Introduction

What is Corporate Finance?

❑ Deals with the capital structure of a corporation, including its funding and the
actions that management takes to increase the value of the company
❑ Also includes the tools and analysis utilized to prioritize and distribute financial
resources
❑ The ultimate purpose is to maximize the value of a business through planning and
implementation of resources while balancing risk and profitability
 Introduction
What We Will Cover?
1. The Business Financial Model
2. Financial Statements
3. Ratio Analysis
4. Project Appraisal
5. Time Value of Money
6. Annuities
7. Working Capital Management
8. Debt Versus Equity Financing
9. Risk and Return
10. Dividend Policy
11. Mergers and Acquisitions
 The Business Financial Model
The businessman’s dilemma can be summed up in one key word,

“Uncertainty”

He depends on knowledge and experience underpinned by sound procedures and

established methodology

The most challenging task for any businessman is to maximize the

utilization of MONEY
 Components of a Financial Model

Share Capital
SHARE The investment made by the owners of the business to secure a unit
CAPITAL of ownership. The share capital remains in the company and is the
SOURCE basis for the Assessment and Payment of dividends
LOAN Loan Capital
CAPITAL OF Monies borrowed from a bank or similar institutions providing finance
to the business for a period of time
FUNDS
Retained Profits
RETAINED “Self financing by the business” through the retention and
PROFITS
reinvestment of profits
Components of a Financial Model
 Components of a Financial Model
FIXED ASSETS
FIXED ASSETS Finance is required to provide the business with the
▪ Land and buildings “tools and environment” to do the job…
▪ Plant and machinery
▪ Vehicles
▪ Furniture and fittings, etc USES WORKING CAPITAL
required to support the flow of materials,
OF services and credit through the business

WORKING CAPITAL Cash

▪ Stocks FUNDS
▪ Utilities Debtors
▪ Telephone Materials
▪ Salaries Stocks
▪ Stationeries
Work-in progress
 Profit
SALES
Net Sales: Sales less any discount allowed
COST OF SALES
Materials, wages and overheads, including
depreciation, attributable to the goods and
services sold
OPERATING PROFIT
The “bottom line” which is often referred to as
PBIT Interest Earnings Taxes

EARNINGS
Operating profit less loan interest and taxes Retained Dividend
Profit
 The Total Business Financial Model
SHARE
CAPITAL
LOAN
CAPITAL
RETAINED
PROFIT
OVERVIEW
• Funds are raised to support the business plan. The
SOURCES OF FUNDS
consequences must be managed and satisfied.
• Funds are used to achieve the business plan resulting
USES OF FUNDS
in the purchase of tools, equipment, etc. and to
provide short-term credit to facilitate sales transaction.
FIXED WORKING • Performance is assessed to determine the profit (or
ASSETS CAPITAL
loss).
Sales

Depreciation COS

Operating Profit

Interest Tax Net Profit

 Financial Reporting
SHARE LOAN RETAINED
CAPITAL CAPITAL PROFIT

SOURCES OF FUNDS
THE
BALANCE
USES OF FUNDS SHEET
FIXED WORKING
ASSETS CAPITAL

Sales

Depreciation COS PROFIT &

Operating Profit LOSS
Interest Tax Net Profit
 Financial Statements
❑ The Balance Sheet
❑ Profit & Loss Account
❑ Source & Application of Funds

These statements provide a measure of the success or failure of the firm’s strategies
and policies, quantified in financial terms.

It is also useful to stock and bond analysts, bank loan officers, suppliers and
competitors. The financial statements can be used as the basis for assessing the
firm’s short-term and long-term creditworthiness and riskiness of the investment.
 Financial Statements
The Balance Sheet
A static description of the firm’s financial position at a fixed point in time.
It details the firm’s assets and liabilities at the end of the fiscal year for an annual
report.

