Corporate finance is the area of finance dealing with the sources of

funding and the capital structure of corporations and the actions that
managers take to increase the value of the firm to the shareholders, as
well as the tools and analysis used to allocate financial resources.
The most important job of a financial manager is to create value from the
firms capital budgeting, financing and working capital activities
Creating value by:
1. Try to buy asset that generate more cash than they cost
2. Sell bonds and stocks and other financial instruments that raise
more cash than they cost
Corporate Firms - Firms are typically associated with business
organization.The firm is a way of organizing the economic activity of
many individual.Problem of the firm is how to raise cash.The corporate
form of business-that is organizing the firm as corporation-is the standard
method solving problems encountered in raising larger amount of cash.
Sole Proprietor.Sole proprietorships are the easiest and least expensive
type of business to start. The owner is in complete control of the business
and also keeps all the income. However, sole proprietors are legally
responsible for business obligations and the owner's personal assets are
at risk if the business fails.
PartnershipForming a partnership is relatively simple and inexpensive,
with most of the paperwork devoted to the partnership agreement.
Partners share their talents and pool their finances for seed money.
However, risk of personal assets is the same as for the sole
proprietorship.
Corporations.A corporation is a business structure that is granted a
charter making it a unique legal entity. Many choose incorporation
because business liabilities are limited to the assets of the corporation
and do not extend to the personal assets of the owners. The difference
between a C Corporation and an S Corporation is that a C Corporation
pays taxes on its profits and then the owners (shareholders) also pay
taxes on their share of the profits, while only shareholders pay taxes in an
S Corporation.
The Goal of the Financial Management

To make money or add value for the owners

To maximize the current value per share of the existing stock

In an Islamic Capital Market (ICM), market transactions are carried out in
ways that do not conflict with the conscience of Muslim and the religion of
Islam.
It is free from activities prohibited by Islam such as usury (riba) gambling
(mysir) and ambiguity (gharar).
Securities are financing or investment bought and sold in financial
market. Some are negotiable, others not. Examples: Bonds, debentures,
notes, options, shares (stocks) and warrants.
Individual securities are bonds or stocks issued by one company or
government entity.
Individual securities represent ownership interest in publicly traded
companies and are often referred to as common stock. The securities may
be traded from numerous exchanges including Kuala Lumpur Stock
Exchange, New York Stock Exchange, American Stock Exchange, NASDAQ
as well as a host of others.
Advantage of Individual Securities
No recurring fees - Unlike most mutual funds, once youve incurred the
brokerage fee, there are no recurring fees or costs for individual stocks.
Greater potential of gain - Individual stocks also typically have a
greater potential for gains since they often have higher risk.
Company monitoring - Individual securities allow investors to get to
know the companies that they have invested in, allowing a more handson approach and closer monitoring of investments and performance
Rate of return
A rate of return is measure of profit as a percentage of investment
The gain or loss on an investment over a specified period, expressed as a
percentage increase over the initial investment cost. Gains on
investments are considered to be any income received from the security
plus realized capital gains.
A rate of return measurement can be used to measure virtually any
investment vehicle, from real estate to bonds and stocks to fine art,
provided the asset is purchased at one point in time and then produces
cash flow at some time in the future.
Financial securities are commonly judged based on their past rates of
return, which can be compared against assets of the same type to
determine which investments are the most attractive.

e.g: Let's say John Doe opens a lemonade stand. He invests RM500 in the
venture, and the lemonade stand makes about $10 a day, or about
RM3,000 a year (he takes some days off).
In its simplest form, John Doe's rate of return in one year is simply the
profits as a percentage of the investment, or RM3,000/RM500 = 600%.
Expected Return (R) Return that an individual expects a stock to earn
over the next period
Variance (2) and Standard Deviation () Variance is a measure of
the square deviations of a securitys return from its expected return.
Standard deviation is the square root of the variance
Covariance and Correlation Covariance is a statistic measuring the
interrelationship between the two securities. Covariance and Correlation
is the building blocks to an understanding of the beta coefficient
Portfolio investment
Investment in securities that is intended for financial gain only and does
not create a lasting interest or effective management control over an
enterprise
It is an investment in an assortment or range of securities, or other types
of investment vehicles, to spread the risk of possible loss due to below
expectation performance of one or a few of them.

