CORPORATE FINANCE

BBA-FINANCE
4th Semester

By: Pitambar Shrestha

 COURSE SYLLABUS
Unit 1: Corporate Finance and Financial Environment - 4 LH
Unit 2: Capital Investment Decision - 8 LH
Unit3: Cost of Capital - 6 LH
Unit4: Raising Capital - 6LH
Unit 5: Financial leverage and Capital Structure - 5 LH
Unit 6: Dividend Policy - 5 LH
Unit 7: Working Capital Management - 6 LH
Unit 8: International Corporate Finance - 8 LH

Basics Texts:
Ross, S. A., Westerfield, R. W., & Jordan, B. D., Fundamentals of
Corporate Finance. New Delhi: Tata McGraw-Hill Education India.
 UNIT 1: CORPORATE FINANCE AND
FINANCIAL ENVIRONMENT

 Overview of Corporate Finance

 Financial Market and Corporation

 Ethics in Financial Decision Making

 Recent Innovation in corporate Finance

 INTRODUCTION
Business concern needs finance to meet their requirements in
the economic world. Any kind of business activity depends on
the finance. Hence, it is called as lifeblood of business
organization.

Whether the business concerns are big or small, they need

finance to fulfil their business activities. Finance may be
defined as the art and science of managing money. It
includes financial service and financial instruments.

Finance also is referred as the provision of money at

the time when it is needed. Corporate finance, Business
finance, Financial management and Managerial finance are
synonyms
 CONT…
Corporate finance is the management of fund or money within the
Corporation, which includes combination of different activities like
acquisition of fund from different sources, allocation of fund to
required business department, utilization of fund from efficient way
and ultimately control of the fund as per financial plan.

Corporate finance is also defined as the process of decision making

based on principle of maximizing shareholders wealth. Therefore, it
is considered as the process of financial decision making which
provides theories, practices and analytical techniques for decision
making.

Corporate Finance also deals with different area of decision making

for investment (capital budgeting). capital structure (financing),
dividend and working capital (liquidity).
 CONT…
Finance can also be divided into personal finance, business
finance and public finance.

The personal finance is concerned with the acquisition

and proper utilization of economic resources by individuals.

The Corporate finance is concerned with the acquisition,

management, and utilization of fund by Corporate business
organization.

The Public finance is the study of the financial aspect of

the government. It is also known as government finance.
 FINANCE IN THE ORGANIZATION
STRUCTURE OF THE FIRM
Finance function is one of the major parts of business
organization, which involves the permanent and continuous
process of the business concern.

Finance is one of the interrelated functions which deal with

human resource function, marketing function, production
function and research and development activities of the
business concern.
FINANCE IN THE ORGANIZATION STRUCTURE OF
THE FIRM

Board of
Director
CEO

Vice president Vice president Vice president

Sales Finance Manufacturing

Treasur
Controller
er
Credit manager Cost accounting manager
Inventory manager Financial accounting
Portfolio Manager manager
Capital Budgeting Data processing manager
Manager Tax manager
FUNCTIONS OF TREASURER
The main functions of the treasurer are as follows:
 Make plan and raise fund,

 Establish relationship with bank and investor,

 Short term financing and management of cash,

 Management of credit related activities,

 Decision making regarding the investment of capital expenditure,

 Management of portfolio,

 Managing foreign exchange and,

 Arrange insurance
 FUNCTION OF CONTROLLER
The functions of controller are related to accounting activities which
are as follows:
 Cost and financial accounting,

 Management of tax related activities,

 Internal auditing,

 Economic appraisal,

 Procession of data,

 Budgeting, planning and controlling,

 Reporting to government.
ROLE OF FINANCIAL MANAGER
The role of financial manage are as follows:

 Raising of funds
 Allocation of funds

 Planning and controlling

 Investment/capital budgeting decision

 Financing/capital structure decision

 Dividend policy decision

 Working capital management/liquidity decision

 Dealing with financial market

 Risk management

 Management of Cash
 SIGNIFICANCE OF CORPORATE FINANCE
1) Help to setting clear goal
 Maximization of the shareholder’s wealth