Fiscal Year
A company's business year, usually a 12-month accounting period which does not
necessarily correspond to the calendar year.
Financial Statements
 Financial Statements
ABC Company Sdn. Bhd.
Consolidated Balance Sheet
as of December 31, 2022
USES OF FUNDS RM
Fixed Assets 8,988,000
Working Capital 2,454,000
Net Assets Employed 11,442,000

FINANCED BY:
Share Capital 6,162,000
Retained Profits 1,000,000
Loan Capital 2,199,000
Other Liabilities 2,081,000
Net Capital Employed 11,442,000
 Financial Statements
The Balance Sheet Equation
TOTAL ASSETS = TOTAL LIABILITIES + TOTAL EQUITY
Cash Accounts Payable
Marketable Securities Notes Payable
Accounts Receivables Bank Overdraft
Inventory Term Loan
Fixed Deposits Retain Earnings
Plant & Equipment Stockholder’s Equity
 Financial Statements
Why does a Balance Sheet Balance?
• The Balance Sheet balances the “net assets employed” with the “net capital
employed”
• Management is required to account for the monies made available which must be
traceable and identifiable within the business
• The funds supplied must equal the funds applied
• The total sources of funds must balance with the total uses of funds
 Financial Statements
The Profit and Loss (P&L) Account
• Another key financial report is the Profit and Loss Account which traces the
financial implications of operating the business to deliver products/services to the
customer.
• Profit is deemed to be the difference between what has been charged to the
customer and the expenses incurred to provide that product/service.
• The Profit and Loss Account traces and summarizes the day to day operations of
the business that relates to a 12 months period
 Financial Statements
The Profit and
Loss (P&L)
Account
 Financial Statements
Companies are required to:
• Apply the basic Accounting Concepts and Practices as per the Standard
Accounting Practices and the Companies Act
• Publish the Accounting Policies applied (Depreciation, R & D, Goodwill, Valuation
of stock, etc.)
• Publish a Statement of Profit/Loss
 Financial Statements
Source & Application of Funds
The Source & Application of Funds statement shows the sources and types of
additional finance obtained by the firm during the accounting period and how
these funds were used in its activities.

• Cash flows from operating activities

• Cash flows from investing activities
• Cash flows from financing activities
 Financial Statements
Source & Application of Funds
 Financial Statements
Source & Application of Funds
 Ratio Analysis
By carrying out Ratio Analysis, one can gain insight regarding the firm’s strengths and
weaknesses.
Categories of Ratio Analysis:
• Time Series Analysis
Is used to evaluate the firm’s performance over time
• Cross-sectional Analysis
Is used to compare the performances of different firms at the same point in time
• Benchmark Analysis
Is used to compare the performance of specific firm to a benchmark
 Ratio Analysis
Key Groupings for Ratio Analysis:
• Profitability
Examines return with respect to investment applied
• Operating Performance
Analysis of revenue income and revenue expenditure and the assessment of performance
• Asset management
Utilization of assets to generate revenue
• Liquidity
Examines the management of working capital and the implications to cash
• Capital Structure
Analysis of the long-term business funding employed by the business
• Shareholders Ratio
A range of ratios used externally to interpret and react to business performance
 Ratio Analysis
Operations Performance Controls
Gross Margin = Gross Margin x 100
Sales
Return on Sales = Operating Profit x 100
(ROS) Sales

Interest Cover = Operating Profit

Loan Interest
 Ratio Analysis
Profitability Ratio
Return on Capital Employed = Operating Profit X 100
Net Capital employed
Operating Performance
Gross Margin = Gross Margin x 100
Sales
Return on Sales = Operating Profit x 100
Sales
Sales Per Employee = Sales . x 100
No. of Employees
 Ratio Analysis
Asset Management

Stock Turnover = Cost of Goods Sold x 100

Total Stocks

Credit Allowed = Debtors x 100

Credit Sales/365

Credit Taken = Creditors x 100

Credit Purchases/365

Fixed Assets = Sales x 100

Turnover Fixed assets
 Ratio Analysis
Liquidity
Current Ratio = Current Assets (CA)
Current Liabilities
Quick Ratio = CA – Inventories – Other CA
Current Liabilities

Capital Structure
Gearing = Loan capital x 100
Shareholders Funds
Interest Cover = Operating Profit
Interest Charge
 Ratio Analysis
Shareholders Ratio
Earnings per Share = Earnings .
No. of Shares

Dividend Yield = Dividend per Share x 100

Market price per share

Price Earning Ratio = Market Price per Share

Earnings per share
 Project Appraisal
The Payback Period
The Payback Period is the period of time required for the project cash flows to recover
the initial capital outlay. It provides a general indication of risk where the longer the
period, the higher the risk.

