1. Chapter 1
A. Why corporate finance important to all managers?
Corporate finance is a basic component of how a business is run. All managers should keep this
in mind to direct funds to the optimal division or product in a company. In addition, managers
should understand how their company is financed and whether it has a risk of bankruptcy.
Conversely, managers should understand if the equity in the business is undervalued and has
the potential to grow.
Corporate finance provide the skills managers need to
 Identify and select the corporate strategies and individual project that add value
to their firm.
 Forecast the funding requirements to their company and devise strategies to
obtain those funds
B. (1) what are the alternative forms of business organization?
(2) what are their advantages and disadvantages?
Sole proprietorships
The most common form of business ownership also the simplest and older. There are no
legal distinctions that separate a sole proprietors status as an individual from her or his
status as a business owner. Common in all industries such as repair shops ,small retail
outlets, service and providers.
Advantages:
i. Easy to form and dissolve
ii. Management flexibility
iii. The owner retains the rights to all profit after payment of personal income tax
iv. Subject to few regulation
Disadvantages:
i. The owner’s financial liability for all debts of the business
ii. Limited life
iii. Difficulty to raise fund

2. iv. The owner must handle wide range of management and operational tasks.
Partnerships
An associations of two or more persons who operate a business as co-owners by
voluntary legal agreement.
Advantages:
i. Easy to form
ii. Legal requirements are simply registering the name and obtaining necessary
licenses and applicable insurance.
iii. Offer expanded financial capabilities- increasing access to borrowing funds
Disadvantages:
i. Unlimited financial liability by the owner’s
ii. Each partner bears full responsibility for any debts
iii. Each is legally liable for actions of other partners
iv. If one partner wants to leave the other partner may have to purchase the
remaining portion of the company.
v. Upon death of one partner a new partnership must be formed.
C. What should be the primary objective of managers?
The primary objective of managers are-
1. Control costs or generate revenue
2. Develop or approve plans and processes
3. Assign and monitor tasks
4. Reorganize and hire or fire people as needed
5. Help new people get started and understand the objectives
6. Make sure deadlines are meet
7. Resolve conflicts and staff issues
8. Guide, motivate and recognize the team
9. Support the team and fight for them
10. Escalate issues or concerns to upper management
11. Help the staff develop their job skills and career
12. Inform the staff of decisions made at higher levels

3. 13. Forecast future needs and growth of the team
14. Develop budgets and hold people accountable
(1) Do firms have any responsibilities to society at large?
Social responsibility is a voluntary effort on the part of business to take various steps to
satisfy the expectation of the different interest group. The interest groups may be owners,
investors, employees, consumers, government and society or community.
Consider the following points:
i. Public Image - The activities of business towards the welfare of the society earn goodwill
and reputation for the business. The earnings of business also depend upon the public
image of its activities. People prefer to buy products of a company that engages itself
in various social welfare programmes. Again, good public image also attracts honest
and competent employees to work with such employers.
ii. Government Regulation - To avoid government regulations businessmen should
discharge their duties voluntarily. For example, if any business firm pollutes the
environment it will naturally come under strict government regulation, which may
ultimately force the firm to close down its business. Instead, the business firm should
engage itself in maintaining a pollution free environment.
iii. Survival and Growth -Every business is a part of the society. So for its survival and
growth, support from the society is very much essential. Business utilizes the available
resources like power, water, land, roads, etc. of the society. So it should be the
responsibility of every business to spend a part of its profit for the welfare of the
society.
iv. Employee satisfaction - Besides getting good salary and working in a healthy atmosphere,
employees also expect other facilities like proper accommodation, transportation,
education and training. The employers should try to fulfill all the expectation of the
employees because employee satisfaction is directly related to productivity and it is
also required for the long-term prosperity of the organization. For example, if business
spends money on training of the employees, it will have more efficient people to work
and thus, earn more profit.
v. Consumer Awareness - Now-a-days consumers have become very conscious about
their rights. They protest against the supply of inferior and harmful products by forming
different groups. This has made it obligatory for the business to protect the interest of
the consumers by providing quality products at the most competitive price.

