COURSE TITLE:

Corporate Finance
COURSE CODE:

(FIN 722)
PROFESSOR:

Muzaffar Hashmi
1

Recommended Books
Fundamental of Corporate Finance (7th Edition)
By: Richard A Brealey, Stewart C Myers Principle of Corporate Finance (4th Edition) By: Richard A Brealey, Stewart C Myers Essential of Corporate Finance By: Stephen A Ross, Randolph W Westerfield, Bradford D Jordan

Corporate Finance
Scheme of Studies:
MODULE # 1 : OVERVIEW OF CORPORATE FINANCE MODULE # 2 : VALUATIONS OF FINANCIAL INSTRUMENTS LIKE

STOCKS SHARES & BONDS MODULE # 3 : CAPITAL BUDGETING MODULE # 4 : RISK STRATEGIES & MANAGEMENT MODULE # 5: COST OF CAPITAL MODULE # 6 : SHORT TERM FINANCE & CAPITAL STRUCTURE MODULE # 7 : SPECIAL TOPICS MERGERS & ACQUISITIONS MODULE # 8 : INTERNATIONAL OPERATIONS

Lecture 1: Module # 1: Introduction to Corp Finance

TO START A BUSINESS - THREE QUESTIONS ARISES:

1. What type of assets do we needs? 2. Where the money will come from to buy

these particular assets? 3. Day to day or Routine financial expenses, how to meet them? 4

Lecture 1: Module # 1: Introduction to Corp Finance

QUESTION # 1: SELECTION OF ASSETS: CAPITAL BUDGETING

CB is defined as process of planning, analyzing and

acquiring of capital.
5

Lecture 1: Module # 1: Introduction to Corp Finance

CB decisions are irreversible in nature SWOT Analysis :

S Strength W Weakness O Opportunities T Threats

CB targeted towards potential opportunities

Lecture 1: Module # 1: Introduction to Corp Finance

Opportunities of a Business Entity depends on

nature of intended business

Example: Air line Industry wants to add an

aircraft that generate more Cash Flows. (i.e. Opportunity and acquire an asset Plane) Cargo Company - Trawlers

Lecture 1: Module # 1: Introduction to Corp Finance

Points keep in view by Financial Manager & CB

Size of Investment Risk Timing

Evaluating Size, timing of CF and Risk associated with

CF is essence of CB
8

Lecture 1: Module # 1: Introduction to Corp Finance

QUESTION # 2:Where to get money from to Finance Investment? Ans: CAPITAL & ITS STRUCTURE Two ways to finance an Investment:
Owners Equity Loans or External Sources
9

Lecture 1: Module # 1: Introduction to Corp Finance

Terminology in Capital Raising

IPOs
IPOs stands for Initial Public Offerings Company lunch their shares in market Offer general Public Share allotted on Draw

Lecture 1: Module # 1: Introduction to Corp Finance

QUESTION # 3

How to manage routine financial activities?

Working Capital Basically Interaction between Current

Assets & Current Liabilities Working Capital needs to meet financial expenses Current Assets - Current Liabilities = WC

OPERATING CYCLE
Vendors Cash Flow from Customers used to Pay Off Vendors

Raw Material

Finished Goods

Sales to Customer

Cash Payment from Customers

Cash from Customers

Lecture 1: Module # 1: Introduction to Corp Finance

Working Capital Policies

Level of Inventory Investment Credit extension policy

Lecture 1: Module # 1: Introduction to Corp Finance

Types of Business
Sole Proprietor Un-Incorporated Business Partnership Limited Liability Business:
Private Company Public Un-listed Company

Lecture 1: Module # 1: Introduction to Corp Finance

Limited Liability Business & Markets Types of Markets:

Primary Market

Secondary Market

Lecture 1: Module # 1: Introduction to Corp Finance

Primary Markets

Original Sale of Securities and shares No tangible Shape General Public offerings Private placements IPOs in Primary Market

Lecture 1: Module # 1: Introduction to Corp Finance

Secondary Markets
Subsequent to first sale or Subsequent to
original sale. Trading of Securities & Shares Tangible Markets Example stock Exchange

Lecture 1: Module # 1: Introduction to Corp Finance

FINANCIAL STATEMENTS & CORPORATE FINANCE

THREE BASIC STATEMENTS

BALANCE SHEET INCOME STATEMENT CASH FLOW STATEMENT

Lecture 1: Module # 1: Introduction to Corp Finance

BALANCE SHEET

Is a Statement of resources controlled by the business

entity and obligations on a specific date.