An interpretation of the payback period will:

➢ Provide a useful comparison between alternative investments
➢ Provide a general indicator of risk
➢ Tend to ignore subsequent cash flows and return on investment
➢ Need to be used together with other techniques such as NPV, IRR
 Project Appraisal
The Payback Period: Example
Initial Investment = RM15,000,000
Net Cash Flows Project A Project B
Year 1 (‘000) RM4,000 RM3,000
Year 2 (‘000) RM5,000 RM5,000
Year 3 (‘000) RM5,000 RM8,000
Year 4 (‘000) RM6,000 RM10,000
Year 5 (‘000) RM6,000 RM12,000

What is the Payback Period for Projects A? Project B?

 Project Appraisal
Project A
a
= a + (b – c )/d Year 0 1 2 3 4 5
= 3 + (15 – 14)/6
= 3 + (1/6) -b d
= 3.17 years Cash flow -15,000 4,000 5,000 5,000 6,000 6,000
OR 3 years 2 months
c
Cumulative inflows 4,000 9,000 14,000 20,000 26,000

a – last period with negative cumulative cash flow

b – initial investment
c – the amount of cumulative inflow in period ‘a’
d – the amount of inflow in the first period with positive cumulative cash flow
 Project Appraisal
Project B
= a + (b – c )/d
= 3 + (15 – 10)/6 Year 0 1 2 3 a 4 5
= 3 + (5/10)
= 3.5 years -b c d
Cash flow -15,000 -3,000 5,000 8,000 10,000 12,000
OR 3 years 6 months

Cumulative inflows -3,000 2,000 10,000 20,000 32,000

 Project Appraisal
Project A – Alternative Computation

= a + (b/c) Year 0 1 2 3 a 4 5
= 3 + (1,000/6,000)
= 3.17 years c
OR 3 years 2 months Cash flow -15,000 4,000 5,000 5,000 6,000 6,000

b
CCF -15,000 -11,000 -6,000 -1,000 5,000 11,000

Note: ‘b’ - Take absolute value of last negative cumulative cash flow
 Project Appraisal
The Payback Period: Strengths & Weaknesses

Strengths Weaknesses
• Easy to use and understand • Does not account for time value
• Easier to forecast short-term of money
than long-term flows • Does not consider cash flows
• Can be used as a measure of beyond the payback period
liquidity • Cutoff period is subjective
 Project Appraisal
Net Present Value
The future stream of benefits and costs converted into equivalent values today. This is
done by assigning monetary values to benefits and costs, discounting future benefits
and costs using an appropriate discount rate. The technique is referred to as the
“Discounted Cash flow”.
In making the decision, there are also other non-financial factors that need to be
considered, such as:
➢ Risk
➢ Market
 Project Appraisal
Net Present Value: The Formula

CF1 CF2 CFn

NPV = + +...+ - ICO
(1+k)1 (1+k)2 (1+k)n

ICO – Initial cash outflow

CF – Cash flow in period 1,2, etc.
k – The discount factor
 Project Appraisal
Net Present Value: Example
The company has determined that the appropriate discount rate (k) for this project is
13%.
$4,000 $5,000 $5,000 $6,000 $6,000
NPV = + + + + - $15,000
(1.13)1 (1.13)2 (1.13)3 (1.13)4 (1.13)5

Find the net present value (NPV) of Project A

(Demonstration on the use of Excel)
 Project Appraisal
Net Present Value: Strengths and Weaknesses

Strengths Weaknesses
• Simple way to determine if a • Accuracy depends on quality of
project delivers value. inputs.
• Cash flows assumed to be • Not useful for comparing
reinvested at the hurdle rate. projects of different sizes
• Accounts for TVM. • Purely quantitative in nature
• Considers all cash flows. and does not consider
qualitative factors.
 Project Appraisal
Internal Rate of Return
The Internal Rate of Return is the DCF factor which would result in discounting the
Net Cash Income to a NPV that equates with the initial cash outlay.