 Direct the efforts of all functional area

2) Help to efficient utilization of resources

 Use fixed as well as current assets

 Capital budgeting techniques

 Maintained appropriate level of current assets

3) Help to taking investment/capital budgeting decision

 Appraisal and selection of capital investment proposal

 Determination of fixed assets and current assets

 Make or buy decision

 Assets replacement decision

 Acquisition, merger and reorganizing decision

 SIGNIFICANCE OF CORPORATE FINANCE
4) Help to deciding sources of financing
 Equity shares, preference shares, bond etc
 Decide appropriate mix of sources

 Capital structure theories

5) Help to making dividend decision

 Dividend is the return of shareholder’s

 How much to pay out of the earnings

 Dividend policies and theories

5) Help to taking working capital/liquidity decision

 Inventory management,

 Debtor management,

 Cash management,

 Current assets management, and

FINANCIAL MARKET AND CORPORATION
The market which deals with transaction of financial instrument and
services. It brings buyer and seller of securities or Fund suppliers and
fund borrowers are brought together.

Financial environment refers to the financial structure in which

investors operate,, consisting of the kinds of marketable securities
available for buy or sell.

The financial environment refers to all internal and external factors,

which have a bearing on functioning of investment decision. The
financial environment is the financial system, which consists of
1) Financial securities
2) Security markets
3) Financial intermediaries
 1. FINANCIAL SECURITIES
A financial security can be defined as a legal contract representing
the right to receive future benefits under a stated set of conditions.

It is a legal document that shows an ownership interest. Securities

are the piece of paper that represent the investor's rights to certain
prospectus or property and the conditions under which he or she
may exercise those rights.

It may be transferred to another investor, and if it is, all rights and

conditions are transferred as well.

Examples of financial securities are common stock, bond, Treasury

bills, commercial paper, preferred stock etc
 2. FINANCIAL MARKET
Financial market is the important component of financial environment.
Financial market is the mechanisms created to facilitate the exchange of
financial assets by bringing together buyers and sellers of securities.
Financial/Securities markets can be classified in various ways. However,
the most common classification is to classify them as
1) Money market
2) Capital
3) Primary market
4) Secondary market.

Money Market
The financial market in which financial assets with term to maturity of
typically less than one year are traded, is known as money market. It
provides short term fund to the government and organization. For
example, Treasury bills, commercial paper, banker's acceptance,
certificate of deposit, repurchase agreement are traded in these types of
market.
 CONT..
Capital Market

The financial market, in which financial assets with a term to

maturity of typically more than one year are traded, is known as
capital market. Securities with high risk and low liquidity are traded
in these types of market.

It provides long term fund to the government and organization. For

example, corporate bond, government bond, preferred stock and
common stock are traded in this market.
 CONT..
Primary Market
Primary market is financial market, where corporate and
government entities can raise capital and where the first transactions
with the new issued securities are performed.

If a company’s share is traded in the primary market for the first

time this is referred to as an initial public offering (IPO).

The institution that performed the role of an expert in issuing new

securities is called investment banker.

These bankers provide advice to the business firms regarding the

nature of security, maturity, interest rate and underwrite the issue of
securities
 CONT….
Secondary Market
Secondary market is that type of security market where previously
issued securities are traded among investors. Generally, individual
investors do not have access to secondary markets.

Security market in which, already issued stocks were traded

(purchased and sold) is known as secondary market. Nepal stock
exchange (NEPSE) is the only one secondary market in Nepal.

Secondary market can be categorized into organized stock

exchange and over the counter market (OTC market).
 CONT….
Organized Stock Exchange
It is a formal and physical location market where securities are
traded under some set of established rules and regulation. An
organized stock exchange provides the facility for the members to
trade securities, and only exchange members may trade there.

