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.

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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

7
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

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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:

– Owner’s Equity
– Loans or External Sources
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Lecture 1: Module # 1: Introduction to Corp Finance

Terminology in Capital Raising

IPO’s
– IPO’s 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
Cash Flow from Customers used to
Vendors 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
• IPO’s 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 2003 2002
RUPEES RUPEES
OPERATING ASSETS
Fixed assets (at cost less accumulated depreciation) 3 125,138,737 109,101,363

DEFERRED COST 4 12,653,681 18,514,377

LONG TERM DEPOSITS (against Lease) 2,930,337 827,737
140,722,755 128,443,477
CURRENT ASSETS

Stores & spares 7,347,476 11,215,891

Stocks -do- 5 22,628,137 19,231,731
Trade debtors 6 2,149,858 3,211,998
Advances, deposits, prepayments and
other receiveables 7 26,089,950 17,450,008
Cash and bank balances 8 107,524 110,421
58,322,945 51,220,049
CURRENT LIABILITIES
Current maturity portion of lease liability 9 (6,794,240) (2,821,322)
Current maturity portion of Long Term Loans (8,004,000) -
Short term borrowings 10 (6,760,139) (19,270,244)
Creditors, accruals and other liabilities 11 (30,831,550) (44,786,359)
TOTAL ASSETS LESS CURRENT LIABILITIES 146,655,771 112,785,601

LONG TERM LIABILITIES

Deferred Income (1,692,510) -
Due to directors and relatives (37,056,700) (21,693,585)
Provident fund trust and gratuity payable 12 (926,457) (926,457)
Long term loans 13 (27,828,000) (47,500,000)
Dealers&Distributors securities 14 (23,871,350) (19,398,600)
Long term portion of leasehold assets (12,710,887) (1,936,847)
(104,085,904) (91,455,489)

TOTAL NET ASSETS 42,569,867 21,330,112

REPRESENTED BY :
Share capital (5,980,000) 15 59,800,000 39,800,000
Profit & (loss) account (27,457,311) (29,697,066)
Surplus on revaluation of fixed assets 8,227,178 8,227,178
Share deposit money 2,000,000 3,000,000
42,569,867 21,330,112