The IRR uses the:

➢ Project investment
➢ Net cash income
➢ Discounted cash flow process
➢ Project life to calculate the rate of return yielded by the project based cash flow.
 Project Appraisal
Internal Rate of Return: The Formula

CF1 CF2 CFn

ICO = + +...+
(1+IRR)1 (1+IRR)2 (1+IRR)n

ICO – Initial cash outflow

CF – Cash flow in period 1,2, etc.
IRR – Internal rate of return
 Project Appraisal
Internal Rate of return: Project A

$4,000 $5,000 $5,000 $6,000 $6,000

$15,000 = + + + +
(1+IRR)1 (1+IRR)2 (1+IRR)3 (1+IRR) 4 (1+IRR)5

Find the interest rate (IRR) that causes the discounted cash flows to equal $15,000.
(Demonstration on the use of Excel)
 Project Appraisal
Internal Rate of Return: Strengths and Weaknesses

Strengths Weaknesses
• Accounts for TVM • Assumes all cash flows
• Considers all cash inflows and reinvested at the IRR
outflows • ICO between investment
• The ranking of project is easy alternatives not considered.
since it indicates percentage • Difficulties with project
return. rankings and Multiple IRRs
• Less subjective
 Time Value of Money

Which would you prefer?

RM10,000 today or RM10,000 in 5 years?

Obviously, RM10,000 today.

You already recognize that there is
TIME VALUE TO MONEY!
 Time Value of Money
Why is TIME such an important element in your decision?
TIME allows one the opportunity to postpone consumption and earn
INTEREST.
Interest
Money paid (earned) for the use of money
 Interest Rate
Types of Interest:
➢ Simple Interest
Interest paid (earned) on only the original amount, or principal
borrowed (lent).
➢ Compound Interest
Interest paid (earned) on any previous interest earned, as well as on
the principal borrowed (lent).
 Interest Rate
Simple Interest Formula
Example:
SI = P0(i)(n) You deposit RM1,000 in an account
earning 7% simple interest for 2
SI: Simple Interest years. What is the accumulated
interest at the end of the 2nd year?
P0: Deposit today (t=0)
i: Interest Rate per Period SI = P0(i)(n)
n: Number of Time Periods = $1,000(.07)(2)
= $140
 Interest Rate
Future Value (FV):
Example:
The value at some future time
You deposit RM1,000 in an account
of a present amount of money,
earning 7% simple interest for 2
or a series of payments,
years. What is the FV of the
evaluated at a given interest
deposit?
rate.
FV = P0 + SI
= $1,000 + $140
FV = P0 + SI = $1,140
 Interest Rate
Present Value (PV): Example:
The current value of a future Present Value (PV):
amount of money, or a series of The PV is simply the RM1,000
payments, evaluated at a given originally deposited. That is the
interest rate. value today!
FV = RM1,140
What is the PV of the previous Discount rate = 7%
transaction? PV = RM1,140(100/114)
= RM1,000
 Interest Rate
Compound interest: Example:
Interest paid (earned) on any You deposit RM1,000 in an account
previous interest earned, as earning 7% simple interest for 2 years.
well as on the principal What is the Present Value of the
borrowed (lent). deposit?
Year 1 interest
FV = $1,000(1.07)2 RM1,000 X .07
FVn = P0 (1+i)n = $1,000(1.07)(1.07) = RM70

= $1,000(1.1449) Year 2 interest

RM1,000 x .07 + RM70 x .07
= $1,144.90 = RM70 + RM 4.90
= RM 74.90
 Interest Rate
Compound Interest Valuation Table:

Period 6% 7% 8%
1 1.060 1.070 1.080
2 1.124 1.145 1.166
3 1.191 1.225 1.260
4 1.262 1.311 1.360
5 1.338 1.403 1.469
 Interest Rate

Future Value of a Single $1,000 Deposit

20000
10% Simple
15000 Interest
10000 7% Compound
Interest
5000 10% Compound
Interest
0
1st Year 10th 20th 30th
Year Year Year
 Interest Rate
Problem:
Nenek Tracy wants to know how large her deposit of RM10,000 today
will become at a simple annual interest rate of 8% for 5 years.

