1. Corporate Finance & financial modelling
AFIN Miss faith moono simwami

2. objectives
understanding of the nature and role of financial management.
understanding of the general financial environment and the operation of financial systems
To develop the student’s ability to apply the tools of financial analysis and interpret results.
To develop a working knowledge and understanding of the theoretical framework and analytical techniques involved in:
investment and financing decisions
working capital management
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3. Assessment Criteria 2/9/2015 Assignment 10% Class test 10%
Mid-Term Exam 20%
Final Exam 60%
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4. syllabus 2/9/2015 6. STOCK VALUATION 7. COST OF CAPITAL
AN OVERVIEW OF CORPORATE FINANCE AND FINANCIAL MODELLING
FINANCIAL ENVIRONMENT
SOURCES OF FINANCE
THE TIME VALUE OF MONEY
BOND VALUATION
6. STOCK VALUATION
7. COST OF CAPITAL
8. CAPITAL BUDGETTING
9. RISK AND RETURN
10. DIVIDEND POLICY
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5. Why are you taking corporate finance?
Prepare for the workplace of tomorrow.
Broadening expectations of financial knowledge and skills.
Use and understand financial terminology and concepts in team communication.
Developing cross-functional capabilities.
Critical thinking.
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6. “IF YOU DON’T KNOW WHERE YOU ARE GOING, IT DOESN’T MATTER HOW YOU GET THERE”
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7. Chapter 1 will teach you to explain the following:
What is Corporate Finance
The Goal of the Firm
Corporate Governance
Organization of the Financial Management Function
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8. What is Corporate Finance?
generally defined as the activities involved in managing cash flows (money) in a business environment
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9. The 5 Basic Corporate Finance Functions
Financial Management
Risk Management
Financing (Raising Capital)
Corporate Governance
Capital Budgeting
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10. 2/9/2015 Financial Management Risk Management
Managing firms ’exposures to all types of risk, both insurable and uninsurable,
in order to maintain optimum risk return trade-off s and thereby maximize
shareholder value.
Financial Management
Managing firms’ internal cash flows and its mix of debt and equity financing, both to maximize the value of the debt and equity claims on firms’ and to ensure that companies can pay off their obligations when they come due.
Financing(Raising Capital)
Raising capital to support companies’ operations and investment programs.
Capital Budgeting
Selecting the best projects in which to invest the resources of the firm, based on
each project’s perceived risk and expected return.
Corporate Governance
Developing ownership and corporate governance structures for companies
that ensure that managers behave ethically and make decisions that
benefit shareholders.
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11. The three decisions in Financial Management
Investment Decisions
Financing Decisions
Dividend Decisions
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12. Most important of the three decisions
Investment Decisions
Most important of the three decisions
What is the optimal firm size?
What specific assets should be acquired?
What assets (if any) should be reduced or eliminated?
These are decisions that have to do with the firm deciding on what investments it wishes to make. It also includes determining what assets to invest in. The decision making process involves selecting viable projects by applying investment appraisal techniques depending on the nature of business the firm is involved in
(E.g. Mining, retail, manufacturing or tourism.
The Hurdle Rate – reflects the riskiness of the investment and the mix od debt and equity used to fund it.
The Return – reflects the magnitude and timing of the cashflows as well as all side effects
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13. Financing Decisions 2/9/2015 What is the best type of financing?
What is the best financing mix?
What is the best dividend policy (e.g., dividend-payout ratio)?
How will the funds be physically acquired?
These are decisions regarding, how the investment(s) selected will be financed. Firms have three options regarding where they source finances. They can source them internally by using retained earnings, borrowing from the debt capital market or issuing stocks (ordinary shares).
The decision to use a specific source of finance is determined by the period of investment (long-term of short-term),use of funds for either capital investment or working capital requirements and desired capital structure for a given firm. That is, the balance between equity and debt used in financing the assets of the firm.
The Optimal mix of debt and equity maximizes firm value
The Right Kind of debt matches the tenor of your assets
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14. Dividend Decisions
These decisions involve determining a dividend policy for the firm which describes how the returns from the investment are distributed to shareholders as dividends. The policy describes when and how much of the profits are distributed as dividends including the mode of payment.
As the finance manager performs these functions the overriding goal is to ensure that the firm’s value is maximized.
How much cash you can return depends upon current & potential investment opportunities
How you chose to return cash to the owners will depend whether they prefer dividends or buybacks
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15. What is the Goal of the Firm?
Possible goals:
Avoid bankruptcy and financial distress
Minimize costs
Maximize sales
Maximize profits
The best goal of a publicly traded firm:
Maximize share price (Maximization of Shareholder Wealth)
Value creation occurs when we maximize the share price for current shareholders.
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16. Why traditional Corporate Financial Theory focuses on maximizing stockholder wealth
Stock prices are easily observable and constantly updated (unlike other performance measures)
Stock prices reflect the wisdom of decisions, short and long term and instantaneously
The objective of stock price performance provides theory on:
Allocation of resources across scarce uses
How to finance these investments
How much to pay in dividends
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17. Strengths of Shareholder Wealth Maximization
Takes account of:
Current and future profits
The timing, duration, and risk of profits
Dividend policy and
All other relevant factors.
Share price serves as a barometer for business performance.
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18. Shortcomings of Profit Maximization ( Maximizing earnings after taxes )
Problems
Could increase current profits while harming firm (e.g., defer maintenance)
Ignores changes in the risk level of the firm(Ignores risk)
Does not fully consider cash flow timing
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19. The Modern Corporation
Shareholders
Management
There exists a SEPARATION between owners and managers.
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20. Management acts as an agent for the owners (shareholders) of the firm.
Role of Management
Management acts as an agent for the owners (shareholders) of the firm.
An agent is an individual authorized by another person, called the principal, to act in the latter’s behalf.
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21. The Agency Problem
This is defined as a potential conflict of interest between the principals (shareholders) and the agents (managers).This is created when managers act in contrast to the expectations of the shareholders regarding the objective of wealth maximization. It is necessary for shareholders to put in place incentives to ensure that managers maximize shareholder wealth.
One agency problem is that managers can use corporate funds for non-value maximizing purposes.
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22. Managerial Incentives to maximize shareholder wealth
To ensure that managers act in line with shareholder expectation agency costs are incurred by firms. These costs take several forms:
Expenditure to monitor managerial actions. E.G external audits
Expenditure to structure the organization so that the possibility of undesirable managerial behavior will be limited.
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23. Mechanism applied to force managers to act in the shareholders best interest include
The threat of being fired.
The threat of take over which takes the form a hostile takeover. When a new firm takeover another company managers are usually replaced by these appointed by the new board. Management would want to avoid a takeover for fear of losing their jobs to competition.
Structured managerial incentives, which include executive share options, where executive, are given an opportunity to buy share in the future at some discounted price and performance shares awarded on the basis of performance using some criteria.
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24. Corporate Social Responsibility
Wealth maximization does not preclude the firm from being socially responsible at the corporate level.
Assume we view the firm as producing both private and social goods.
Then shareholder wealth maximization remains the appropriate goal in governing the firm.
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25. Corporate Governance
Corporate governance: represents the system by which corporations are managed and controlled.
Includes shareholders, board of directors, and senior management.
Then shareholder wealth maximization remains the appropriate goal in governing the firm.
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26. Board of Directors 2/9/2015 Typical responsibilities:
Set company-wide policy;
Advise the CEO (chief executive officer) and other senior executives;
Hire, fire, and set the compensation of the CEO;
Review and approve strategy, significant investments, and acquisitions; and
Oversee operating plans, capital budgets, and financial reports to common shareholders.
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27. 2/9/2015