Can span a wide range of asset classes stocks, government bonds,

corporate bonds, Treasury bills, real estate investment trusts, mutual
funds, exchange traded funds, certificates of deposit and so on

Composition of portfolio depend on number of factors such as:

1)Investors risk tolerance 2)Investment horizon 3)Amount of
investment
The Return and the risk of portfolio
+ Obviously, investor would like a portfolio with a high expected return
and a low standard deviation of return.
+ It is therefore worthwhile to consider:

The relationship between the expected return on individual securities

(R) and the expected return on a portfolio () made up of these
securities

The relationship between the standard deviation on individual

securities, the correlation between these securities, and the standard
deviation on a portfolio made up of these securities
Relationship between Risk and Expected Return (CAPM)

Expected rate of return can be measured using the capital asset

pricing model (CAPM).

It is the sum of risk-free rate plus a risk premium

The risk premium is the different between the expected return for the
market and the risk-free rate
Required Rate of return = Risk-free rate + Beta(Risk Premium)
Systematic risk

Systematic risk is also known as non diversifiable risk or market risk.

It is attributable to market factors that affect all firms.

Result from forces outside the firms control and is therefore not
unique to given security

It is defined as variability of return on stocks or portfolios associated

with changes in return on the market as a whole.

Example, news that is specific to a small number of stocks, such as a

sudden strike by the employees of a company you have shares in, is
considered to be unsystematic risk.
Unsystematic risk

Unsystematic risk, also known as "specific risk," "diversifiable risk" or

"residual risk,".

It is defined as the variability of return on stocks that is not the result

or general market movements.

It is specific to a particular firm or industry and they do not affect

other firms or industry and they do not affect other firms or industries
in the economy.

Unsystematic risk can be reduced through diversification.

For example, news that is specific to a small number of stocks, such

as a sudden strike by the employees of a company you have shares
in, is considered to be unsystematic risk.
The efficient frontier represents that set of portfolios with the
maximum rate of return for every given level of risk, or the minimum risk
for every level of return
Frontier will be portfolios of investments rather than individual securities
Exceptions being the asset with the highest return and the asset with the
lowest risk
Markowitz Portfolio Theory

Quantifies risk, Derives the expected rate of return for a portfolio of

assets and an expected risk measure, Shows that the variance of the rate
of return is a meaningful measure of portfolio risk ,Derives the formula for
computing the variance of a portfolio, showing how to effectively diversify
a portfolio
Assumptions of Markowitz Portfolio Theory
1. Investors consider each investment alternative as being presented by a
probability distribution of expected returns over some holding period.
2. Investors minimize one-period expected utility, and their utility curves
demonstrate diminishing marginal utility of wealth.
3. Investors estimate the risk of the portfolio on the basis of the variability
of expected returns.
4. For a given risk level, investors prefer higher returns to lower returns.
Similarly, for a given level of expected returns, investors prefer less risk to
more risk.
Financial Market
A financial market is a broad term describing any marketplace where
buyers and sellers participate in the trade of assets such as equities,
bonds, currencies and derivatives.
Financial markets are typically defined by having transparent pricing,
basic regulations on trading, costs and fees, and market forces
determining the prices of securities that trade.
Financial markets can be found in nearly every nation in the world. Some
are very small, with only a few participants, while others - like the New
York Stock Exchange (NYSE) and the forex markets - trade trillions of
dollars daily.
Financial markets are essentially markets for borrowing and lending
Markets where: Firms deal with other firms, Very large quantities of
money are at stake, Borrowing and lending are not intermediated
Two types of Financial Market, Money market and Capital market
Money market
Money market are the markets for shorter-term finance, typically of a
year or less.
The money market is a segment of the financial market in which financial
instruments with high liquidity and very short maturities are traded. The
money market is used by participants as a means for borrowing and
lending in the short term, from several days to just under a year.
Money market securities consist of negotiable certificates of deposits
(CDs), banker's acceptances, U.S. Treasury bills, commercial paper,
municipal notes, eurodollars, federal funds and repurchase agreements
(repos). Money market investments are also called cash investments
because of their short maturities.
Capital markets
Capital markets are markets for longer-term finance, typically longer
than a year
A capital market is one in which individuals and institutions trade financial
securities. Organizations and institutions in the public and private sectors
also often sell securities on the capital markets in order to raise funds.
Any government or corporation requires capital (funds) to finance its
operations and to engage in its own long-term investments. To do this, a
company raises money through the sale of securities - stocks and bonds
in the company's name. These are bought and sold in the capital markets.
Bond Markets- A bond is a debt investment in which an investor loans
money to an entity (corporate or governmental), which borrows the funds
for a defined period of time at a fixed interest rate. Bonds are used by
companies, municipalities, states and U.S. and foreign governments to
finance a variety of projects and activities. Bonds can be bought and sold
by investors on credit markets around the world. This market is
alternatively referred to as the debt, credit or fixed-income market. The
main categories of bonds are corporate bonds, municipal bonds, Treasury
bonds, notes and bills, which are collectively referred to as simply
"Treasuries."
Cash or Spot Market- Investing in the cash or "spot" market is highly
sophisticated, with opportunities for both big losses and big gains. In the

