an overview of corporate finance by binam ghimire
Post on 23-Feb-2016
76 Views
Preview:
DESCRIPTION
TRANSCRIPT
1
An overview of Corporate Financeby Binam Ghimire
Learning Objectives
Concept, Scope and Significance Key Decisions in Corporate Finance Agency problem Appreciate Business Ethics and social
Responsibilities
2
Finance: What is it?
Finance as a resource Finance as a discipline
Monetary means of financing assets of an entity
Collection and allocation of resources
3
Specialised areas of finance
Personal
4
Specialised areas of finance
Public
5
Specialised areas of finance
Securities and investment
6Source: London Evening Standard, 18 May 2011
Specialised areas of finance
Institutional
7
Source: The Telegraph, 29th July 2011
Specialised areas of finance
International Finance
Table from Bringham and Huston (2002, p. 7)8
£, $, €, ¥, %
Corporate Finance
?
9
The Corporate Firm
10
? ??
Sole Proprietorship
Business is owned and run by one person Typically have few, if any, employees Advantages: Easy to create Disadvantages: Unlimited personal liability, No
separation between the firm and the owner, Limited life, Difficult to transfer ownership
Partnership
Similar to a sole proprietorship, but with more than one owner
Income is taxed at the personal level All partners have unlimited personal liability The partnership ends with the death or
withdrawal of any single partner General and limited partner
The Corporation
AKA: JSC, PLC, LLC, Corporation,
The Corporation
A legal entity separate from its owners Has many of the legal powers individuals have
such as the ability to enter into contracts, own assets, and borrow money …
Source: www.bizstats.com
The Corporation
16
Several advantages: Limited liability, ease of ownership transfer and unlimited life. These give the corporation an enhanced ability to raise cash, However
Starting is more complicated than others: Articles of associations and a set of bylaws, and one great disadvantage is
_ _ _ _ _ e _ _ x_ _ _ _ n
17
Corporation Partnership
Liability
Perpetuity
Taxation
Voting Rights
Liquidity/ sale of shareDividend
18
Corporation Partnership
Liability No Limited: noGeneral: yes
Perpetuity Yes No
Taxation Double: corporate income and dividends to shareholders
Partnerships is not taxed, partners are on their partnership profit
Voting Rights One vote per share, vote to elect director
Some by limited partners, general are active in managing and operating
Liquidity/ sale of share
Yes – common stock can be listed in exchange and traded
There is usually no established trading market
Dividend Not bound legally Generally no retention i.e. distribute all
Corporate Finance: Concept
Corporate finance: Finance for the corporate or beyond?
limited to management of funds?
Sell - Cash - Value
19
Corporate Finance: concept
Corporate Finance deals with:Determining value of a Corporate EntityAdding Value to a Corporate EntityThe Value of X is what X is worth now at time t.Making the best decision when that decision
involves a consideration or an opportunity cost and the cost of consideration may be higher or lower given time t
This is part of strategy
Corporate Finance: the concept
Strategy is how an organization achieves her long term objectives through re-configuration of her resources in
response to a changing external business environment
to achieve competitive advantage in order to satisfy stakeholder’s objectives
Corporate Finance: the concept
Corporate Finance is the: The Reconfiguration of Resources The study of the external changing Business
Environment Definition of what stakeholder’s Financial
objectives are Gaining of competitive advantage
The Three Key Corporate Finance Decisions Investment Decisions concerned with whether
to undertake capital expenditure projects or not Financing Decisions concerned with the
collection of funds from appropriate sources Managerial Decisions concerned with dividend,
working capital and other decisions at management level
Investment Decisions The Investment Decisions of a Firm are taken
using the various investment appraisal techniques which we will study
This techniques are tools which work well if applied properly
They have various decision criteria's and can be very effective if used by the right kind of managers
While they can cause a loss of corporate value if used wrongly
Investment Decisions The process of making and managing
expenditures on long-lived assets: Capital budgeting/ Investment appraisal
Financing Decision
The Financing Decision if informed by the Target Capital Structure desired by the firm
The cost of capital the firm has to bear The sources of finance available to her
Financing Decision
The sources of finance available can be current and long term
Long term debt and equity falls in capital structure
Cost of capital explains about the cost associated with such components of debt and equity capital
Managerial Decisions How large should the firm grow? How Much Dividend Should be Paid and How
Much profit should be retained for growth? How fast should this growth be? How should the firm manage its receivables and
payables? e.g. Should the firm grant credit to a customer?