28. Forms of Business Organizations
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29. THE THREE BASIC FORMS OF BUSINESS ORGANIZATION
Sole Proprietorships
Partnerships (general and limited)
Corporations
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30. The Business Environment
Sole Proprietorship – A business form for which there is one owner. This single owner has unlimited liability for all debts of the firm.
Oldest form of business organization.
Business income is accounted for on your personal income tax form.
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31. Sole Proprietorship Advantages Disadvantages 2/9/2015 Easiest to start
Least regulated
Single owner keeps all the profits
Single tax filing on individual form
Disadvantages
Unlimited liability
Hard to raise additional capital
Transfer of ownership difficulties
Limited to life of owner
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32. partnership
Partnership – A business form in which two or more individuals act as owners.
Business income is accounted for on each partner’s personal income tax form.
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33. Types of Partnerships
General Partnership – all partners have unlimited liability and are liable for all obligations of the partnership.
Limited partnership – limited partners have liability limited to their capital contribution (investors only). At least one general partner is required and all general partners have unlimited liability.
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34. Partnership 2/9/2015 Advantages Disadvantages Can be simple
Low setup cost, higher than sole proprietorship
Relatively quick setup
Limited liability for limited partners
Disadvantages
Unlimited liability for the general partner
Difficult to raise additional capital, but easier than sole proprietorship
Transfer of ownership difficulties
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35. Corporation
Corporation – A business form legally separate from its owners.
An artificial entity that can own assets and incur liabilities.
Business income is accounted for on the income tax form of the corporation.
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36. Corporation Disadvantages Advantages 2/9/2015 Double taxation
Limited liability
Easy transfer of ownership
Unlimited life
Easier to raise large quantities of capital
Disadvantages
Double taxation
More difficult to establish
More expensive to set up and maintain
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37. 2/9/2015

38. Take Away 2/9/2015 Research the requirements needed to list a company.
Chose a company you would like to base your assignment on. me:
Name
Company chosen – must be listed on a market
First come, first serve.
Everyone has to chose a different company
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