ADM 658: Chapter 1 - Corporate Finance


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ADM 658: Chapter 1 - Corporate Finance

  1. 1. ADM658 – CHAPTER 1: CORPORATE FINANCE Definition Practical Reason Goal of the firm Legal Reason Corporate Finance Other Possible Capital budgetting Financial Management Decision Capital Structuring Importance of Finance Manager Working Capital Management Definition Corporate Finance. Occurance Problem Agency Problem Costs. Principal-Agent Relationship Agency Relationship Management goal and agency cost Solutions sole proprietorshp General Partnership Form of Business Partnership Limited Liability Partnership Company Role Primary Secondary Financial Market Money Market Capital Market Derivative Maret Systematic Risk Risk and return Unsystematic Risk. NurAisyahBintiMahbob (2010312861) Faculty of Administration Science and Policies Studies. Page 1
  2. 2. ADM658 – CHAPTER 1: CORPORATE FINANCE DEFINITION OF FINANCE MANAGEMENT. A process involved in an attempt to obtain and allocate financial resources effectively and efficiently to achieve the firm’s goal that is to maximize the shareholder’s wealth by maximizing the share price. Sole Proprietorship Partnership Company Description Owned by a single person Coming together Given its legal status by (association) of 2 or CA 1965 Owner has title to the more individuals for a business’ assets & all Need to be incorporated common purpose to business liabilities. with the Registrar of operate a business Companies ,under CCM No limitation – as to the together for profit. amount of gains and Must have MOA and AOA 2 subcategories of losses that the owner Separation of ownership partnership: shall be entitled or liable and control o General P. to o Limited Liability P Advantages No legal requirements Cheap Ownership can be other than the need to transferred by way of Easy to form register the business transfer of shares. Management control with the Registrar of Unlimited life resides with the general Business partner. Shareholder’s liability Cheap limited to the amount Two or more owners Easy to start invested in the company More capital to start Business incurs no Easy to raise additional Income taxed once as corporation or income funding from external personal income tax – tax liability borne providers of finance by the individual. (bank) Life of business depends Limited liability on the life of the owner. Disadvantages Funds in business limited Unlimited liability Annual accounts need to to amount that the sole be prepared Partnership dissolves proprietor has personally when one partner dies or Accounts of the company SP has unlimited liability withdraws from the need to be audited by for debts and liabilities partnership agreement. external auditors No distinction/separation Difficult to transfer Filing of financial made between business ownership statements and annual and personal assets returns must be made Difficult to raise with Registrar of Creditors may claim the additional funding. Companies every year. SP’s personal assets when the business’ Annual & extraordinary assets cannot pay the meeting must be creditor. conducted. Difficult to sell ownership Min director: 2 interest Double taxation. (Corporate/personal rate NurAisyahBintiMahbob (2010312861) Faculty of Administration Science and Policies Studies. Page 2
  3. 3. ADM658 – CHAPTER 1: CORPORATE FINANCE To maximize the wealth of shareholders. GOAL OF THE FIRM Practical reason When making investment and financing decision for the firm, decisions can be made much more simply and quickly. If the interest of other stakeholders were also be considered,decisions may be not be madequickly and efficiently. Shareholder are the owner of the firm. Firms become into being due to contribution made by the shareholder Legal reason Shareholders are protected under the CA1965 Finance manager owe some kind of allegiance to the 'owners' of the firm. (Principal-agent relationship) Maximize sales/market share Minimize cost Maximize profits Other prossible goal Achieve adequate profits Ensure continued earning growth Catch up and overtake competitiors Avoid financial distress and bankruptcy. NurAisyahBintiMahbob (2010312861) Faculty of Administration Science and Policies Studies. Page 3
  4. 4. ADM658 – CHAPTER 1: CORPORATE FINANCE Financial Market •an organization that responsible for the distribution of fund to the end user as they collect from the general public & channel it to the user. •Function: to help allocate the financial resources within economy •Types: •Primary/Secondary/Money/Capital Market. Roles Of Financial Markets •facilitation of savings by individual by allowing them to consume less today (saving) to be able to consume more in future. •platform to raise financing by the users (firms) of finance •channel whereby demand for and supply of fund can interact and arrived at a suitable market price for funds. •provision of financial services that allow participants to work out and balance their risk tolenrance and expected return primary market. •Used when firms first issue securities for funds •involves 2 types of activities: public offering/private placements •PO: issue debt/equity to the public •publish prospectuses - advertise in newspaper •Private placement: Firms may issue debt or equity to certain parties - after discussion Secondary market •already issued securities to raise the fund in order to finance new investment in fixed asset •investor buy & sell shares/bonds/loan stocks Money Market •for debt securities that will be repaid in the short-term (<1 year) •related to a group loosely connected markets. •main player: Dealer-Bank. Active in market (as lenders/borrowers) •large firm lend when they have surplus cash/borrow when they are short of money.a Capital Market •markets for long-term debt and equity •ex: bonds/debentures/term loan/leasing/industrial hire purchase •Equity: •shares are equity in firm •represents ownership •resdual interest in firm: shareholders can only clain on he share of earnings and assets has be made to other claimants. •shareholder have dividend right, voting rights, liquidation, pre-emptive rights. •Debt vs. Equity Securities. NurAisyahBintiMahbob (2010312861) Faculty of Administration Science and Policies Studies. Page 4