1. An overview of Corporate Finance by Binam Ghimire

2. Learning Objectives Concept, Scope and Significance
Key Decisions in Corporate Finance
Agency problem
Appreciate Business Ethics and social Responsibilities

3. Finance: What is it? Finance as a resource Finance as a discipline
Monetary means of financing assets of an entity
Collection and allocation of resources

4. Specialised areas of finance
Personal

5. Specialised areas of finance
Public

6. Specialised areas of finance
Securities and investment
Source: London Evening Standard, 18 May 2011

7. Specialised areas of finance
Institutional
Source: The Telegraph, 29th July 2011

8. Specialised areas of finance
International Finance
Table from Bringham and Huston (2002, p. 7)
£, $, €, ¥, %

9. Corporate Finance ?

10. The Corporate Firm ? ? ?

11. Sole Proprietorship Business is owned and run by one person
Typically have few, if any, employees
Advantages: Easy to create
Disadvantages: Unlimited personal liability, No separation between the firm and the owner, Limited life, Difficult to transfer ownership

12. Partnership
Similar to a sole proprietorship, but with more than one owner
Income is taxed at the personal level
All partners have unlimited personal liability
The partnership ends with the death or withdrawal of any single partner
General and limited partner

13. The Corporation
AKA: JSC, PLC, LLC, Corporation,

14. The Corporation A legal entity separate from its owners
Has many of the legal powers individuals have such as the ability to enter into contracts, own assets, and borrow money …

15. Source: www.bizstats.com

16. The Corporation
Several advantages: Limited liability, ease of ownership transfer and unlimited life. These give the corporation an enhanced ability to raise cash, However
Starting is more complicated than others: Articles of associations and a set of bylaws, and one great disadvantage is
_ _ _ _ _ e _ _ x_ _ _ _ n

17. Liquidity/ sale of share Dividend
Corporation
Partnership
Liability
Perpetuity
Taxation
Voting Rights
Liquidity/ sale of share
Dividend

18. Liquidity/ sale of share Dividend
Corporation
Partnership
Liability No
Limited: no
General: yes
Perpetuity
Yes
Taxation
Double: corporate income and dividends to shareholders
Partnerships is not taxed, partners are on their partnership profit
Voting Rights
One vote per share, vote to elect director
Some by limited partners, general are active in managing and operating
Liquidity/ sale of share
Yes – common stock can be listed in exchange and traded
There is usually no established trading market
Dividend
Not bound legally
Generally no retention i.e. distribute all

19. Corporate Finance: Concept
Corporate finance: Finance for the corporate or beyond?
limited to management of funds?
Sell - Cash - Value

20. Corporate Finance: concept
Corporate Finance deals with:
Determining value of a Corporate Entity
Adding Value to a Corporate Entity
The Value of X is what X is worth now at time t.
Making the best decision when that decision involves a consideration or an opportunity cost and the cost of consideration may be higher or lower given time t
This is part of strategy

21. Corporate Finance: the concept
Strategy is how an organization
achieves her long term objectives
through re-configuration of her resources in response to a changing external business environment
to achieve competitive advantage
in order to satisfy stakeholder’s objectives

22. Corporate Finance: the concept
Corporate Finance is the:
The Reconfiguration of Resources
The study of the external changing Business Environment
Definition of what stakeholder’s Financial objectives are
Gaining of competitive advantage

23. The Three Key Corporate Finance Decisions
Investment Decisions concerned with whether to undertake capital expenditure projects or not
Financing Decisions concerned with the collection of funds from appropriate sources
Managerial Decisions concerned with dividend, working capital and other decisions at management level

24. Investment Decisions
The Investment Decisions of a Firm are taken using the various investment appraisal techniques which we will study
This techniques are tools which work well if applied properly
They have various decision criteria's and can be very effective if used by the right kind of managers
While they can cause a loss of corporate value if used wrongly

