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Introduction to
Corporate Finance
Kashfia Sharmeen
Corporate Finance

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What is Corporate Finance?

Corporate Finance is an area of finance
dealing with the financial decisions
corporations make and the tools and
analysis used to make those decisions.

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The Balance-Sheet Mode of the Firm

Total Value of Assets:
Current Assets

Fixed Assets
1 Tangible
2 Intangible

Total Firm Value to Investors:

Current
Liabilities
3 important

question for a
firm that
directly related
to this balancesheet model:

Long-Term
Debt

Shareholders
Equity

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The Balance-Sheet Mode of the Firm

The Capital Budgeting and Capital Expenditure Decision
Current
Liabilities

Current Assets

Long-Term
Debt
Fixed Assets
1 Tangible
2 Intangible

(1) What longterm investments

should the firm
engage in?

Shareholders
Equity

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The Balance-Sheet Mode of the Firm

The Firms Capital Structure Decision

Current Assets

Fixed Assets
1 Tangible
2 Intangible

Current
Liabilities

(2)How can
the firm raise
cash for
required
capital
expenditure?

Long-Term
Debt

Shareholders
Equity

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The Balance-Sheet Mode of the Firm

The Net Working Capital Investment Decision

Current Assets

Fixed Assets
1 Tangible
2 Intangible

Current
Liabilities
Net
Working
Capital

(3)How much
short-term cash
flow does a
company need to
pay its bills?

Long-Term
Debt

Shareholders
Equity

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Capital Structure
The value of the firm can be thought
of as a pie.
The goal of the manager is to
increase the size of the pie.

70% 30%
Debt Equity

The Capital Structure

decision can be viewed as how
best to slice up a the pie.
If how you slice the pie affects the
size of the pie, then the capital
structure decision matters.

Value of the firm (V)=

Value of the Debt +
Value of the Equity

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Hypothetical Organization Chart

Board of Directors
Chairman of the Board and
Chief Executive Officer (CEO)
President and Chief
Operating Officer (COO)
Vice President and
Chief Financial Officer (CFO)

Controller

Treasurer

Cash Manager

Credit Manager

Tax Manager

Cost Accounting

Capital Expenditures

Financial Planning

Financial Accounting

Data Processing

Cash flow between the Firm and

the Financial Markets
Firm
Invests
in assets
(B)

Firm issues securities to raise cash (A)

Financial
markets

Retained cash
flows to reinvest (F)

Short-term debt

Current assets Cash (generate) Dividends and

Fixed assets flow from firm (C) debt payments (E)

Ultimately, the firm

must be a cash
generating activity.

Taxes (D)

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Government

Long-term debt
Equity shares

The cash flows from the

firm must exceed the
cash flows from the
financial markets.

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The Corporate Firm

The corporate form of business is the
standard method for solving the problems
encountered in raising large amounts of
cash.
However, businesses
can take other
forms.

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Forms of Business Organization

The Sole Proprietorship
The Partnership
General Partnership
Limited Partnership

The Corporation
Advantages and Disadvantages

Liquidity and Marketability of Ownership

Control
Liability
Continuity of Existence
Tax Considerations

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A Comparison of Partnership
and Corporations
Corporation

Partnership

Liquidity

Shares can easily be

exchanged.

Subject to substantial
restrictions.

Voting Rights

Usually each share gets

one vote

General Partner is in
charge; limited partners
may have some rights.

Taxation

Double

Partners pay taxes on

distributions.

Reinvestment and
dividend payout

Broad latitude

All net cash flow is

distributed to partners.

Liability

Limited liability

Continuity

Perpetual life

General partners may

have unlimited liability.
Limited partners enjoy
limited liability.
Limited life

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Goals of the Corporate Firm

The traditional answer is that the managers of the
corporation are obliged to make efforts to maximize
shareholder wealth.
Other possible goals of management are as follows
Survival of the firm
Avoid financial distress and bankruptcy
Maximize sales or market share
Minimize costs
Maximize Profits
Maintain steady growth of earnings
Maintain steady growth or expansion of the firm

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The Set-of-Contracts Perspective

The firm can be viewed as a set of contracts.
One of these contracts is between shareholders
and managers.
The managers will usually act in the shareholders
interests.
- The shareholders can devise contracts
that align the incentives of the managers
with the goals of the shareholders.
- The shareholders can monitor the
behavior.
managers
This contracting and monitoring is costly.

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The Agency Problem

The agency relationship

In an agency relationship the members of the
management team are the agents.
The equity investors (shareholders) are the
principals.
Will managers work in the shareholders best
interests?
Agency costs
The monitoring costs of the shareholders
The costs of implementing control devices.

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Managerial Goals
Managerial goals may be different from
shareholder goals
Survival
Independence and self-sufficiency

These two basic financial objectives of

managers will lead to the maximization
of corporate wealth. Increased in
corporate growth and size are not
necessarily the same thing as
increased shareholder wealth.

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Financial Markets
Primary Market
New issues: here, corporations initially sell
their securities. Example-IPO.
Usually an underwriter is involved (syndicate
of investment banking firms)

Secondary Markets
After debt and equity securities are initially
sold, they are traded in the secondary market.

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Financial Markets

Firms

Stocks and
Bonds
Money

Investors
John

securities

Tom

money
Primary Market
Secondary
Market

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Money Market vs. Capital

Market

Money Market:
The financial markets in which funds are
borrowed or loaned for short periods
(generally one year or less).
Capital Market:
The financial markets for stocks and longterm debt (generally longer than one
year).

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Auction Market vs. Dealer

Market
The equity securities of most large
corporations are traded in organized auction
markets. Example: New York Stock
Exchange (NYSE), Dhaka Stock Exchange
(DSE), Chittagong Stock Exchange (CSE),
etc.
Most debt securities are traded on dealer
markets. Some stocks are also traded in
dealer markets. When they are, it is referred
to as over-the-counter (OTC) market.

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Listings
Firms that want their equity shares to be
traded on the national stock exchange
must apply for listings. To be listed in the
national stock exchanges a company is
expected to satisfy minimum
requirements.

More financial stuff

1 USD

Taka

1 GBP

Taka

1 EUR

Taka

1 JPY

Taka

The answers
1 USD

1 GBP

= 114.0919 Taka

1 EUR

85.2039Taka

1 JPY
*Date: 13

0.6669 Taka

th

78.50

Taka

January, 2016

Source: https://www.bb.org.bd/econdata/exchangerate.php

WIFE AND
KIDS?

NO, A PHOTO OF A
SET OF BEAUTIFULLY
PREPARED ACCOUNTS

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End of the Chapter