FV = P0 + SI
= P0 + P0(i)(n)
SIn = P0(i)(n) = P0 [1+ (.08 x 5)]
= RM10,000(1.40)
= RM14,000
 Interest Rate
Problem:
Atuk Kamarul wants to know how large his deposit of RM10,000 today
will become at a compound annual interest rate of 8% for 5 years.

FV = RM10,000 (1+.08)5
FVn = P0 (1+i)n = RM10,000 X 1.469
= RM14,690
 Interest Rate
Problem:
Miss Susie wants to know how large of a deposit to make now so that the
money will grow to RM10,000 in 5 years at an interest rate of 10%

PV0 = FVn / (1+i)n Can we Check!

PV0 = $10,000 / (1+ 0.10)5 HOW?

= $6,209.21 FV = PVo(1+i)n
= $6,209.21(1.1)5
= $6,209.21(1.61)
= $10,000
 Interest Rate
Solving for i:
A security of RM78.35 will pay RM100.00 in 5 years. What is the interest
rate, i?
FVn = PV0(1+i)n
100 = 78.35(1+i)5
(1+i)5 = 100/78.35
= 1.28
(1+i) = 1.28
= 1.05
i = 1.05 – 1
= .05 or 5%
 Interest Rate
Rule-of-72
How long does it take to double $5,000 at a compound rate of 12% per
year (approx.)?

Approximate Years to Double = 72 / i%

72/12% = 6 Years
[Actual Time is 6.12 Years]

How long does it take to double your EPF contributions assuming that
the dividend rate is 5%?
 Annuities
An Annuity represents a series of equal payments (or receipts) occurring
over a specified number of equidistant periods.
• Ordinary Annuity Example:
➢ Payments or receipts occur at the ➢ Student Loan Payments
end of each period. ➢ Car Loan Payments
• Annuity Due
➢ Insurance Premiums
➢ Payments or receipts occur at the
beginning of each period. ➢ Mortgage Payments
➢ Retirement Savings
 Annuities
Ordinary Annuity

End of End of End of

Period 1 Period 2 Period 3

0 1 2 3

$100 $100 $100

Today
Cash flows
 Annuities
Annuity Due (AD)

Beginning of Beginning of Beginning of

Period 1 Period 2 Period 3

0 1 2 3

$100 $100 $100

Today
Cash Flows
 Annuities

Future Value of Ordinary Annuity

Cash flows occur at the end of the period
0 1 2 n n+1
i% . . .

R R R
R = Periodic Cash Flow

FVAn = R(1+i)n-1 + R(1+i)n-2+ ... + R(1+i)1 + R(1+i)0

 Annuities

Future Value of Ordinary Annuity

Cash flows occur at the end of the period
0 1 2 3 4
7%

$1,000 $1,000 $1,000

$1,070
$1,145

$3,215 = FVA3
 Annuities

Future Value of Ordinary Annuity

Cash flows occur at the end of the period

Period 6% 7% 8%
1 1.000 1.000 1.000 FVAn = R (FVIFAi%,n)
2 2.060 2.070 2.080 FVA3 = $1,000 (FVIFA7%,3)
3 3.184 3.215 3.246 = $1,000 (3.215)
4 4.375 4.440 4.506 = $3,215
5 5.637 5.751 5.867
 Annuities

Future Value of Annuity Due

Cash flows occur at the beginning of the period
0 1 2 3 n-1 n
. . .
i%
R R R R R

FVADn = R(1+i)n + R(1+i)n-1 + ... + R(1+i)2 + R(1+i)1

= FVAn (1+i)
 Annuities

Future Value of Annuity Due

Cash flows occur at the beginning of the period
0 1 2 3
6%
RM2,000 RM2,000 RM2,000 RM2,120

RM2,247

RM2,382
RM6,749 = FVAD3
 Annuities

Present Value of Ordinary Annuity

Cash flows occur at the end of the period

0 1 2 n n+1
i% . . .

R R R

PVAn
PVAn = R/(1+i)1 + R/(1+i)2 + ... + R/(1+i)n
 Annuities

Present Value of Ordinary Annuity

Cash flows occur at the end of the period
0 1 2 3 4
7%
$1,000 $1,000 $1,000
$934.58
$873.44
$816.30
$2,624.32 = PVA3
PVA3 = $1,000/(1.07)1+ $1,000/(1.07)2+ $1,000/(1.07)
= $934.58 + $873.44 + $816.30`
= $2,624.32
 Annuities

Present Value of Annuity Due

Cash flows occur at the beginning of the period
0 1 2 n-1 n
i% . . .

