Lecture1.pptx

Topics to be covered in this Chapter
Financial Management Decisions
Forms of Business organizations
Goals of finanacial management
Ownership & control
Stakeholders
Financial markets
Faculty
of
Management
Sciences

KEY POINTS/ CONCEPTS
Introduction to corporate finance
Objectives of a company
 Primary objective
Maximization of Shareholders Wealth
 Secondary Objectives
Maximize Profits
Maximize Sales Revenue
Minimize Cost
Increase Market Share
Customer Satisfaction
Organization Growth
Faculty
of
Management
Sciences

Financial Objectives
 High return on capital employed
 Increase in profit margins
 Maintaining adequate cash flows
 Increase in earning per share
 Increase in dividend payments
 Maintaining gearing level
Faculty
of
Management
Sciences

Non-Financial Objectives
 Welfare of employees
 Welfare of management
 Fulfillment of responsibilities towards
customers/ suppliers
 The welfare of society
FINANCIAL STATEMENTS AT A GLANCE
 Income Statement
 Balance Sheet
 Cash Flow Statement
Faculty
of
Management
Sciences

What comes first in your mind when you plan to
start your own business?

1- Investment Decisions/ Capital Budgeting Decisions
What should we do? In which project
should we invest or not?
2- Financing Decisions
How would we finance the investments in
projects?
3- Working Capital Decisions
How would we manage running finances?
Faculty
of
Management
Sciences

Financial Manager
The person responsible to answer all
three above stated decisions in a
corporation
WHAT IS Corporate FINNACE?
Corporate Finance focuses on decisions
relating to how much and what type
of assets to acquire, how to raise the
capital needed to buy assets and how
to run the firm so as to maximize its
value
Faculty
of
Management
Sciences

Concerns of Financial Manager
Investment Decisions
Size, Timings and Risk Factor of future
cash flows
Financing Decisions/Capital Structuring
Decisions
Debt or Equity financing
Working Capital Decisions
Management of short term assets &
liabilities
Faculty
of
Management
Sciences

Forms of Business Organizations
1- Sole proprietorship
2- Partnership
General
Limited
3- Corporations
Faculty
of
Management
Sciences

Goals of Financial Management
Primary Goal
Maximize the Market Value of the
existing owners equity
Reason?
Faculty
of
Management
Sciences

Goals of Financial Management
Profitability Goals
Maximize sales, minimize cost, maximize
profits, Increase market share,
maintaining earning growth
LIQUIDITY GOALS
Survival, Avoid Financial Distress &
Bankruptcy, Liquidity
Faculty
of
Management
Sciences

Do you think Liquidity and Profitability goals will
conflict each other?

Agency Problem/ Ownership & Control
Principal – Agent Relationship
Financial Mangers should act in the best
interest of the stockholders
Agency Relationship
The relationship between the stockholders
and the management
Agency Problem
Conflict of interest between stockholders
and management
Example ??
Faculty
of
Management
Sciences

Agency Cost
Cost of the conflict of interest between
stockholders and management
Types of Agency Cost
Direct Agency Cost
Indirect Agency Cost
Faculty
of
Management
Sciences

Direct Agency Cost
1- Corporate expenditure that benefits
management but costs the
stockholders
i-e Purchase of luxurious and un-needed corporate
asset
2- Expense that arises from the need to
monitor management action
i-e Paying outside auditors to assess the accuracy of
financial statement information
Faculty
of
Management
Sciences

Indirect Agency Cost
Cost of lost opportunity
i-e Not taking a project (might be riskier one)
but in the interest of shareholders
Faculty
of
Management
Sciences

Do managers act in the stockholders
interest?
Managerial compensation
Control of the firm
Faculty
of
Management
Sciences

Do managers act in the stockholders interest?
Managerial compensation
Reasons:
1. Financial Performance (General Terms)
2. Increase in share value (Particular Terms)
Terms:
1. Option to buy stock
2. Promotions/High Salaries
Faculty
of
Management
Sciences

Control of the firm
Control of the firm rests with the
stockholders
1. Election of board of directors
2. Hiring / Firing of managers
Faculty
of
Management
Sciences

Control of the firm (contd.)
Proxy Fighting
A mechanism by which unhappy
stockholders can act to replace the
existing management
i-e Acquiring of a target company by persuading
current shareholders
Faculty
of
Management
Sciences

STOCKHOLDERS CONTROLS THE FIRM AND THE
STOCKHOLDERS WEALTH MAXIMIZATION IS THE
RELEVANT GOAL OF THE CORPORATION/
MANAGEMENT

STAKEHOLDERS OF A CORPORATION
Anyone that can affect or be affected by a
company’s actions, objectives and policies
OR
Anyone who has a claim on the cash flows of
the firm
Types of Stakeholders
Internal
External
Faculty
of
Management
Sciences

INTERNAL
STAKEHOLDERS
EMPLOYEES
MANAGERS
JOB SECURITY
PAY INCENTIVES

EXTERNAL
STAKEHOLDERS
SHAREHOLDERS
Profitability
Market Share SUPPLIERS
Business
Opportunities
CUSTOMERS
Customer care
Ethical Products
CREDITORS
Liquidity
Contracts
COMMUNITIES
Environmental
Protection
INVESTORS
Return on
Investment
GOVERNMENT
Taxation
Legalities
Reporting's

FINANCIAL MARKETS & THE
CORPORATIONS
Markets where financial instruments/
securities are traded
Types of Financial Markets
Primary Markets
Secondary Markets
Faculty
of
Management
Sciences

PRIMARY MARKETS
Primary markets refers to the markets where
the securities are issued first time or the
market of original sale of securities by
government and corporations
Types of Primary Markets
IPO’S (Selling securities to general public)
Private Placements ( Selling securities to
specific buyers)
i-e Financial Institutions, Insurance Companies,
Mutual Funds
IS SECP REGISTRATION MANDATORY FOR PRIMARY MARKETS?
Faculty
of
Management
Sciences

SECONDARY MARKETS
Market in which securities are bought
and sold after the original sale
TYPES OF SECONDARY MARKETS
Dealer Markets
Auction Markets
Faculty
of
Management
Sciences

SECONDARY MARKETS
Dealer Markets
Dealer markets in stocks/Debt are called OTC (Over
the Counter)
What will be the Model of OTC?
Physical LOCATION?
COMMUNICATION MODE?
Faculty
of
Management
Sciences

SECONDARY MARKETS
Auction Markets
What will be the Model of Auction market?
Physical LOCATION?
COMMUNICATION MODE?
Faculty
of
Management
Sciences

INVESTMENT DECISIONS/ CAPITALBUDGETING
DECISIONS/ LONG TERM DECISIONS
Faculty
of
Management
Sciences

CAPITAL INVESTMENT
Capital investment is an expenditure
incurred on non-current assets (Fixed
Assets) in expectation of profits in the
future
What are capital and revenue
Expenditures?
Faculty
of
Management
Sciences

CAPITAL INVESTMENT DECISION
MAKING PROCESS
1. Identifying investment opportunities
2. Screening investment proposals
3. Analyzing and evaluating investment
proposals
4. Approving investment proposals
5. Implementing, monitoring and
reviewing investments
Faculty
of
Management
Sciences

ACCOUNTING PROFITS & CASH FLOWS
Why it is more appropriate to evaluate future
cash flows rather than accounting profits
for the purpose of capital investment?
Relation between cash flows and profits
Profits= Net Cash Flows – Depreciation
Net Cash Flows= Profits + Depreciation
Faculty
of
Management
Sciences

Lecture1.pptx

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