25. Investment Decisions
The process of making and managing expenditures on long-lived assets: Capital budgeting/ Investment appraisal

26. Financing Decision
The Financing Decision if informed by the Target Capital Structure desired by the firm
The cost of capital the firm has to bear
The sources of finance available to her

27. Financing Decision
The sources of finance available can be current and long term
Long term debt and equity falls in capital structure
Cost of capital explains about the cost associated with such components of debt and equity capital

28. Managerial Decisions How large should the firm grow?
How Much Dividend Should be Paid and How Much profit should be retained for growth?
How fast should this growth be?
How should the firm manage its receivables and payables? e.g. Should the firm grant credit to a customer?

29. The Role of The Financial Manager6 6 6 6 11 10

30. Organisational Chart of a Typical Corporation

31. Firm's Financial operations Investors Manager (1) (2) (3) 4 5
Real assets 6 6 6 6 11 10

32. Financial Manager’s Roles
5. Cash returned to investors
3. Cash generated by the firm’s operations
2. Cash invested in the firm’s operations
1. Cash raised by selling financial assets to investors
4. Cash reinvested

33. Goals of a firm Profit Maximisation vs. Wealth Maximisation
Accounting concept
Zero dividend
Time value of benefits
Quality of benefits
Modern business environment
Who are the shareholders?
Conflict of interest among stakeholders of a firm

34. The Three Different Views of the Firm
The Investment Vehicle Model of the Firm
The Accounting Model of the Firm
Set of Contracts Model of the Firm

35. The Investment Vehicle Model of the Firm
Investment Decisions
Financing Decisions
Investors
Financial
Intermediaries
Markets
Exchange of Money and Financial Assets
The
World
Exchange of Money and Real Assets
Three Main Areas of Finance:
Corporate Financial Management
Financial Markets and Intermediaries
Investments

36. The Accounting Model of the Firm
The Investment Decision
Current Assets
Cash
Marketable Securities
Accounts Receivable
Inventory
Total Fixed Assets
Tangible Fixed Assets
Intangible Fixed Assets
The Financing Decision
Current Liabilities
Accounts Payable
Current Debt
Long-Term Liabilities
Long-Term Bank Debt
Bonds
Shareholder’s Equity
Common Stock
Retained Earnings
Net Working Capital =CA - CL

37. Set of Contracts Model of the Firm
Bondholders
Banks
Employees
Customers
Environment
Governments
Firm
Common
Stockholders
Preferred
Stockholders
Communities
Society
Creditors
Suppliers
Managers

38. Managers and Owners The Wall Street Journal Survey of CEO Compensation

39. Agency Problem: Responsibility for the financial manager
Agency Theory
Michael C. Jensen and William H. Meckling propounded this theory in 1976
Principal and Agent
Management and Shareholders, Creditors and shareholders

40. Agency Problem: Responsibility for the financial manager
Manager owns less than 100% of the company
Agency Problem
Agency Cost (Monitoring, Structuring and opportunity costs)

41. Agency Problem Owners of Corporations cannot manage them Personally
They have to employ Directors to Manage their Businesses on their Behalf
These Directors May not carry out the management to the standard expected of them
They may do it but to their own advantage or at a higher cost
Shareholders have to pay the Directors and these is part of Agency Cost
Because of Breakdown of Trust, Shareholders have to employ Auditors to Vouch the Stewardship Report of Directors
All theses add up and the management of the Agent Principal Relationship with its attendant cost to the Principals is the Agency Cost

42. Agency Problem/cost: How to reduce?
Managerial compensation plan (e.g. performance stock)
Direct Intervention by shareholders
Threat of firing
Threat of takeover (e.g. hostile takeover, M&A)

43. Stakeholder? Stakeholders identification Models
Stakeholder Theory
A Stakeholder is someone who can affect or be affected by the operations of an organization as it seeks to meet its corporate objectives
Stakeholder? Stakeholders identification Models
Who are
these
To what Extent Should Companies take them into consideration? Stakeholders Mapping
What if what is good for one stakeholder is Bad for Another? Satisficing
What if What is good for stakeholders is viewed as unethical? Moral Frameworks and Guidelines

44. Business Ethics Ethics: The study of right and wrong “in action”
Making a business decision can involve ethical dilemmas

45. An Ethical Dilemma? Choice to be made
Implicates competing values, rights, & goals
Potential harm to decision maker?
Potential harm to others?
“Ripple effect:” long-term, far reaching implications of decision to be made.

