketing research Marketing research Design of marketing and distributions Design of marketing and distributions

channels channels Product pricing Product pricing

Why Study Finance?Why Study Finance?

Accounting and FinanceAccounting and Finance Accountants are required to make Accountants are required to make

financial decisions as well as understand financial decisions as well as understand thethe

implications of new financial contractsimplications of new financial contracts Financial analysts make extensive use of Financial analysts make extensive use of

accounting informationaccounting informationManagement and FinanceManagement and Finance Business Strategy is always disastrous if Business Strategy is always disastrous if

financial planning is not adhered to . financial planning is not adhered to .

What is Finance What is Finance

In order to start any new business, In order to start any new business, the following issues become vital the following issues become vital What long-term investment should be What long-term investment should be

taken on? taken on? From where to get the long-term From where to get the long-term

financing to pay for investment? Bring in financing to pay for investment? Bring in other owners other owners or borrow the money? or borrow the money?

How to manage everyday financial How to manage everyday financial activities? activities?

Responsibilities of Responsibilities of Financial Manager Financial Manager

Forecasting & Panning:Forecasting & Panning:

Investment & Financing Decisions:Investment & Financing Decisions:

Coordination & Control:Coordination & Control:

Interaction With Capital Market:Interaction With Capital Market:

Hypothetical Hypothetical Organization Chart Organization Chart

Corporate Finance and Corporate Finance and Financial Manager Financial Manager

Financial Management DecisionsFinancial Management Decisions

Capital BudgetingCapital Budgeting Capital StructureCapital Structure Working Capital ManagementWorking Capital Management

Financial Management Financial Management Decisions Decisions

Capital BudgetingCapital Budgeting

The process of planning and managing a The process of planning and managing a firm’s long-term investments firm’s long-term investments

Financial managers concern with how Financial managers concern with how much, when and how likely is cash much, when and how likely is cash expected to receive expected to receive

Evaluating the size, timing and risk of Evaluating the size, timing and risk of future cash flows is the essence of capital future cash flows is the essence of capital budgeting budgeting

The Capital Budgeting The Capital Budgeting DecisionDecision

The Capital Structure The Capital Structure Decision Decision

The Capital Structure The Capital Structure DecisionDecision

Capital StructureCapital Structure The value of the firm can be thought of The value of the firm can be thought of

as a pie.as a pie. The goal of the manager is to increase The goal of the manager is to increase

the size of the pie.the size of the pie. The Capital Structure decision can be The Capital Structure decision can be

viewed as how bestviewed as how best to slice up the pie.to slice up the pie. If how you slice the pie affects the size If how you slice the pie affects the size

of the pie, thenof the pie, then the capital structure decision matters.the capital structure decision matters.

The Net Working Capital The Net Working Capital Investment Decision Investment Decision

Changing Role Of Financial Changing Role Of Financial ManagementManagement

Alternative Form of Alternative Form of BusinessesBusinesses

Forms of Business Forms of Business Organization Organization

Three major forms Three major forms Sole proprietorship Sole proprietorship Partnership Partnership

General General Limited Limited

Corporation Corporation Limited liability company Limited liability company

The Corporate FirmThe Corporate Firm

The corporate form of business is The corporate form of business is the standard method for solving the the standard method for solving the problems encountered in problems encountered in raising large amounts of cash. raising large amounts of cash.

However, businesses can take other However, businesses can take other forms. forms.

Corporation Corporation

A business created as a distinct legal entity A business created as a distinct legal entity owned by one or more individuals or owned by one or more individuals or entities.entities.

Forming of corporation involves preparingForming of corporation involves preparing Charter Charter including corporation’s name, including corporation’s name,

intended life, business purpose and intended life, business purpose and number ofnumber of

sharesshares Set of bylaws Set of bylaws which describes the which describes the

regulations for the businessregulations for the business

CorporationCorporation

AdvantagesAdvantages Limited liabilityLimited liability Unlimited lifeUnlimited life Separation of ownership and managementSeparation of ownership and management Transfer of ownership is easyTransfer of ownership is easy Easier to raise capitalEasier to raise capital

DisadvantagesDisadvantages Separation of ownership and managementSeparation of ownership and management Double taxation (income taxed at the corporate Double taxation (income taxed at the corporate

rate and then dividends taxed at personal rate)rate and then dividends taxed at personal rate)

Goal Of CorporationGoal Of Corporation

Stockholder wealth maximizationStockholder wealth maximization Social Responsibility Social Responsibility Normal profitsNormal profits OligopolisticOligopolistic Business EthicsBusiness Ethics Stock price maximization Stock price maximization

The Set-of-Contracts The Set-of-Contracts PerspectivePerspective

The firm can be viewed as a set of contracts.The firm can be viewed as a set of contracts. One of these contracts is between shareholders One of these contracts is between shareholders

and managers.and managers. The managers will The managers will usually usually act in the act in the

shareholders’ interests.shareholders’ interests. The shareholders can devise contracts that align The shareholders can devise contracts that align

the incentives of the managers with thethe incentives of the managers with the goals of the shareholders.goals of the shareholders.