Over the Counter (OTC) Market

The over-the-counter (OTC) market is not a formal exchange. It is
organized network of brokers and dealers who negotiate sales of
securities. OTC stocks are usually considered as very risky
because they are the stocks that are not considered large or stable
enough to trade on the major exchange.
 3. FINANCIAL INTERMEDIARIES
Financial intermediaries are middlemen who stand between saver
and borrower of fund. Financial intermediaries are investment
companies and other financial institutions that collect funds from
small investors and/or savers and lend considerable sum to large
borrowers.

It collects and transfers the funds from one sector of economy

(surplus sector) to another sector of economy (deficit sector).
Generally, corporation can obtain funds directly from public
through the direct placement. Alternatively, they can obtain funds
indirectly from the public using financial intermediates.
 TYPES OF BUSINESS ORGANIZATIONS
There are three types of business organization:
Sole Proprietorship
 A sole proprietorship is a business owned by only one person. It is easy
to set-up and is the least costly among all forms of ownership.
 The owner faces unlimited liability; meaning, the creditors of the
business may go after the personal assets of the owner if the business
cannot pay them.
 The sole proprietorship form is usually adopted by small business
entities.
Partnership
 A partnership is a business owned by two or more persons who
contribute resources into the entity. The partners divide the profits of the
business among themselves.
 In general partnerships, all partners have unlimited liability. In limited
partnerships, creditors cannot go after the personal assets of the limited
partners.
 CONT….
Corporation
 A corporation is a business organization that has a
separate legal personality from its owners. Ownership in
a stock corporation is represented by shares of stock.
 A corporation is a legal entity that is separate and distinct
from its owners. Corporations enjoy most of the rights
and responsibilities that individuals possess.
 An important element of a corporation is limited
liability. The owners (stockholders) enjoy limited
liability but have limited involvement in the company's
operations
 The board of directors, an elected group from the
stockholders, controls the activities of the corporation.
 ETHICS IN FINANCIAL DECISION MAKING

Business Ethics (also known as Corporate Ethics) is a form of

applied ethics or professional ethics that examines ethical principles
and moral or ethical problems that arise in a business environment

Ethical decision-making in finance is a decision-making ideology

that is based on an underlying moral philosophy of right and wrong.

Ethical decision-making is normative in nature, and ethical

decisions are not solely driven by the goal of profit.
 ETHICS IN FINANCIAL DECISION MAKING
Business ethics
 Set of moral principles and rules

 Standard of behavior

 Defined right and wrong conduct

 Standard of social norms and values

 Truth and justice accepted by the managers

Significance off managerial ethics

 Promotes goodwill and image

 Helps maintain better relation with stock holders

 Less interference from government

 Promotes fair competition

 Promotes social responsibility

 Improve working environment

 Helps to increase market share

RECENT INNOVATION IN CORPORATE FINANCE

Financial innovation is the process of creating

new financial products, services, or processes.

Financial innovation has come via advances over time in

financial instruments and payment systems used in the
lending and borrowing of funds.

These changes include updates in technology, risk

transfer, and credit and equity generation and have
increased available credit for borrowers and given banks
new and less costly ways to raise equity capital.
 RECENT INNOVATION IN CORPORATE FINANCE

Recent financial innovations have included crowdfunding, mobile

banking technology, and remittance technology.

1) Crowdfunding is a way to raise money from a large number of

people. Large groups of people pool together small individual
investments to provide the capital needed to get a company or
project off the ground.

Crowdfunding is the use of small amounts of capital from a large

number of individuals to finance a new business venture.

Two popular platforms for equity crowdfunding are SeedInvest and

FundersClub.
 RECENT INNOVATION IN CORPORATE FINANCE

2) Remittances are another area that financial innovation is

transforming. Remittances are funds that expatriates send back to his or
her country of origin via wire, mail, or online transfer. Given the
volume of these transfers worldwide, remittances are economically
significant for many of the countries that receive them.

3) Mobile banking has made major innovations for retail customers.

Today, many banks offer comprehensive apps with options to deposit
checks, pay for merchandise, transfer money to a friend, or find
an ATM instantly.

It is still important for customers to establish a secure connection

before logging into a mobile banking app in order to avoid his or her
personal information being compromised.
THANK YOU