Topic 01

Introduction to Corporate Finance

Introduction to Corporate Finance

Learning Outcomes

At the end of the summary I will be able to ;

 Identify the basic areas of Finance
 Identify the Corporate Finance & the Financial Manager
 Identify the goal of Financial Management
 Recognize the Agency problem & control of the corporation
 Identify the Financial Markets and the Corporation

Abstract

The study of corporate finance should focus on the central issues associated with it. There
you must first understand what corporate finance and financial management. It also discusses
the role of the financial manager. It then discusses the purpose of financial management, the
relationship between shareholders and managers in financial management and the issues that
arise. Finally I hope to discuss the financial markets used in corporate financial management.

Identify the basic areas of Finance

There are three basic areas of finance ;

1. Capital markets and Financial Institutions

2. Investments
3. Corporate Finance

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Identify the Corporate Finance & the Financial Manager

What is Corporate Finance ?

Corporate Finance is ,

- funding sources
- capital structure of corporations
- manager’s actions to increase the value of a company to shareholders
- tools and analytics used to allocate financial resources

the financial sector that deals with these.

What is Financial Management ?

The process of financing planning, organizing, directing and controlling a company to

achieve its objectives is called financial management. The following are some of the major
issues that arise in financial management ;

- What long-term investments should the firm take on ?

- Where will we get the long-term financing to pay for the investment ?
- How will we manage the everyday financial activities of the firm ?

Who is Financial Manager ?

A person who oversees and controls the financial planning of an organization is called a
financial manager.

Task of Financial Manager

• Produces financial statements

• Formulates strategies and plans for investment activities and long-term financial goals
• Responsible for financial health
• Budget monitoring and management

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 • Develop strategies to reduce financial risk

Financial Management decisions

Capital budgeting • What long-term investments should the firm take on ?

decisions

Capital structure • Where will we get the long-term financing to pay for the
decisions investment ?

Working capital • How will we manage the everyday financial activities of

management the firm ?
decisions

Capital budgeting decisions

The process of planning and managing a firm’s long-term investments is called capital
budgeting. The financial manager seeks to identify more investment opportunities for the
company. The investment opportunities considered in the capital budget depend on the nature
of the company’s business.

Ex -: For a large retailer such as Wal-Mart, deciding whether to open another store would be
an important capital budgeting decision.

Capital structure decisions

The second issue of the financial manager is the capital structure in which the financial
manager seeks to learn how to obtain and manage the long-term financing required to support
the company’s long-term investors.

Working capital management decisions

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Working capital includes short-term assets and short-term liabilities.
Through working capital management,
- to continue the company’s
operations

- to avoid expensive interruptions

ensures that there are sufficient resources.

Identify the goal of Financial Management

The following are some of the objectives of financial management ;

• Survive
• Avoid financial distress and bankruptcy
• Beat the competition
• Maximize sales or market share
• Minimize costs
• Maximize profits
• Maintain steady earnings growth

Decisions are made by the financial manager on behalf of the shareholders of a corporation.
Here the financial manager tries to maximize the present value of the existing stock when
making decisions on behalf of the shareholders.

“ The goal of financial management is to maximize the current value per share of the existing
stock”

Recognize the Agency problem & control of the corporation

The relationship between stockholders & management is called an agency relationship. This
relationship arises when a person hires another person for his or her needs.
Ex -: Mr.Silva hiring another person to sell his land can sometimes create a conflict between
Mr.Silva and the agent, which is called an agent issue.
Agency problems can arise from the way compensation is paid to an agent hired on behalf of
an individual.

Do managers act in the stockholders’ Interests ?

Whether managers act in the best interests of the shareholder depends on the following two
factors ;

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 1) How closely management goals are aligned with shareholder goals 2)
Can managers be replaced if shareholder objectives are not met ?

Principal Agent

Shareholders Employees
Identify the Financial Markets and the Corporation
Financial markets play an important role in corporate financing
1. Cash flows to and from the firm
There is a very close interaction between the corporation and the financial market and
there is a transfer of money from the financial markets to the company and from the
company to the financial markets.

2. Primary vs secondary markets

Financial markets function as both primary and secondary markets for debt and equity
securities.
Primary market the original sale of securities by governments and corporations
Secondary market those in which these securities are bought and sold after the
original sale

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Summary
 There are three basic areas of finance ;
 Capital markets and financial institutions
 Investments
 Corporate finance
 Financial management decisions can be categorized as follows ;
 Capital budgeting decisions – What long-term investments should the firm
take on ?
 Capital structure decisions – Where will we get the long-term financing to pay
for the investments ?
 Working capital management decisions – How will we manage the everyday
financial activities of the firm ?
 The financial manager seeks to maximize the present value of the existing stock when
making decisions on behalf of the shareholders
 The relationship between stockholders and management is called an agency
relationship
 As major financial markets in corporate finance,
 Cash flows to the firm
 Primary vs secondary markets

can be specified.

References
A.Ross, S., 1221. Fundamentals of corporate finance. s.l.:McGrow-Hill/Irwin.

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