2. © 2005 Pearson Education Canada Inc. BZUPAGES.COM 1-1 Overview of Corporate Finance Hashim Ali Shah 0333-4616495 www.pakmanagement.com

3. © 2005 Pearson Education Canada Inc. BZUPAGES.COM 1-2 Learning Goals LG 1 – Define finance and describe its three major areas and career opportunities. LG 2 – Review basic forms of business organization, their strengths and weaknesses. LG 3 – Describe managerial finance function and differentiate from economics and accounting.

4. © 2005 Pearson Education Canada Inc. BZUPAGES.COM 1-3 Learning Goals (continued) LG 4 – Identify key activities of financial manager within the firm. LG 5 – Explain why wealth maximization is firm’s goal.

5. © 2005 Pearson Education Canada Inc. BZUPAGES.COM 1-4 What is Finance? At the macro level, finance is the study of financial institutions and financial markets and how they operate within the financial system. At the micro level, finance is the study of financial planning, asset management, and fund raising for businesses and financial institutions. Financial management can be described in brief using the following balance sheet.

6. © 2005 Pearson Education Canada Inc. BZUPAGES.COM 1-5 What is Finance? Working Capital Working Capital Investment Decisions Financing Decisions Macro Finance

7. © 2005 Pearson Education Canada Inc. BZUPAGES.COM 1-6 Areas of Specialization in Finance Financial Markets –Markets of users and savers of funds. Financial Services –Design and delivery of financial advice and products to individuals, businesses, government. Managerial Finance –Financial management of business firms.

8. Importantn Terms 1.Financial Institutions 2.Financial Markets 3.Primary Market 4.Secondary Market 5.Money Market 6.Marketable Securities 7.Capital Market 8.Bonds © 2005 Pearson Education Canada Inc. BZUPAGES.COM 1-7

9. Financial Institutions An intermediary that channels the savings of individuals, busninesses, and governments into the loan or investment. Financial Markets: Forums inwhich suppliers of funds can transact business directly. Primary Market: Market in which securities are initially issued. Secondary Market: Market in which preowned securities are traded. © 2005 Pearson Education Canada Inc. BZUPAGES.COM 1-8

10. Money Market: A financial relationship created between suppliers and demanders of short term funds. Marketable Securities: Short term debts instruments, (such as bills, commercial papers and certificates) Capital Market: A market that enables suppliers and demanders of long term funds to make transactions. Bonds: Long term debt instrument used by business and government to raise large sums of money. © 2005 Pearson Education Canada Inc. BZUPAGES.COM 1-9

11. © 2005 Pearson Education Canada Inc. BZUPAGES.COM 1-10 Areas of Employment in Finance Financial Analyst Capital budgeting analyst/manager Project finance manager Cash manager Credit analyst/manager Pension fund manager

12. © 2005 Pearson Education Canada Inc. BZUPAGES.COM 1-11 Basic Forms of Business Organization Sole Proprietorship –Owned by one person, operated for personal profit. Partnerships –Owned by two or more people, operated for joint profit. Corporations –“Legal entity”, owned by individuals, operated for joint profit.

13. © 2005 Pearson Education Canada Inc. BZUPAGES.COM 1-12 Sole Proprietorship STRENGTHS: Low organizational cost Income taxed once as personal income Independence Secrecy Ease of dissolution WEAKNESSES: Unlimited liability Limited funding Proprietor must be all Difficult to develop staff career opportunities Lack of continuity on death of proprietor

14. © 2005 Pearson Education Canada Inc. BZUPAGES.COM 1-13 Partnerships STRENGTHS: Improved funding sources Increased managerial talent Income split by partnership contract, taxed as personal income WEAKNESSES: Unlimited liability to all partners Partnership dissolved upon death of partner Difficult to liquidate or transfer ownership

15. © 2005 Pearson Education Canada Inc. BZUPAGES.COM 1-14 Corporations STRENGTHS: Owners’ liability limited Large capitalization possible, greater funding Ownership readily transferable Indefinite life Professional management WEAKNESSES: Higher tax rates Expensive organization Greater government regulation When publicly traded, lacks secrecy

16. © 2005 Pearson Education Canada Inc. BZUPAGES.COM 1-15 Corporate Organization Chart

17. © 2005 Pearson Education Canada Inc. BZUPAGES.COM 1-16 Organization of Finance Functions CFO – Chief Financial Officer Treasurer responsibilities: –Financial planning, fund raising, capital expenditure decisions, cash and credit management. Controller responsibilities: –Corporate accounting, cost accounting, and tax management.

18. © 2005 Pearson Education Canada Inc. BZUPAGES.COM 1-17 Relationship to Economics Fundamental Economic Principle: Marginal Analysis –Financial decisions should be made and actions taken only when the added benefits exceed the added costs.

19. © 2005 Pearson Education Canada Inc. BZUPAGES.COM 1-18 Relationship to Accounting Cash Flows –Accrual Basis: recognizes sales revenue and expenses incurred to make sale at time of sale. –Cash Basis: recognizes revenues and expenses as they occur.

20. © 2005 Pearson Education Canada Inc. BZUPAGES.COM 1-19 Accounting vs. Financial Views Accounting View (Accrual Basis) Income Statement Peakes Quay, Inc. For year ended 12/31 Financial View (Cash Basis) Cash Flow Statement Peakes Quay, Inc. For year ended 12/31 Sales revenue $100,000 Less: Costs 80,000 Net Profit $ 20,000 Cash inflow $ 0 Less: Cash outflow 80,000 Net cash flow ($80,000)

21. © 2005 Pearson Education Canada Inc. BZUPAGES.COM 1-20 Financial Manager – Key Activities Balance Sheet Current Assets _______________ Fixed Assets Current Liabilities _______________ Long-Term Funds (Debt & Equity) Financial Analysis & Planning Making Investment Decisions Making Financing Decisions

22. © 2005 Pearson Education Canada Inc. BZUPAGES.COM 1-21 Should Firms Maximize Profit? Corporations commonly define profit as “Earnings per Share” (EPS). –A measure of total earnings divided by total number of ownership shares. EPS ignores critical factors of –the timing of the returns. –cash flows available to common shareholders. –risk factors facing the firm.

23. © 2005 Pearson Education Canada Inc. BZUPAGES.COM 1-22 Or Should Firms Maximize Shareholder Wealth? Evaluating Shareholder Wealth addresses factors of timing, cash flows and risk ignored by the EPS. Therefore, Maximizing Shareholder Wealth is a more comprehensive goal for the firm, its managers and employees. This can be explored through “economic valued added” and a focus on stakeholders.

24. © 2005 Pearson Education Canada Inc. BZUPAGES.COM 1-23 What about Stakeholders? Stakeholders include groups that have direct economic links to the firm. Stakeholders include not only owners, but also employees, customers, suppliers, and creditors. Maintaining positive stakeholder relationships helps maximize long-term benefits to shareholders.

25. © 2005 Pearson Education Canada Inc. BZUPAGES.COM 1-24 Importance of Ethics The standards of conduct or moral judgment: Honesty, trustworthiness, fair dealing are foundations of sustainable business relations: –With customers, –With suppliers, –With creditors, –With employees, –With owners. Ethical behaviour is necessary to achieve the goal of maximizing shareholder wealth.

26. © 2005 Pearson Education Canada Inc. BZUPAGES.COM 1-25 Financial Goals of a Company Maximize sales. Maximize cash flow. Maximize market share. Maximize profit. Minimize costs. Maximize return on sales, investment, equity. Ensure earnings stability. Achieve target goals for sales, profits, market share or return.