Embed Size (px)
DESCRIPTION
basics of corporate finance
Citation preview
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
1- 1
McGraw-Hill/Irwin
Topics Covered
What Is A Corporation?The Role of The Financial ManagerWho Is The Financial Manager?Separation of Ownership and
Management
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
1- 2
McGraw-Hill/Irwin
Corporate Structure
Sole Proprietorships
Corporations
Partnerships
Limited Liability
Corporate tax on profits +
Personal tax on dividends (dividend distribution tax as of now in India)
Unlimited Liability
Personal tax on profits
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
1- 3
McGraw-Hill/Irwin
Role of The Financial Manager
Financialmanager
Firm'soperations
Financialmarkets
(1) Cash raised from investors
(1)
(2) Cash invested in firm
(2)
(3) Cash generated by operations
(3)
(4a) Cash reinvested
(4a)
(4b) Cash returned to investors
(4b)
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
1- 4
McGraw-Hill/Irwin
The 6 ‘A’s
Anticipating financial needsAcquiring financial resourcesAllocating funds in businessAdministrating the allocation of fundsAnalyzing the performance of fundsAccounting and reporting to management
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
1- 5
McGraw-Hill/Irwin
Role of The Financial Manager
Common Finance Terminology– Real assets– Financial assets / Securities– Capital markets and financial
markets– Investment / capital budgeting– Financing
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
1- 6
McGraw-Hill/Irwin
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
1- 7
McGraw-Hill/Irwin
Who is The Financial Manager?
Chief Financial Officer
ControllerTreasurer
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
1- 8
McGraw-Hill/Irwin
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
1- 9
McGraw-Hill/Irwin
3 Broad decisions of FMInvestment decisions
Finance decisions
Dividend decisions
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
1- 10
McGraw-Hill/Irwin
INVESTMENT DECISIONS Ascertainment of funds the firm can commit
Appraisal & selection of Capital Investment Proposals
Measurement of risk & uncertainty in the investment proposals
Prioritization of investment decisions
Determination of fixed assets to be acquired………..
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
1- 11
McGraw-Hill/Irwin
Determination of level of investment in the Current Assets
Buy or lease decisions
Asset Replacement decisions
Restructuring, Mergers & Acquisitions
Security Analysis & Portfolio management
…………contd….
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
1- 12
McGraw-Hill/Irwin
FINANCE DECISIONS Determination of the financing mix for long-term,
medium-term & short-term investments
Raising funds through issue of financial instruments
Arrangement of funds from banks, Fis
…………..contd…………
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
1- 13
McGraw-Hill/Irwin
…………..contd…… Strategies to reduce Tax liability of the firm Various modes of improving the EPS & the market
value of the share Consideration of Cost of Capital & WACC Optimization of financing mix to improve returns to
shareholders Considering impact of over/under capitalization on
firm’s profitability Impact of economic conditions of the country on
modes of financing
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
1- 14
McGraw-Hill/Irwin
DIVIDEND DECISIONSDetermination of dividend & retention
policies of the company
Consideration of impact of levels of dividend and retention of earnings on the market value of the share & future earnings of the company
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
1- 15
McGraw-Hill/Irwin
Leads to ‘agency’ problem
– Managers (agents)are supposed to act on behalf of the shareholders(principal)
– Conflict of interests– Mismanagement of funds– Burden of ‘agency costs’
Separation of Ownership from Management
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
1- 16
McGraw-Hill/Irwin
AGENCY COSTSCosts to the shareholders of managers making
decision that are not in the shareholder’s interests.
Expenditure to minimise dishonesty Expenditure to monitor management’s actions
by internal audits Expenditure to protect owners from mischief of
managers Opportunity cost of lost profits
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
1- 17
McGraw-Hill/Irwin
Solutions
Value maximizationAccountability of DirectorsMonitoringMotivation through incentives (ESOPs)
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
1- 18
McGraw-Hill/Irwin
INTERNATIONAL FINANCE
How to source it ?? How to manage it….. ??!!!!!!
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
1- 19
McGraw-Hill/Irwin
Regulatory changes – GAAP to IFRS
M&As leading to complex operating models
Financial risk management
Prioritizing capital investments
Managing taxes
Key Challenges for CFOs
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
1- 20
McGraw-Hill/Irwin
FINANCE & ACCOUNTING
Accounting info acts as input to the finance function
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
1- 21
McGraw-Hill/Irwin