The shareholders can monitor the managers The shareholders can monitor the managers behavior.behavior.

This contracting and monitoring is costly.This contracting and monitoring is costly.

Agency ProblemsAgency Problems

PrincipalsPrincipals AgentsAgents Stock HoldersStock Holders CreditorsCreditors

Leveraged BuyoutsLeveraged Buyouts

A situation in which a group, often A situation in which a group, often management , uses credit to management , uses credit to

purchase the outstanding shares of purchase the outstanding shares of the company.the company.

Arrange a line of creditArrange a line of credit Makes a Tender OfferMakes a Tender Offer Takes the company privateTakes the company private

Hostile TakeoverHostile Takeover

Hostile takeovers (where management Hostile takeovers (where management does not want the company to be does not want the company to be

taken over) are most likely to occur taken over) are most likely to occur when company’s stock in under when company’s stock in under valued relative to its potential valued relative to its potential because of poor managerial because of poor managerial

decisions decisions

Proxy FightProxy Fight

An attempt to gain control of firm by An attempt to gain control of firm by soliciting stockholders to vote for a soliciting stockholders to vote for a

new management team.new management team.

Agency CostAgency Cost

The cost associated with monitoring The cost associated with monitoring managements actions to insure that managements actions to insure that

those actions are consistent with those actions are consistent with contractual agreement between contractual agreement between

manager, stock holder and creditorsmanager, stock holder and creditors

Agency CostAgency Cost

Monitoring expenditureMonitoring expenditure

Structuring expenditureStructuring expenditure

Opportunity costOpportunity cost

Business CombinationsBusiness Combinations

MergerMerger

It refers to the combination of two or It refers to the combination of two or more corporations in such a way more corporations in such a way that legally just one corporation that legally just one corporation

survive, while the other is dissolved survive, while the other is dissolved according to laws of the state.according to laws of the state.

ConsolidationConsolidation

Consolidation occurs when two or Consolidation occurs when two or more corporation combine to create more corporation combine to create

an entirely new corporate entity.an entirely new corporate entity.

Types of MergersTypes of Mergers

Congeneric MergersCongeneric Mergers

Occurs between firms that have Occurs between firms that have related business interests.related business interests.

Conglomerate MergersConglomerate Mergers

Occurs when unrelated businesses Occurs when unrelated businesses combine.combine.

How Merges are Effected How Merges are Effected

Friendly TakeoversFriendly Takeovers Purchase of AssetsPurchase of Assets Purchase of StocksPurchase of Stocks

Hostile TakeoversHostile Takeovers Tender OfferTender Offer Proxy fightProxy fight

Language Of Merges & Language Of Merges & AcquisitionsAcquisitions

Blank CheckBlank Check

Authorizing issuance of new shares at the Authorizing issuance of new shares at the discretion of BOD. Giving voting right to vote discretion of BOD. Giving voting right to vote

down HT.down HT. Shark RepellentsShark Repellents

Amending charter or bylaws to make HT more Amending charter or bylaws to make HT more complexcomplex

Poison PillsPoison Pills

An action taken by firm to make it unattractive to An action taken by firm to make it unattractive to potential buyers in an attempt to avoid hostile potential buyers in an attempt to avoid hostile

takeover.takeover.

Language Of Merges & Language Of Merges & AcquisitionsAcquisitions

Scorched EarthsScorched EarthsImplementing a defensive strategy that may Implementing a defensive strategy that may

threaten the very survivability of the threaten the very survivability of the target. target.

Pac-Man StrategyPac-Man StrategyTrying to buy each other by buying the stock.Trying to buy each other by buying the stock. GreenmailGreenmail

A situation in which firm trying to avoid a A situation in which firm trying to avoid a takeover, offers to buy back stock at price takeover, offers to buy back stock at price

above than marker price. above than marker price.

Language Of Merges & Language Of Merges & AcquisitionsAcquisitions

White KnightWhite Knight

Coming to the rescue of a target firm Coming to the rescue of a target firm threatened by a hostile takeover.threatened by a hostile takeover.

Crown JewelCrown Jewel

Referring to a very highly profitable Referring to a very highly profitable division owned by the target firm division owned by the target firm

which is especially sought after by which is especially sought after by the acquiring firm. the acquiring firm.

Corporate RestructuringCorporate Restructuring

Sell offSell off LiquidationLiquidation Going PrivateGoing Private LBOLBO

Agency ProblemsAgency Problems

Managers vs StockholdersManagers vs Stockholders

Stockholders vs Creditors Stockholders vs Creditors

Dividend PolicyDividend Policy

Stock prices is dependentStock prices is dependent Projected EPSProjected EPS Timing of the earnings streamTiming of the earnings stream Riskiness of projected earningsRiskiness of projected earnings Use of debtUse of debt Dividend policey Dividend policey