corporate finance final (1)

7/28/2019 Corporate Finance Final (1)

1/61


2/61

Finance may be defined as the art and scienceof managing money. It includes financial serviceand financial instruments.

Finance also is referred as the provision ofmoney at the time when it is needed. Financefunction is the procurement of funds and theireffective utilization in business concerns.

The concept of finance includes capital, funds,money, and amount. But each word is havingunique meaning. Studying and understandingthe concept of finance become an importantpart of the business concern.


3/61

According to Khan and Jain, Finance is theart and science of managing money


4/61

According to the Wheeler, Businessfinance is that business activity whichconcerns with the acquisition and

conversation of capital funds in meetingfinancial needs and overall objectives of abusiness enterprise.


5/61

Finance

Business

FinancePartnership

Finance

Individual

Finance

Private

Finance Public Finance

Central

Government

State

Governm

ent

Semi

Governm

ent


6/61

Suppose you decide to start a firm to make tennis balls.To do this you hire managers to buy raw materials, and

you assemble a workforce that will produce and sellfinished tennis balls. In the language of finance, youmake an investment in assets such as inventory,

machinery, land, and labor. The amount of cash youinvest in assets must be matched by an equal amount ofcash raised by financing. When you begin to sell tennisballs, your firm will generate cash. This is the basis ofvalue creation. The purpose of the firm is to createvalue for you, the owner. The value is reflected in theframework of the simple balance sheet model of thefirm.


7/61

Current assets

Current liabilities

Long term debt

Fixed assets

Tangible fixed assetIntangible fixed asset

Share holders equity

Total value of

assetsTotal value of the firm investors

Net

working

capital


8/61

The Sole Proprietorship

The Partnership

The Corporation


9/61

A sole proprietorship is a business owned by one person.

Here are some factors that are important in considering a soleproprietorship:

The sole proprietorship is the cheapest business to form. No

formal charter is required, and few government regulations mustbe satisfied for most industries. The sole proprietorship has unlimited liability for business debts

an obligations. No distinction is made between personal and business assets. The life of the sole proprietorship is limited by the life of the

sole proprietor. Because the only money invested in the firm is the proprietors,

the equity money that can be raised by the sole proprietor islimited to the proprietors personal wealth.


10/61

Any two or more people can get together and form apartnership.

Partnerships fall into two categories: (1) generalpartnerships and (2) limited partnerships.

In ageneral partnershipall partners agree to providesome fraction of the work andcash and to share the profitsand losses. Each partner is liable for all of the debts of thepartnership. A partnership agreement specifies the nature ofthe arrangement. The partnership agreement may be an oralagreement or a formal document setting forth theunderstanding.

Limited partnershipspermit the liability of some of thepartners to be limited to theamount of cash each hascontributed to the partnership. Limited partnerships usuallyrequire that (1) at least one partner be a general partner and(2) the limited partners do not participate in managing the

business.


11/61

Partnerships are usually inexpensive and easyto form.

Written documents are required in complicatedarrangements.

Business licenses and filing fees may benecessary.

General partners have unlimited liability for alldebts. The liability of limited partners is

usually limited to the contribution each hasmade to the partnership. If one generalpartner is unable to meet his or hercommitment, the shortfall must be made up bythe other general partners.


12/61

The general partnership is terminated when ageneral partner dies or withdraws (but this isnot so for a limited partner). It is difficult for apartnership to transfer ownership withoutdissolving. Usually all general partners mustagree. However, limited partners may sell theirinterest in a business.

It is difficult for a partnership to raise largeamounts of cash. Equity contributions are usuallylimited to a partners ability and desire tocontribute to the partnership.

Income from a partnership is taxed as personalincome to the partners.

Management control resides with the generalpartners. Usually a majority vote is required onimportant matters, such as the amount of profitto be retained in the business.


13/61

Of the forms of business enterprises, thecorporation is by far the most important. Itis a distinct legal entity. As such, a

corporation can have a name and enjoy manyof the legal powers of natural persons.

For example, corporations can acquire andexchange property. Corporations can enter

contracts and may sue and be sued. Forjurisdictional purposes the corporation is acitizen of its state of incorporation (itcannot vote, however).


14/61

Starting a corporation is more complicated thanstarting a proprietorship or partnership. Theincorporators must prepare articles of incorporationand a set of bylaws.

The articles of incorporation must include thefollowing:

1. Name of the corporation.

2. Intended life of the corporation (it may beforever).

3. Business purpose.4. Number of shares of stock that the corporation is

authorized to issue, with a statement of limitations

and rights of different classes of shares.5. Nature of the rights granted to shareholders.6. Number of members of the initial board of

directors.


15/61

The finance function in a large firm is further

subdivided into two categories: the functions

of the treasurer and the functions of the

controller.