R R R R

PVADn PVADn = R/(1+i)0 + R/(1+i)1 + ... + R/(1+i)n-1

= PVAn (1+i)
 Annuities

Present Value of Annuity Due

Cash flows occur at the beginning of the period
0 1 2 3
6%
RM1,000 RM1,000 RM1,000

RM1,000
RM 934.58
RM 873.44
RM2,808.02 = PVADn
 Working Capital Management
Working Capital Management
• The set of activities performed by a company to make sure it has
enough resources for day-to-day operating expenses while keeping
resources invested in a productive way.
• The main components of net working capital are cash, inventory,
receivables, and payables
• Ensuring that the company possesses appropriate resources for its
daily activities
 Working Capital Management
The Cash and Operating Cycles for a Firm
 Working Capital Management
Working Capital
The difference between a company’s current assets and its current
liabilities.

Current Assets Current Liabilities

➢ Cash ➢ Accounts payable
➢ Accounts receivable ➢ short-term borrowings
➢ Inventories ➢ accrued liabilities.

Working capital = Total currents assets – Total current liabilities

 Working Capital Management
Working Capital Calculation: Example
Working Capital Management
Ensures that the company possesses enough cash resources
for its ordinary business needs and unexpected needs of a
reasonable amount

Should grant its customers the proper flexibility or level of

commercial credit while making sure that the right amounts of
cash flow in via operations

Ensuring that the company keeps an adequate level of

inventory to deal with ordinary operations and fluctuations in
demand

The right balance between early payments and commercial

debt should be achieved

Selection of the right financing instruments and the sizing of

the funds accessed via each instrument, e.g. regular credit
lines, revolving credit, short-term loans, factoring, etc.
 Working Capital Management
➢ Working capital management involves balancing movements related to five main
items – cash, trade receivables, trade payables, short-term financing, and inventory
– to make sure a business possesses adequate resources to operate efficiently.
➢ The levels of cash should be enough to deal with ordinary or small unexpected
needs, but not so high to result in an inefficient allocation of capital.
➢ Commercial credit should be used properly to balance the need to maintain sales
and healthy business relationships with the need to limit exposure to customers
with low creditworthiness.
➢ Managing short-term debt and accounts payable should allow the company to
achieve enough liquidity for ordinary operations and unexpected needs, without an
excessive increase in financial risk.
➢ Inventory management should make sure there are enough products to sell and
materials for its production processes while avoiding excessive accumulation and
obsolescence.
 Debt Versus Equity Financing
What is Business Debt?
• Debt incurred for the purpose of carrying on an enterprise or business
conducted by a company, whether by way of finance to fund its
operations or capital requirements, for the supply of goods and
services to the business
• The sum of money that is borrowed by a company for a certain period
of time to be repaid along with the interest.
• The use of a loan or a bond issuance to obtain funding for a business.
• Short-term debt financing is more commonly used to obtain working
capital
• Long-term debt financing is used to acquire assets
 Debt Versus Equity Financing
Categories of Business Debts:
• Secured Debt
➢ Debt that requires property or assets with a large enough value pledged as
security to cover the amount of the debt.
➢ Burden is on the borrower
• Unsecured Debt
➢ Debt that does not require collateral as security
➢ Burden is on the lender
 Debt Versus Equity Financing
Questions That Must Be Asked Before Taking the Business Loan
• Is getting a loan the only option?
• What will the money be used for?
• Can I make the monthly payments?
• Which type of financing best suits my needs?
• Can I provide collateral?
• Are my credit ratings strong enough?
 Debt Versus Equity Financing
Advantages and Disadvantages of Debt Financing
Advantages
• Preserve company ownership
• Tax-deductible interest payments
Disadvantages
• The need for regular income
• Negative impact on credit ratings
• May pose cash flow problems
 Debt Versus Equity Financing
What is Equity?
• The ownership of any asset after any liabilities associated with the asset are
cleared
• An ownership “share” in the revenue stream of a corporation’s income once all
prior obligations and debts have been satisfied
• Equity is the ownership (share) an investor has in a corporation
• The total amount of money that a shareholder is eligible to receive if all of a
company’s debts are paid off and its assets liquidated
• Total assets minus total liabilities

Question: Is it possible for equity to be negative?