Lecture 1: Module # 1: Introduction to Corp Finance

Contents of Balance Sheet

Assets = Fixed (tangible & intangible)& current

assets Liabilities = Long Term Liability + Current Or Short Term Liability Equity = shareholders contribution + earnings

Lecture 1: Module # 1: Introduction to Corp Finance

Fixed Assets:

Earning assets Fixed Assets e.g. Plant, Machinery, Vehicles etc

Current Assets: Inventory, Prepayments, Cash & Bank Balance, Short Term Investment etc

Lecture 1: Module # 1: Introduction to Corp Finance

Balance Sheet Format

Format of B/S in Pakistan is Governed by

International Financial Reporting Standard or International Accounting Standard B/S construction is Non-liquid or Illiquid Asset is at top

Lecture 1: Module # 1: Introduction to Corp Finance

Two Conventions for B/S Construction

1st as in Pakistan IAS or IFRS 2nd Convention GAAP (General Accepted

Accounting Principle) applicable in United States GAAP In B/S top item is highly liquid asset i.e. cash or near money

Lecture 1: Module # 1: Introduction to Corp Finance

Current Liabilities ingredients

Creditor, Accrued Liabilities, Short Term Finances Current Assets - Current liabilities equal Working
Capital

Lecture 1: Module # 1: Introduction to Corp Finance

Liquidity

Conversion into cash without losing its value. Timing Loss of value Example: Bonds

Lecture 1: Module # 1: Introduction to Corp Finance

Equity & Long Term Liabilities

Equity
Paid up Capital Reserves Profit & Loss

Long Term Liabilities

Loans OR Financial Leverage

BALANCE SHEET AS AT 30 JUNE 2003 NOTES OPERATING ASSETS Fixed assets (at cost less accumulated depreciation) DEFERRED COST LONG TERM DEPOSITS (against Lease) CURRENT ASSETS Stores & spares Stocks -doTrade debtors Advances, deposits, prepayments and other receiveables Cash and bank balances CURRENT LIABILITIES Current maturity portion of lease liability Current maturity portion of Long Term Loans Short term borrowings Creditors, accruals and other liabilities 7,347,476 22,628,137 2,149,858 26,089,950 107,524 58,322,945 (6,794,240) (8,004,000) (6,760,139) (30,831,550) 11,215,891 19,231,731 3,211,998 17,450,008 110,421 51,220,049 (2,821,322) (19,270,244) (44,786,359) 2003 RUPEES 125,138,737 12,653,681 2,930,337 140,722,755 2002 RUPEES 109,101,363 18,514,377 827,737 128,443,477

3 4

5 6 7 8

9 10 11

TOTAL ASSETS LESS CURRENT LIABILITIES LONG TERM LIABILITIES Deferred Income Due to directors and relatives Provident fund trust and gratuity payable Long term loans Dealers&Distributors securities Long term portion of leasehold assets

146,655,771

112,785,601

(1,692,510) (37,056,700) 12 (926,457) 13 (27,828,000) 14 (23,871,350) (12,710,887) (104,085,904) 42,569,867

(21,693,585) (926,457) (47,500,000) (19,398,600) (1,936,847) (91,455,489) 21,330,112

TOTAL NET ASSETS REPRESENTED BY : Share capital (5,980,000) Profit & (loss) account Surplus on revaluation of fixed assets Share deposit money

15

59,800,000 39,800,000 (27,457,311) (29,697,066) 8,227,178 8,227,178 2,000,000 3,000,000 42,569,867 21,330,112