46. How to Resolve Ethical Dilemmas in Business
Identify relevant facts
Identify relevant issue(s)
Identify primary stakeholders
Identify possible solutions
Evaluate each possible solution
Compare and assess consequences
Decide on solution
Take action

47. Additional Approaches to Ethical Decision Making
Five Question Approach (Tucker)
Moral Standards Approach (Velasquez)
Pastin’s Approach

48. Practical Approaches to Ethics
Five Question Approach (Tucker)
Evaluate each alternative on:
Profitability (shareholders)
Legality (society at large)
Fairness
Impact on the rights of stakeholders
Impact on sustainable development (environment)

49. Practical Approaches to Ethics
Tuckers Five Questions
Is it profitable?
Is it fair?
Is it legal?
Is it right?
Is it sustainable?

50. Practical Approaches to Ethics
Moral Standards Approach (Velasquez)
Is the decision:
Of net benefit to society
Fair to all stakeholders (fair distribution of benefits and burdens)
Consistent with each person’s rights

51. Practical Approaches to Ethics
Pastin’s approach (Pastin)
Ground rule ethics (organization/individual rules and values)
End-point ethics (greatest net good for all concerned)
Rule ethics (determine ethical boundaries to take into account – impingement of rights)
Social contract ethics (how to move boundaries)

52. Consider This: “You and John”
You are the manager for Tesco. You recently fired John, a sales clerk, after John punched a customer during a dispute in the store. John admitted this after the customer complained.
Lisa, manager of your competitor, Asda, calls you to tell you that John has applied for a job at Asda, and to ask you whether John is “good with customers.”
What will you reply to Lisa?

53. Legal Vs. Ethical: “You and John”
Action
Legal/Illegal
Ethical/Unethical
Tell the Truth
Lie
No Comment
Other

54. Corporate Social Responsibility
Milton Friedman's argument
There is one and only one responsibility of business: to use its resources and energy in activities designed to increase its profit so long as it stays within the rule of game and engages in open and free competition, without deception and fraud.
Source: The New York Times Magazine, September 13, 1970, The New York Times Company.

55. Corporate Social Responsibility
This is Davis and Blomstrom (1971) Iron Law of Responsibility
An iron law of responsibility which states that in the long-term those who do not use power in a manner that society considers responsible will tend to lose it.
Source: Davis, K. and Blomstrom, R. (1971) Business, Society and Environment. Social Power and Social Response, 2nd edition, New York, McGraw-Hill.
Davis, K. (1973) The case for and against Business assumptions of Social Responsibilities, The Academy of Management Journal, 16, 2,

56. Corporate Social Responsibility
Gray, Owen and Adams (1996) described society as a series of social contracts between members of society and society itself.

57. Corporate Social Responsibility
Gray, Owen and Adams (1996)
1.Pristine Capitalist, 2.Expedient, 3.Social contract, 4.Social Ecologists, 5.Socialists, 6.Radiacal Feminists, 7.Deep Ecologists

58. Corporate Social Responsibility
Different approaches
Social Obstruction
Social Obligation
Social Response
Social Contribution
Charity Principle
Stewardship Principle

59. Discussion
Sarbanes-Oxley Act (2002), USA

60. Discussion Ethics & Management Objectives
Does value maximization justify unethical behavior?
Enron example
WorldCom example
AIG example 18

61. Careers in Finance
Discuss 18

62. Thank You