The following table will identify the

activities undertaken by these functionaries:


16/61

Functions as atreasurer

Functions as aController

Acquisition of funds Financial accounting

Banking relationships Internal auditing

Cash management Taxation

Credit management Management accounting

Capital budgeting Cost control

Dividend decision Record keeping

Insurance Tax planning


17/61
http://lh5.googleusercontent.com/-Kjazjzz60UM/TnoSHdUBn3I/AAAAAAAAFSA/qsILJXq14A4/Need-and-Importance-of-Corporate-Finance.png


18/61

Research andDevelopment -

Corporate Finance isneeded for Researchand Development.Today, a company

cannot survive withoutcontinuous research

and development. Thecompany has to go onmaking changes in itsold products. It must

also invent new

products. If not, it willbe get automaticallythrown out of the

market.

Motivating Employees -Manager and employees

must be continuouslymotivated to improve

their performance. Theymust be given financialincentives, such as

bonus, higher salaries,etc. They must also be

given non-financial

incentives such astransport facilities,canteen facilities

(eatery), etc. All thisrequires finance.


19/61

Promoting a Company :Finance is needed forpromoting (starting) a

company. It is needed forpreparing Project Report,Memorandum ofAssociation, Articles ofAssociation, Prospectus,etc. It is needed for

purchasing Land andBuildings, Plant andMachinery and otherfixed assets. It is neededto purchase raw materials.It is also needed to paywages, salaries and otherexpenses. In short, wecannot start a companywithout finance.

Smooth Conduct ofBusiness :

Finance isneeded for conductingthe business smoothly.It is needed as workingcapital. It is needed

for paying day-to-dayexpenses. It is neededfor advertising, salespromotion, distribution,etc. A company cannotrun smoothly withoutfinance.


20/61

Expansion andDiversification :Expansion means toincrease the size of thecompany. Diversificationmeans to produce and sellnew products. Modernmachines and moderntechniques are needed

for expansion anddiversification. Finance isneeded for purchasingmodern machines andmodem technology. So,

finance becomesmandatory for expansionand diversification of acompany.

Meeting Contingencies :

The company has to meetmany contingencies. Fore.g. Sudden fall in sales,loss due to naturalcalamity, loss due tocourt case, loss due tostrikes, etc. The companyneeds finance to meetthese contingencies


21/61

Government Agencies :There are manygovernment agencies such

as Income Taxauthorities, Sales Taxauthorities, Registrar ofCompanies, Exciseauthorities, etc. The

company has to pay taxesand duties to theseagencies. Finance isneeded for paying thesetaxes and duties.

Dividend and Interest : Thecompany has to pay dividends tothe shareholders. It has to payinterest to the debenture holders,

banks, etc. It also has to repay theloans. Finance is needed to paydividends and interest.

Replacement of Assets : Plant andMachinery are the main assets of thecompany. They are used for producinggoods and services. However, aftersome years, these assets become old

and outdated. They have to bereplaced by new assets. Finance isneeded for replacement of old assets.That is, finance is needed to buy newassets.


22/61

THE FINANCIAL SYSTEM

Suppliers of Funds

Individuals

Businesses

Governments

Demanders of

FundsIndividuals

Businesses

Governments

Private

Placement

Funds

Securities


23/61

Transferring Capital

Direct Transfer of Funds

saver


24/61



saverfirm


25/61

Cash



saverfirm


26/61

Cash

Securities



saverfirm


27/61


Indirect Transfer using a Financial Intermediary

saver


28/61



financialintermediarysaver


29/61

Funds



financialintermediarysaver


30/61

Funds



financialintermediaryfirm

saver


31/61

Funds



Funds


saver


32/61

Funds



Funds


saver

Firm

Securities


33/61

Funds



Intermediary

Securities

Funds

Firm

Securities


saver


34/61


Direct Transfer using Financial Market

saver


35/61


Direct Transfer through Financial Markets

saver

firmFinancial Markets


36/61

Funds



saver



37/61

Funds



Funds

saver



38/61

Funds



Funds

Securities

saver



39/61

Funds



Securities

Funds

Securities

saver



40/61

Finance

Financial instrumentsFinancial InstitutionFinancial Markets

Money market

Capital market

Banking institutions

Non banking financialinstitutions

Primary securities

Secondary securities


41/61

Defined as the market in which financial

assets are created or transferred.

These assets represent a claim to thepayment of a sum of money sometime in thefuture and/or periodic payment in the formof interest or dividend.


42/61

Classification

Money market

(Short term instrument)

Capital markets (Long term instrument)

The most important distinction between thetwo:The difference in the period of maturity.


43/61

Main Function

To channelize savings into short term productiveinvestments like working capital .

Instruments in Money MarketCall money marketTreasury bills marketMarkets for commercial paper

Certificate of depositsBills of ExchangeMoney market mutual funds Promissory Note


44/61

Part of the national money market

Day-to day surplus funds mainly of banks are traded

Short term in nature

Maturity of these loans vary from 1 to 15 days

Lent for 1 day: Call money

Lent for more than 1 day but less than 15 days: Notice money

Convenient interest rate

Highly liquid loan repayable on demand


45/61

Referred as note payable in accounting

It is a contract detailing the terms of apromise by one party (the maker) to pay asum of money to the other (thepayee).

The obligation may arise from the repaymentof a loan or from another form of debt.