 Debt Versus Equity Financing
What is Equity Financing?
• Selling a portion of a company's equity in return for capital
• Raising funds to meet liquidity needs of an organisation by selling a company's
stock in exchange for cash
• Sale of an ownership interest to various investors to raise funds for business
objectives
• Raise money by selling shares in the business, either to existing shareholders or
to a new investor
• Finance that consists of funds from investors to finance the business by offering
portions of the company (shares) to investors
 Debt Versus Equity Financing
Types of Equity Financing
• Common stock
➢ A security which represents a portion of the owner's capital in a business and
share the success or failure of the business
➢ Shareholders have the right to vote in general meetings and to elect and
dismiss directors
➢ Usually form the bulk of a company's capital and have no special rights over
other shares
➢ In the event of liquidation, ordinary shares rank after all other liabilities of the
company.
 Debt Versus Equity Financing
Types of Equity Financing
• Preferred shares
➢ Carry the right to fixed dividend which ranks for payment before that of
ordinary shareholders
➢ Preferred as regards to distribution of assets upon dissolution of the company
➢ Usually carry no voting rights except upon failure to pay dividends
 Debt Versus Equity Financing
Types of Equity Financing
• Contributed surplus (Additional paid-in capital)
➢ Shareholders’ equity that reflects excess amounts collected from the issuance
of shares above their par value
➢ Appears in the shareholder's equity section of a company's balance sheet
• Retained earnings
➢ The accumulated portion of a business’s profits that are not distributed as
dividends to shareholders
➢ Reserved for reinvestment back into the business
➢ Normally, these funds are used for working capital and fixed asset purchases
(capital expenditures) or allotted for paying off debt obligations.
 Debt Versus Equity Financing
Sources of Equity Financing
• Angel investor
An individual who invests his/her own money in the business to help it grow
• Venture capitalist
Manages the pooled money of others, such as pension funds to provide funding in
exchange for a stake in the business
• Private equity
Capital investments made into private companies by institutional investors such as
pension funds and insurance companies.
 Debt Versus Equity Financing
Sources of Equity Financing … cont.
• Equity crowdfunding
To seek funding from investors and members of the public to buy shares in the
company by listing the business on a regulated online platform
• Initial public offering (IPO)
Raises finance publicly for the first time to secure large amounts of investment
• Expansion capital
An investment by capital firm a large sum of money into a business for an equity
stake
 Debt Versus Equity Financing
Advantages and Disadvantages of Equity Financing
Advantages
• No obligation to repay the money
• Access to business contacts, management expertise, and other sources of capital
Disadvantages
• Dilution of ownership and operational control
• No tax shields
• Investors require a higher rate of return than lenders
 Debt Versus Equity Financing
Debt OR Equity Financing?
The choice often depends upon:
• Source of funding most easily accessible to the company
• Cash flow position
• How important maintaining control of the company is to its principal owners
• How much of a company's financing is proportionately provided by debt and equity
(debt-to-equity ratio)
 Risk and Return
What is Risk?
In finance, risk refers to the degree of uncertainty and/or potential financial loss inherent in
an investment decision
What is Return?
Money made or lost on an investment over some period of time.
What is Risk-Return Tradeoff?
• The potential return rises with an increase in risk.
• Individuals associate low levels of uncertainty with low potential returns, and high levels
of uncertainty or risk with high potential returns
• Invested money can render higher profits only if the investor will accept a higher
possibility of losses.
 Dividend Policy
What is Dividend?
• A distribution of profits by a corporation to its shareholders.
• A sum of money paid regularly (typically annually) by a company to its
shareholders out of its profits (or reserves)
• A share of profits and retained earnings that a company pays out to its
shareholders and owners
• A reward that publicly-listed companies extend to their shareholders from the
company’s net profit in the form of cash, cash equivalent, shares, etc.
 Dividend Policy
What is Dividend Policy?
• A set of guidelines or rules, determined by the Board of Directors, that a company
follows when deciding how much of its profits to distribute to its shareholders,
taking into account the company's financial performance, future investments,
capital requirements, and other factors
• The policy that dictates the amount of dividends paid out by the company to its
shareholders and the frequency with which the dividends are paid out
• The policy a company uses to structure its dividend payout to shareholders
 Dividend Policy
Dividend Pattern
• Stable dividend
Shareholders receive a fixed dividend amount from time to time irrespective of the amount of
earnings of the company, even when it is making losses
• Regular dividend
A fixed percentage of profits to be given as dividends where a higher profit results in the
company paying a higher dividend and a lower dividend when it makes a smaller profit.
 Dividend Policy
Dividend Pattern … cont.
• Irregular Dividend
A certain amount of dividend paid to the shareholders on a case-to-case basis dependent upon
its priority
• No Dividend
The company retains all its profits and does not distribute them among its shareholders.
 Dividend Policy
Factors that Determine Dividend Policy
• Profitability of the company
• Availability of funds
• Growth plans
• Dividend history of the company
• Dividend trends in the industry.
 Dividend Policy
Benefits of a Dividend Policy
• For companies
➢ Shareholders exhibit more trust in the company that pays periodic dividends
over a non-dividend paying company.
➢ Regular dividend payments attract investors who want to invest in robust
businesses and earn a steady income through dividends.
• For shareholders
➢ The dividend policy clearly and transparently states the terms of dividend
distribution between the shareholders and the company.
➢ Shareholders of a dividend stock can earn dual income.
 Mergers and Acquisitions
Merger
• A business integration process where two or more enterprises join forces to create
a new organization by entering into a legal agreement
• A strategic process whereby two or more companies mutually form a new single
legal entity.

