Lec 01.ppt_2

COURSE TITLE:COURSE TITLE:

Corporate FinanceCorporate FinanceCOURSE CODE: COURSE CODE:

(FIN 722)(FIN 722)PROFESSOR:PROFESSOR:

Muzaffar HashmiMuzaffar Hashmi

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Recommended BooksRecommended Books

Fundamental of Corporate Finance (7Fundamental of Corporate Finance (7thth Edition) Edition)By: By: Richard A Brealey, Stewart C

MyersPrinciple of Corporate Finance (4Principle of Corporate Finance (4thth Edition) Edition)

By: Richard By: Richard A Brealey, Stewart C Myers

Essential of Corporate Finance Essential of Corporate Finance By: By: Stephen A Ross, Randolph

W Westerfield, Bradford D Jordan

Corporate FinanceCorporate Finance

Scheme of StudiesScheme of Studies::• MODULE # 1 :MODULE # 1 : OVERVIEW OF CORPORATE FINANCEOVERVIEW OF CORPORATE FINANCE• MODULE # 2 : VALUATIONS OF FINANCIAL MODULE # 2 : VALUATIONS OF FINANCIAL

INSTRUMENTS LIKE STOCKS SHARES & BONDS INSTRUMENTS LIKE STOCKS SHARES & BONDS • MODULE # 3 : CAPITAL BUDGETINGMODULE # 3 : CAPITAL BUDGETING• MODULE # 4 : RISK STRATEGIES & MANAGEMENTMODULE # 4 : RISK STRATEGIES & MANAGEMENT• MODULE # 5: COST OF CAPITAL MODULE # 5: COST OF CAPITAL • MODULE # 6 : SHORT TERM FINANCE & CAPITAL MODULE # 6 : SHORT TERM FINANCE & CAPITAL

STRUCTURESTRUCTURE• MODULE # 7 : SPECIAL TOPICS – MERGERS & MODULE # 7 : SPECIAL TOPICS – MERGERS &

ACQUISITIONSACQUISITIONS• MODULE # 8 : INTERNATIONAL OPERATIONS MODULE # 8 : INTERNATIONAL OPERATIONS

Lecture 1: Module # 1: Introduction to Corp FinanceLecture 1: Module # 1: Introduction to Corp Finance

TO START A BUSINESS - THREE TO START A BUSINESS - THREE QUESTIONS ARISESQUESTIONS ARISES::

• 1. What type of assets do we needs?1. What type of assets do we needs?• 2. Where the money will come from 2. Where the money will come from

to buy these particular assets? to buy these particular assets? • 3. Day to day or Routine financial 3. Day to day or Routine financial

expenses, how to meet them?expenses, how to meet them?4


QUESTION # 1: SELECTION OF QUESTION # 1: SELECTION OF ASSETS:ASSETS:

CAPITAL BUDGETINGCAPITAL BUDGETING

•CB is defined as process of planning, CB is defined as process of planning, analyzing and acquiring of capital.analyzing and acquiring of capital.

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• CB decisions are irreversible in natureCB decisions are irreversible in nature• SWOT Analysis :SWOT Analysis :

– S – StrengthS – Strength– W – WeaknessW – Weakness– O – OpportunitiesO – Opportunities– T – ThreatsT – Threats

• CB targeted towards potential CB targeted towards potential opportunitiesopportunities


• Opportunities of a Business Entity Opportunities of a Business Entity depends on nature of intended depends on nature of intended businessbusiness

• Example: Air line Industry wants to Example: Air line Industry wants to add an aircraft that generate more add an aircraft that generate more Cash Flows. (i.e. Opportunity and Cash Flows. (i.e. Opportunity and acquire an asset Plane)acquire an asset Plane)

Cargo Company - TrawlersCargo Company - Trawlers7


Points keep in view by Financial Manager Points keep in view by Financial Manager & CB& CB

• Size of InvestmentSize of Investment

• RiskRisk

• TimingTiming

• Evaluating Size, timing of CF and Risk Evaluating Size, timing of CF and Risk associated with CF is essence of CBassociated with CF is essence of CB

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QUESTION # 2:Where to get money QUESTION # 2:Where to get money from to Finance Investment?from to Finance Investment?

Ans: Ans: CAPITAL & ITS STRUCTURECAPITAL & ITS STRUCTURE• Two ways to finance an Investment:Two ways to finance an Investment:

– Owner’s Equity Owner’s Equity – Loans or External Sources Loans or External Sources

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Terminology in Capital Raising Terminology in Capital Raising

IPO’sIPO’s– IPO’s stands for Initial Public OfferingsIPO’s stands for Initial Public Offerings– Company lunch their shares in marketCompany lunch their shares in market– Offer general PublicOffer general Public– Share allotted on DrawShare allotted on Draw


QUESTION # 3QUESTION # 3

• How to manage routine financial How to manage routine financial activities?activities?

• Working Capital Basically Interaction between Working Capital Basically Interaction between Current Assets & Current LiabilitiesCurrent Assets & Current Liabilities

• Working Capital needs to meet financial Working Capital needs to meet financial expensesexpenses

• Current Assets - Current Liabilities = WCCurrent Assets - Current Liabilities = WC

Vendors

Finished Goods

Raw Material

Cash from Customers

Sales to Customer

OPERATING OPERATING CYCLECYCLE

Cash Flow from Customers used to Pay Off Vendors

Cash Payment from Customers


Working Capital PoliciesWorking Capital Policies

• Level of Inventory InvestmentLevel of Inventory Investment

• Credit extension policyCredit extension policy


• Sole Proprietor Sole Proprietor

• Partnership Partnership

• Limited Liability Business:Limited Liability Business:– Private CompanyPrivate Company– Public Un-listed CompanyPublic Un-listed Company

Un-Incorporated BusinessUn-Incorporated Business

Types of BusinessTypes of Business


Types of MarketsTypes of Markets::

• Primary MarketPrimary Market

• Secondary Market Secondary Market

Limited Liability Business & MarketsLimited Liability Business & Markets


• Original Sale of Securities and Original Sale of Securities and sharesshares

• No tangible ShapeNo tangible Shape

• General Public offeringsGeneral Public offerings

• Private placementsPrivate placements

• IPO’s in Primary MarketIPO’s in Primary Market

Primary MarketsPrimary Markets


• Subsequent to first sale or Subsequent to first sale or Subsequent to original sale.Subsequent to original sale.