4. (2) Is stock price maximization good or bad for society?
In general, it is good because stock price maximization requires firms:
1. To operate in an efficient and low-cost manner.
2. To develop new products.
3. To provide in an efficient and courteous service.
(3) Should firms behave ethically?
Yes off course. Executives of most major firms believe that firms do try to maintain high ethical
standards in all of their business dealings. Furthermore, most executives believe that there is a
positive correlation between ethics and long-run profitability. Conflicts often arise between
profits and ethics. Companies must deal with these conflicts on a regular basis, and a failure to
handle the situation properly can lead to huge product liability suits and even to bankruptcy.
There is no room for unethical behavior in the business world.
C. What factors affect stock prices?
Earnings Per Share
The investor knows that a successful company will earn a substantial profit, which will result in
strong earnings per share. Divide the net earnings of a company by the total number of shares
of stock outstanding, and you get the earnings per share. Earnings are affected by company
management, market sector dominance and cyclical industry performance. When a company
announces good EPS, the stock price generally rises, but not always. Some companies, such as
biotech and Internet companies, frequently have high stock prices with little or no earnings per
share.
Industry Outlook
Stocks of companies in new and promising industries often trade at high earnings multiples --
market price divided by EPS -- because of the perception that one day those companies will
have high earnings.
Economic Factors
During recessions, investors buy defensive stocks they expect will perform well when the
economy is bad. Classic defensive stocks include companies that produce necessities such as:
tobacco, liquor, food and personal products. During boom times, autos, electronics, appliances,
travel and hospitality stocks perform well because consumers have money to spend.
Dividends

5. A dividend tends to keep the price of a stock stable during market fluctuations, and tends to
support the stock during periods of high interest rates when the stock market usually contracts.
Dividends also aid in the image of corporate stability, until some difficulty requires the company
to lower its dividend.
Demand and supply
One of the major factors affecting stock price is demand and supply. The trend of the stock
market trading directly affects the price. When people are buying more stocks, then the price of
that particular stock increases. On the other hand if people are selling more stocks, then the
price of that stock falls.
Market Cap
Never try to guess the worth of a company simply by comparing the price of the stock. Always
keep in mind that it is not the stock but the market capitalization of the company that
determines the worth of the company. So market cap is another factor that affects stock price.
News
When people get positive news about a company then it can increase the buying interest in the
market. On the other hand, when there is a negative press release, it can ruin the prospect of a
stock. In this case should remember that news should not matter much but the overall
performance of the company matters more. So, news is another factor affecting stock price.
Earning/Price Ratio
Another important factor affecting stock price is the earning/price ratio. This gives a fair idea of
a company’s share price when it is compared to its earnings. The stock becomes undervalued if
the price of the share is much lower than the earnings of a company. But if this is the case,
then it has the potential to rise in the near future. The stock becomes overvalued if the price is
much higher than the actual earning
D. What factors determine cash flows?
Accounts receivable Accounts receivable represent sales that have not yet been collected in
the form of cash. An account receivable is created when you sell something to a customer in
return for his or her promise to pay at a later date. To properly manage your cash flow, you
must know the negative cash flow affects caused by the time it takes your customers to pay
on their accounts.

6. Credit terms Credit terms are the time limits you set for your customers' promise to pay for
the merchandise or services purchased from your business. Credit terms affect the timing of
your cash inflows. Offering trade discounts is one way you might be able to improve your
cash flows
Credit policy A credit policy is the blueprint you use when deciding to extend credit to a
customer. The correct credit policy is necessary to ensure that your cash flow doesn't fall victim
to a credit policy that is too strict or to one that is too generous.
Inventory Inventory describes the extra merchandise or supplies your business keeps on
hand to meet the demands of customers. An excessive amount of inventory hurts your cash
flow by using up money that could be used for other cash outflows.
Accounts payable and cash flow Accounts payable are amounts you owe to your suppliers
that are payable sometime within the near future, "near" meaning 30 to 90 days. Without
payables and trade credit you'd have to pay for all goods and services at the time you
purchase them. For optimum cash flow management, you'll need to examine your payables
schedule.
F. What factors affect the level and risk of cash flows?
Sales and Prices
Reduced customer demand or increased competitor pressure may adversely impact sales
volumes, prices and, as a consequence, gross revenue. Also pay attention to production
cycle, typical sales lead times and any seasonal factors that impact on business. A delay in
bringing product or service to market or failure to respond to periods of peak demand can
have a devastating effect on incoming cash. If creditors require payment before business
have received sales revenues, money will leave the business faster than it comes in, leading
to negative cash flow.
Customers and Payments
If customers' disposable cash reduces because of recessionary pressures, this is likely to
adversely impact on income, particularly nonessential service. Reduced sales volumes will
adversely affect the amount of cash generated, while late or missed payments from
customers will impact both the level and timing of business cash receipts. To minimize the
risks of extending credit, carefully vet all new clients and chase all late payments in a timely
manner. Consider offering incentives to encourage customers to pay on time or to settle
their accounts before the due date.
Costs and Suppliers