For example, in the sale of a business, thepurchase price might be a combination of animmediate cash payment and one or morepromissory notes for the balance.
http://en.wikipedia.org/wiki/Contracthttp://en.wikipedia.org/wiki/Moneyhttp://en.wikipedia.org/wiki/Moneyhttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Debthttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Debthttp://en.wikipedia.org/wiki/Debthttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Moneyhttp://en.wikipedia.org/wiki/Contract


46/61

Unsecured Promissory note. Issued by well known companies with strong and

high credit rating.

Sold directly by the issuers to investors or throughagents like merchant banks and security houses.

Flexible Maturity

Low interest rates with compared to banks.

Imparts a degree of financial stability to thesystem.


47/61

Defined as short term deposit by way of

using promissory notes.Greater flexibility to investors in the

deployment of surplus funds.

Permitted by the RBI to banks

Maturity of not less than 3 months and upto

1 year.

Transferable in nature

Free negotiability and limited flexibility


48/61

Invest primarily in money market instrumentsof very high quality.

RBI and public financial institution can set iteither directly or through its existing

subsidiaries.


49/61

Introduction of t-bill market A particularkind of finance note put out by the governmentof the country.

Treasury bills are highly liquid because

there cannot be a better guarantee ofrepayment than the one given by thegovernment.

They are claims against the government.

That means when you buy a Treasury, we areactually loaning money to the government andthe government in turn is paying you intereston the borrowed money

Treasury Bills one of the safest money market


50/61

Treasury Bills, one of the safest money marketinstruments, are short term borrowing instruments of theCentral Government of the Country issued through theCentral Bank (RBI in India).

They are zero risk instruments, and hence the returns are

not so attractive. It is available both in primary market as well as secondary

market. It is a promise to pay a said sum after a specifiedperiod.

T-bills are short-term securities that mature in one yearor less from their issue date. They are issued with three-

month, six-month and one-year maturity periods. The Central Government issues T- Bills at a price less than

their face value (par value). They are issued with apromise to pay full face value on maturity. So, when the T-Bills mature, the government pays the holder its facevalue. The difference between the purchase price and the

maturity value is the interest income earned by thepurchaser of the instrument.

T-Bills are issued through a bidding process at auctions


51/61

A non-interest-bearing written order usedprimarily in international trade that binds oneparty to pay a fixed sum of money to anotherparty at a predetermined future date.

A bill of exchange is an instrument in writing.It must be signed by the maker or drawer. It contains an unconditional order. The order

must be to pay money and money only. The sum payable must be specific. The amount

must be paid within a stipulated time or ondemand. The name of the drawee must beclearly mentioned. It must be dated andstamped


52/61

Provided resources needed by medium and large

scale industries.

Purpose for these resources Expansion Capacity Expansion Investments Mergers and Acquisitions

Deals in long term instruments and sources offunds


53/61

Main Activity

Functioning as an institutional mechanism tochannelize funds from those who save to those whoneeded for productive purpose.

Provides opportunities to various class of individualsand entities.


54/61

Primary Markets Secondary MarketsWhen companies need financial resources

for its expansion, they borrow money frominvestors through issue of securities.

The place where such securities are traded

by these investors is known as thesecondary market.

A primary market is one in which a borrowerobtains funds from a lender by selling newlyissued securities.

Secondary financial markets are thosewhere people can buy and sell existingsecurities

Securities issueda) Preference Sharesb) Equity Sharesc) Debentures

Securities like Preference Shares andDebentures cannot be traded in thesecondary market.

Equity shares is issued by the under writersand merchant bankers on behalf of the

company.

Equity shares are tradable through aprivate broker or a brokerage house.

People who apply for these securities are:a) High net worth individualb) Retail investorsc) Employeesd) Financial Institutionse) Mutual Fund Housesf) Banks

Securities that are traded are traded bythe retail investors.


55/61

Financial Instruments: The written legalobligation of one party to transfer somethingof value, usually money, to another party atsome future date, under certain conditions. The enforceability of the obligation is

important. Financial instruments obligate one party

(person, company, or government) to transfersomething to another party.

Financial instruments specify payment will be

made at some future date. Financial instruments specify certain

conditions under which a payment will bemade.


56/61

A financial instrument is a trade ableasset of any kind; either cash, evidenceof an ownership interest in an entity, ora contractual right to receive or deliver

cash or another financial instrument.Primary Securities: Equity, Preference,

Debt and Various combinations.

Secondary Securities: Mutual Fund

Units and Insurance Policies etc.


57/61

Banking Institutions: Participate inthe economy's payment mechanism, depositliabilities constitute a major part of

national money supply.Non-Banking Institutions: LIC,

SIDBI, IIBI, IFCI ( All India FinancialInstitutions), SFCs & SIDCs


58/61

To link the savers & investors.

To inspire the operators to monitor the

performance of the investment.

To achieve optimum allocation of riskbearing.

It makes available price - related

information.

It helps in promoting the process of financialdeepening and broadening


59/61

Depositories

Custodial

Credit Rating

Leasing Portfolio Management

Underwriting etc.


60/61

Financial Institutions

Financial Markets

Financial Instruments Financial Services


61/61

corporate finance final (1)

Documents