cash market, goods are sold for cash and are delivered immediately. By
the same token, contracts bought and sold on the spot market are
immediately effective. Prices are settled in cash "on the spot" at current
market prices. This is notably different from other markets, in which
trades are determined at forward prices.
Derivatives Markets- A derivative is a contract, but in this case the
contract price is determined by the market price of the core asset. If that
sounds complicated, it's because it is. The derivatives market adds yet
another layer of complexity and is therefore not ideal for inexperienced
traders looking to speculate. However, it can be used quite effectively as
part of a risk management program. Examples of common derivatives are
forwards, futures, options, swaps and contracts-for-difference (CFDs). Not
only are these instruments complex but so too are the strategies
deployed by this market's participants. There are also many derivatives,
structured products and collateralized obligations available, mainly in the
over-the-counter (non-exchange) market, that professional investors,
institutions and hedge fund managers use to varying degrees but that
play an insignificant role in private investing.
Forex and the Interbank Market - The interbank market is the
financial system and trading of currencies among banks and financial
institutions, excluding retail investors and smaller trading parties. While
some interbank trading is performed by banks on behalf of large
customers, most interbank trading takes place from the banks' own
accounts.
A share price is the price of a single share of a number of saleable
stocks of a company, derivative or other financial asset. Share prices
change because of supply and demand. If more people want to buy a
stock (demand) than sell it (supply), then the price moves up. Conversely,
if more people wanted to sell a stock than buy it, there would be greater
supply than demand, and the price would fall.
A bond is a debt instrument: it pays periodic interest payments based on
the stated (coupon) rate and return the principal at the maturity. The
price of bonds in the secondary market depends on all of the following:
Rating,Interest rates, Term, Coupon rate, Type of bond, Issuer, Supply &
demand, Other features i.e. Callable, convertible
Par Value Par value of a bond is equal to the amount that the investor
has loaned to the issuer. The terms par value, face value and principal
amount are synonymous and are always equal to $1,000. The principal
amount is the amount that will be received by the investor at maturity,
regardless of the price the investor paid for the bond. An investor who
purchases a bond in the secondary market for $1,000 is said to have paid
par for the bond.
Discount In the secondary market, many different factors affect the price
of the bond. It is not at all unusual for an investor to purchase a bond at a
price that is below the bonds par value. Anytime an investor buys a bond
at a price that is below the par value, they are said to be buying the bond
at a discount.
Premium Often market conditions will cause the price of existing bonds
to rise and make it attractive for the investors to purchase a bond at a
price that is greater than its par value. Anytime an investor buys a bond
at a price that exceeds its par value, the investor is said to have paid a
premium.
Efficient Market
In efficient markets, prices become not predictable but random, so no
investment pattern can be discerned. A planned approach to investment,
therefore, cannot be successful.
This "random walk" of prices, commonly spoken about in the EMH school
of thought, results in the failure of any investment strategy that aims to
beat the market consistently.
In fact, the EMH suggests that given the transaction costs involved in
portfolio management, it would be more profitable for an investor to put
his or her money into an index fund.