• Trading of Securities & SharesTrading of Securities & Shares

• Tangible MarketsTangible Markets

• Example stock ExchangeExample stock Exchange

SecondarySecondary MarketsMarkets


•THREE BASIC STATEMENTSTHREE BASIC STATEMENTSBALANCE SHEETBALANCE SHEETINCOME STATEMENT INCOME STATEMENT CASH FLOW STATEMENTCASH FLOW STATEMENT

FINANCIAL STATEMENTS & FINANCIAL STATEMENTS & CORPORATE FINANCECORPORATE FINANCE


BALANCE SHEETBALANCE SHEET

• Is a Statement of resources controlled by Is a Statement of resources controlled by the business entity and obligations on a the business entity and obligations on a specific date.specific date.


Contents of Balance SheetContents of Balance Sheet

• Assets = Fixed (tangible & Assets = Fixed (tangible & intangible)& current assetsintangible)& current assets

• Liabilities = Long Term Liability + Liabilities = Long Term Liability + Current Or Short Term LiabilityCurrent Or Short Term Liability

• Equity = shareholders’ contribution + Equity = shareholders’ contribution + earningsearnings


Fixed AssetsFixed Assets::

• Earning assetsEarning assets

• Fixed Assets e.g. Plant, Machinery, Fixed Assets e.g. Plant, Machinery, Vehicles etcVehicles etc

Current AssetsCurrent Assets::

• Inventory, Prepayments, Cash & Bank Inventory, Prepayments, Cash & Bank Balance, Short Term Investment etcBalance, Short Term Investment etc


Balance Sheet FormatBalance Sheet Format

• Format of B/S in Pakistan is Format of B/S in Pakistan is Governed by International Financial Governed by International Financial Reporting Standard or International Reporting Standard or International Accounting StandardAccounting Standard

• B/S construction is Non-liquid or B/S construction is Non-liquid or Illiquid Asset is at topIlliquid Asset is at top


Two Conventions for B/S Two Conventions for B/S ConstructionConstruction

• 11stst as in Pakistan IAS or IFRS as in Pakistan IAS or IFRS• 22ndnd Convention GAAP (General Accepted Convention GAAP (General Accepted

Accounting Principle) applicable in Accounting Principle) applicable in United StatesUnited States

• GAAP – In B/S top item is highly liquid GAAP – In B/S top item is highly liquid asset i.e. cash or near moneyasset i.e. cash or near money


Current Liabilities ingredientsCurrent Liabilities ingredients

• Creditor, Accrued Liabilities, Short Term Creditor, Accrued Liabilities, Short Term FinancesFinances

• Current Assets - Current liabilities equal Current Assets - Current liabilities equal Working CapitalWorking Capital


LiquidityLiquidity

• Conversion into cash without losing its Conversion into cash without losing its value.value.

• TimingTiming

• Loss of valueLoss of value

• Example: BondsExample: Bonds


Equity & Long Term LiabilitiesEquity & Long Term Liabilities

• EquityEquity– Paid up CapitalPaid up Capital– ReservesReserves– Profit & Loss Profit & Loss

• Long Term LiabilitiesLong Term Liabilities– Loans OR Financial LeverageLoans OR Financial Leverage

BALANCE SHEET AS AT 30 JUNE 2003

NOTES 2003 2002RUPEES RUPEES

OPERATING ASSETS Fixed assets (at cost less accumulated depreciation) 3 125,138,737 109,101,363

DEFERRED COST 4 12,653,681 18,514,377LONG TERM DEPOSITS (against Lease) 2,930,337 827,737

140,722,755 128,443,477CURRENT ASSETS

Stores & spares 7,347,476 11,215,891Stocks -do- 5 22,628,137 19,231,731Trade debtors 6 2,149,858 3,211,998Advances, deposits, prepayments and

other receiveables 7 26,089,950 17,450,008Cash and bank balances 8 107,524 110,421

58,322,945 51,220,049CURRENT LIABILITIES

Current maturity portion of lease liability 9 (6,794,240) (2,821,322) Current maturity portion of Long Term Loans (8,004,000) - Short term borrowings 10 (6,760,139) (19,270,244) Creditors, accruals and other liabilities 11 (30,831,550) (44,786,359)

TOTAL ASSETS LESS CURRENT LIABILITIES 146,655,771 112,785,601

LONG TERM LIABILITIES Deferred Income (1,692,510) -Due to directors and relatives (37,056,700) (21,693,585) Provident fund trust and gratuity payable 12 (926,457) (926,457) Long term loans 13 (27,828,000) (47,500,000) Dealers&Distributors securities 14 (23,871,350) (19,398,600) Long term portion of leasehold assets (12,710,887) (1,936,847)

(104,085,904) (91,455,489)

TOTAL NET ASSETS 42,569,867 21,330,112

REPRESENTED BY : Share capital (5,980,000) 15 59,800,000 39,800,000 Profit & (loss) account (27,457,311) (29,697,066) Surplus on revaluation of fixed assets 8,227,178 8,227,178 Share deposit money 2,000,000 3,000,000

42,569,867 21,330,112

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Lec 01.ppt_2