Corporate Finance

Lecture 1
Introduction

Introduction to Corporate Finance 1

 Course contents
1. Introduction of the course
2. Short Term Financing
3. Long Term Financing
4. Operating and Financial Leverage
5. Capital Structure Theories
6. Dividend Policy
7. Cost of Capital

Introduction to Corporate Finance 2

 Finance
• Allocation of Money
• Acquiring Money
• Raising and Investing/Spending Money

Role of a corporation's management

“To increase the value of the firm to its shareholders
while observing applicable laws and responsibilities.”

Introduction to Corporate Finance 3

 Finance

• Corporate finance deals with the strategic financial issues

associated with achieving this goal, such as how the
corporation should raise and manage its capital.
• What investments the firm should make, what portion of
profits should be returned to shareholders in the form of
dividends, and whether it makes sense to merge with or
acquire another firm.

Introduction to Corporate Finance 4

 Scope of Corporate Finance
– Financing Activities (Corporate Finance)
– Investing Activities
– Asset Management
– Financial Analysis

Introduction to Corporate Finance 5

 Equity Financing
• Common stock
• Preferred stock
– Cumulative
– Participating
– Redeemable
– Convertible
• Share Capital
– Authorized
– Issued, subscribed and paid up

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 Equity Financing
– Shareholder’s Equity
• Share Capital
• Additional Capital
• Reserves and retained earnings
– Redeemable Capital
– Right shares

Introduction to Corporate Finance 7

 Debt Financing
• Short term and Long term debt
• Loan and Public debt
• Secured and unsecured debt
• Lease and other forms

Introduction to Corporate Finance 8

 Debt related issues
– Cost
– Maturity
– Secured and unsecured
– Default risk
• Investment grade
• Junk
• Credit rating

Introduction to Corporate Finance 9

 Moody’s
Aaa Best Quality
Aa High Quality
A Upper Medium Grade
Baa Medium Grade
Ba Posses speculative element
B Generally lack desirable investment characteristics
Caa Poor standing,
Ca Highly Speculative, often in default
C Lowest Grade

Introduction to Corporate Finance 10

 Cost of Financing - Rates
– Fixed rates
– Floating rates
– Nominal rate
– IRR
– Effective rate
– Equivalent
– Implied rate
– Prime rate
– LIBOR
– KIBOR

Introduction to Corporate Finance 11