The Role of The Financial Manager
Organisational Chart of a Typical Corporation
FinancialManager
Firm'soperations Investors
(1)(2)
(3)
4
5Real assets
Financial Manager’s Roles
32
4. Cash
reinvested
2. Cash invested in the firm’s
operations
3. Cash generated by the firm’s operations5. Cash returned to
investors
1. Cash raised by selling financial assets to
investors
Goals of a firm Profit Maximisation vs. Wealth Maximisation
Accounting conceptZero dividendTime value of benefitsQuality of benefitsModern business environmentWho are the shareholders?Conflict of interest among stakeholders of a
firm
The Three Different Views of the Firm
The Investment Vehicle Model of the Firm The Accounting Model of the Firm Set of Contracts Model of the Firm
The Investment Vehicle Model of the Firm
The Firm
Investment Decisions
Financing Decisions
Corporate Financial Management
Financial Markets and Intermediaries Investments
Three Main Areas of Finance:
TheWorld
Exchange of Money and Real Assets
Investors
FinancialIntermediaries
FinancialMarkets
Exchange of Money and
Financial Assets
The Accounting Model of the FirmThe Financing
DecisionCurrent Liabilities
Accounts PayableCurrent Debt
Long-Term Liabilities
Long-Term Bank DebtBonds
Shareholder’s Equity
Common StockRetained Earnings
The Investment Decision
Current AssetsCashMarketable SecuritiesAccounts ReceivableInventory
Total Fixed AssetsTangible Fixed AssetsIntangible Fixed Assets
Net Working Capital =CA - CL
Set of Contracts Model of the Firm
PreferredStockholders
Managers
Firm
CommonStockholders
Communities
Creditors
Governments
Customers
Suppliers
Society
Banks
Environment
Bondholders
Employees
Managers and Owners
The Wall Street Journal Survey of CEO Compensation
http://www.businessinsider.com/25-most-overpaid-ceos-2010-10#18-news-corp-rupert-murdoch-8
Agency Problem: Responsibility for the financial manager
Agency TheoryMichael C. Jensen and William H. Meckling
propounded this theory in 1976 Principal and Agent Management and Shareholders, Creditors and
shareholders
Agency Problem: Responsibility for the financial manager
Manager owns less than 100% of the company Agency Problem Agency Cost (Monitoring, Structuring and
opportunity costs)
Agency Problem
Owners of Corporations cannot
manage them Personally
They have to employ Directors to Manage their Businesses on
their Behalf
These Directors May not carry out the
management to the standard expected of
them
They may do it but to their own advantage or at a higher cost
Shareholders have to pay the Directors and
these is part of Agency Cost
Because of Breakdown of Trust, Shareholders
have to employ Auditors to Vouch the Stewardship Report of
Directors
All theses add up and the management of the Agent Principal Relationship with its attendant cost to the
Principals is the Agency Cost
Agency Problem/cost: How to reduce?
Managerial compensation plan (e.g. performance stock)
Direct Intervention by shareholders Threat of firing Threat of takeover (e.g. hostile takeover, M&A)
Stakeholder Theory
Who are these
Stakeholder? Stakeholders identification Models
To what Extent Should Companies take them into
consideration? Stakeholders Mapping
What if what is good for one stakeholder is Bad for Another? Satisficing
What if What is good for stakeholders is viewed as
unethical? Moral Frameworks and Guidelines
A Stakeholder is someone who can affect or be
affected by the operations of an
organization as it seeks to meet its corporate
objectives
Business Ethics
Ethics: The study of right and wrong “in action” Making a business decision can involve ethical
dilemmas
An Ethical Dilemma?
Choice to be made Implicates competing values, rights, & goals Potential harm to decision maker? Potential harm to others? “Ripple effect:” long-term, far reaching
implications of decision to be made.
How to Resolve Ethical Dilemmas in Business
Identify relevant facts Identify relevant issue(s) Identify primary stakeholders Identify possible solutions Evaluate each possible solution Compare and assess consequences Decide on solution Take action
Additional Approaches to Ethical Decision Making Five Question Approach (Tucker) Moral Standards Approach (Velasquez) Pastin’s Approach
Practical Approaches to Ethics
Five Question Approach (Tucker) Evaluate each alternative on:
Profitability (shareholders)Legality (society at large)FairnessImpact on the rights of stakeholdersImpact on sustainable development
(environment)
Tuckers Five QuestionsIs it profitable?Is it fair?Is it legal?Is it right?Is it sustainable?
Practical Approaches to Ethics
Practical Approaches to Ethics
Moral Standards Approach (Velasquez) Is the decision:
Of net benefit to societyFair to all stakeholders (fair distribution of
benefits and burdens)Consistent with each person’s rights
Practical Approaches to Ethics
Pastin’s approach (Pastin)Ground rule ethics (organization/individual
rules and values)End-point ethics (greatest net good for all
concerned)Rule ethics (determine ethical boundaries to
take into account – impingement of rights) Social contract ethics (how to move
boundaries)
Consider This: “You and John”
You are the manager for Tesco. You recently fired John, a sales clerk, after John punched a customer during a dispute in the store. John admitted this after the customer complained.
Lisa, manager of your competitor, Asda, calls you to tell you that John has applied for a job at Asda, and to ask you whether John is “good with customers.”
What will you reply to Lisa?
Legal Vs. Ethical: “You and John”
Action Legal/Illegal Ethical/Unethical
Tell the Truth
Lie
No Comment
Other
Corporate Social Responsibility
Milton Friedman's argument
There is one and only one responsibility of business: to use its resources and energy in activities designed to increase its profit so long as it stays within the rule of game and engages in open and free competition, without deception and fraud.
Source: The New York Times Magazine, September 13, 1970, The New York Times Company.
Corporate Social Responsibility
This is Davis and Blomstrom (1971) Iron Law ofResponsibility
An iron law of responsibility which states that in the long-term those who do not use power in a manner that society considers responsible will tend to lose it.
Source: Davis, K. and Blomstrom, R. (1971) Business, Society and Environment. Social Power and Social Response, 2nd edition, New York, McGraw-Hill. Davis, K. (1973) The case for and against Business assumptions of Social Responsibilities, The Academy of Management Journal, 16, 2, 312-322
Corporate Social Responsibility
Gray, Owen and Adams (1996) described society as a series of social contracts between members of society and society itself.
Corporate Social Responsibility Gray, Owen and Adams (1996)
1.Pristine Capitalist, 2.Expedient, 3.Social contract, 4.Social Ecologists, 5.Socialists, 6.Radiacal Feminists, 7.Deep Ecologists
Corporate Social Responsibility
Different approachesSocial ObstructionSocial ObligationSocial ResponseSocial Contribution
Charity Principle Stewardship Principle
Discussion Sarbanes-Oxley Act (2002), USA
59
Discussion
Ethics & Management Objectives Does value maximization justify unethical
behavior?
Enron exampleWorldCom exampleAIG example
Careers in Finance
Discuss
62
Thank You
top related