Acquisition
• A strategic move of one company buying another company by acquiring major
stakes of the firm, usually, to share its customer base, operations and market
presence
 Mergers and Acquisitions
Common Types of Merger
• Horizontal merger
➢ When two companies operating in the same market, selling similar products or
services, come together to dominate market share
➢ Aims to build economies of scale and decrease market competition
• Vertical merger
➢ Two companies in the same industry who operate in different stages of
production. For example, a retailer who merges with a wholesaler, or a
wholesaler merging with a manufacturer
➢ Ideal for streamlining operations, boosting efficiencies, and cutting costs across
the supply chain.
 Mergers and Acquisitions
Common Types of Merger … cont.
• Congeneric merger (Concentric merger)
➢ The acquirer and target company have different products or services, but
operate within the same market and sell to the same customers
➢ They could be indirect competitors, although their products often complement
each other
➢ Allow the new business entity to expand its product lines and increase market
share
 Mergers and Acquisitions
Common Types of Merger … cont.
• Market-extension and product-extension mergers
➢ Two companies in the same industry joining forces with the aim of expanding market
reach
➢ Commonly, this type of transaction occurs across multiple geographic regions
➢ A product extension merger occurs when a specific product is added to the product
line of the acquirer from the acquired company.
• Conglomerate merger
➢ Occurs between two companies whose business activities and industries may be
completely unrelated
➢ In pure conglomerate mergers, the two firms may continue to operate separately
within their own markets
➢ In a mixed one, they may look to expand product or market reach
 Mergers and Acquisitions
Why Companies Merge with or Acquire Other Companies
• To grow the business
• To achieve revenue synergies
• To achieve economies of scale
• To diversify
• To vertically integrate the business
• To avail of tax benefits
• For knowledge transfer
 Mergers and Acquisitions
Differences between mergers and acquisitions
Merger Acquisition
Two or more individual companies One company completely takes over the operations of
Procedure
join to form a new business entity. another.
In case the acquiring company takes over another
A merger is agreed upon by mutual
Mutual Decision enterprise without the latter’s consent, it is termed as a
consent of the involved parties.
hostile takeover.
The acquired company mostly operates under the name
The merged entity operates under a
Name of Company of the parent company but can retain its original name if
new name.
the parent company allows it.
Comparative Similar stature, size, and scale of The acquiring company is larger and financially stronger
Stature operations. than the target company.
There is dilution of power between The acquiring company exerts absolute power over the
Power
the involved companies. acquired one.
Shares New shares issued New shares are not issued.