7. Changes in the costs of raw materials, inventory and essential services will impact the level
of business cash flow. Negotiate with all suppliers, large and small, the best prices and
most preferential payment terms. If fail to make payments as they fall due, a supplier may
withdraw extended payment terms with potentially serious consequences to business cash
flow. Suppliers may also try to tighten payment terms if they are facing financial difficulties.
Minimize the potential supplier risks by maintaining a list of alternative suppliers and,
where possible, avoid relying on a single supplier for any product or service.
Lenders and Investors
Business organization may plan to borrow money to acquire fixed assets, to pay for
inventory or to support working capital, particularly during periods of business growth.
Lenders frequently change their acceptance criteria, especially during times of economic
uncertainty, and this can make it difficult to arrange borrowing. Increasing interest rates will
also adversely impact on cash flow.
Efficiency
To maximize positive cash flow, business should operate at peak efficiency. Wasted materials
are a drain on cash and should be kept to an absolute minimum. If workforce is inefficient, it
will cost more -- and take longer -- to produce and sell product, negatively impacting both the
level and timing of business cash flow.
G. what are financial assets? Describe some financial instrument?
Financial assets include Cash, and those assets that can be converted to cash in a reasonably
short period of time - one year or less than one year. Financial assets are-
Cash
Cash Equivalents
Short Term Investments
Accounts Receivable
Financial instruments can be categorized by form depending on whether they are cash
instruments or derivative instruments:
Cash instruments are financial instruments whose value is determined directly by the
markets. They can be divided into securities, which are readily transferable, and other
cash instruments such as loans and deposits, where both borrower and lender have to
agree on a transfer.
Derivative instruments are financial instruments which derive their value from the
value and characteristics of one or more underlying entities such as an asset, index, or
interest rate. They can be divided into exchange-traded derivatives and over-the-
counter (OTC) derivatives.

8. Alternatively, financial instruments can be categorized by "asset class" depending on whether
they are equity based (reflecting ownership of the issuing entity) or debt based (reflecting a
loan the investor has made to the issuing entity). If it is debt, it can be further categorized into
short term (less than one year) or long term
H. Who are the providers and users of capital? How is capital transferred between savers and
borrowers?
 Household: net savers
 Non- financial corporation : net users
 Government : Net borrowers
 Financial corporation : slightly net borrowers but almost breakeven
Capital is transferred between savers and borrowers by three ways
• Direct transfers
• Investment banking house
• Financial intermediaries
I. List some financial intermediaries
Banks
Building societies
Credit unions
Financial brokers
Insurance companies
Pension funds
J. What are some different types of market?
There are generally two types of markets
Consumer Markets
Consumer markets are the markets for products and services bought by individuals for their own
or family use. Goods bought in consumer markets can be categorized in several ways:
1.Fast – moving consumer goods
2. Soft goods
3. consumer durable
4. Services

9. Industry markets
Industry markets involve sale of goods between businesses. These are goods that are not aimed
directly at consumers. Industry markets include
Selling finished goods
Selling raw material
Selling services to businesses

10. Chapter 6
Summary
SMP Ltd. can provide revised layout plans for the existing stores and a facilitated planning of
site arranged resource to re-organize the physical stores layout to satisfy the new planned
structure. This will provide:
Tagging and labeling of current stock items
Install racking and bins
Racking/Shelving/Bin identification – Bar-coding
Quarantining of unknown stock items for site to evaluate
Physical spare part re-location
Company problems
The company problem is managing the inventory systems. These include
Uncontrolled stores
No ability to find individual items
Parts availability for service as low as 40%
Value of engineering spares in excess of £600000
Large quantities of spares for obsolete assets
Large quantities of unidentified stock items
One shift stores person coverage landing to uncontrolled stores access
Company action taken
 ‘PPM Scoping phase’ completed to identify assets requiring spares holding.
 Stores inventory policy developed to detail requirements for stock holding.
 New store raking system installed .
 Stores arranged by process map area, with main assets assigned to individual racks and
selves.
 Each spares item identified and assigned to individual assets.
 Obsolete stock identified, put to one side and auction off.
 All retained stock labeled and located into new stores structure.
 Long- term continuous improvement plan developed for site.
Recommendation
Maintenance and updating of new Plant or alterations
System maintenance and improvement
Audit and review including upgrading or customization