“ من طلب العلا سهر الليالي” INSTRUCTOR: SIHEMSMIDA Second term1436 Principles of corporate finance 211FIN

1- 2 Contents of course  Module1: Introduction to corporate finance  Module2: Time value of money, present value and opportunity cost  Module3: Making investment decisions Module4: Financial analysis  Module5: Financial planning  Module6: Funding sources

Chapter 1 principles of corporate finance principles of corporate finance Introduction to Corporate Finance Lecturer Sihem Smida Sihem Smida

1- 4 Chapter Objectives  Understand the basic idea of corporate finance.  Discuss the three main decisions facing financial managers.  Understand the importance of cash flows in financial decision making.  Know the financial implications of the three forms of business organization.  Outline the various types of financial markets.

1- 5 What is Corporate Finance  Corporate finance is the area of finance dealing with monetary decisions that business enterprises make and the analysis used to make these decisions.  The primary goal of corporate finance is to maximize shareholder value (wealth).

1- 6 Important decisions in Finance  Corporate finance attempts to find the answers to the following questions: –What investments should the business take on? THE INVESTMENT DECISION –How can finance be obtained to pay for the required investments? THE FINANCE DECISION –Should dividends be paid? If so, how much? THE DIVIDEND DECISION

1- 7 The Financial Manager  Financial managers try to answer some or all of these questions.  The top financial manager within a firm is usually the General Manager–Finance. – Financial Manager: oversees (supervises) cash management, credit management, capital expenditures and financial planning. –Accountant: oversees taxes, cost accounting and financial accounting.

1- 8 Role of The Financial Manager Financial manager Firm's operations Financial markets (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)

1- 9 The Investment Decision  Corporate management seeks to maximize the value of the firm by investing in projects which yield a positive net present value (profit) when valued using an appropriate discount rate in consideration of risk.

1- 10 The Investment Decision  Capital investment decisions are long-term and short-term corporate decisions Short term decisions deal with the short-term balance of current assets and current liabilitiescurrent assetscurrent liabilities Long-term corporate finance decisions relating to fixed assets and capital structure. fixed assetscapital structure

1- 11 Capital structure

1- 12 Capital budgeting  Management must allocate limited resources between competing opportunities (projects) in a process known as capital budgeting.capital budgeting  Capital budgeting is the process of determining which real investment projects should be accepted and given an allocation of funds from the firm.

1- 13 Finance decision  A firm’s capital structure is the specific mix of debt and equity used to finance the firm’s operations.  Decisions need to be made on both the financing mix and how to raise the money.

1- 14 Sources of financing  Achieving the goals of corporate finance requires that any corporate investment be financed appropriately.  The sources of financing are, generically, capital self-generated by the firm and capital from external funders, obtained by issuing new debt and equity (example: loans and bonds) capital self-generated by the firmdebtequity

1- 15  ‘Organic growth’ – growth generated through the development and expansion of the business itself. Can be achieved through:  Generating increasing sales – increasing revenue to impact on overall profit levels  Use of retained profit – used to reinvest in the business  Sale of assets – can be a double edged sword – reduces capacity? Internal Sources of Finance and Growth

1- 16 External Sources of Finance  Long Term – may be paid back after many years or not at all!  Short Term – used to cover fluctuations in cash flow  ‘Inorganic Growth’ – growth generated by acquisition The existence of capital markets enable firms to raise long term loans and share capital. Copyright: Photolibrary Group

1- 17 Long Term  Shares (Shareholders are part owners of a company) –Ordinary Shares (Equities): Ordinary shareholders have voting rights Dividend can vary Last to be paid back in event of collapse Share price varies with trade on stock exchange –Preference Shares: Paid before ordinary shareholders Fixed rate of return Cumulative preference shareholders – have right to dividend carried over to next year in event of non-payment –New Share Issues – arranged by merchant or investment banks –Rights Issue – existing shareholders given right to buy new shares at discounted rate –Bonus or Scrip Issue – change to the share structure – increases number of shares and reduces value but market capitalisation stays the same

1- 18 Long term  Loans (Represent creditors to the company – not owners) –Debentures – fixed rate of return, first to be paid –Bank loans and mortgages – suitable for small to medium sized firms where property or some other asset acts as security for the loan –Merchant or Investment Banks – act on behalf of clients to organise and underwrite raising finance –Government/EU – may offer loans in certain circumstances Grants

1- 19 Short Term  Bank loans – necessity of paying interest on the payment, repayment periods from 1 year upwards but generally no longer than 5 or 10 years at most  Overdraft facilities – the right to be able to withdraw funds you do not currently have –Provides flexibility for a firm –Interest only paid on the amount overdrawn –Overdraft limit – the maximum amount allowed to be drawn - the firm does not have to use all of this limit  Trade credit – Careful management of trade credit can help ease cash flow – usually between 28 and 90 days to pay  Factoring – the sale of debt to a specialist firm who secures payment and charges a commission for the service.  Leasing – provides the opportunity to secure the use of capital without ownership – effectively a hire agreement