1. What is finance?

The distinction between public finance and corporate

finance? 2
2. What is corporate finance? Its characteristics? And its goals? 3
3. Who is financial manager? The roles of financial manager? 4
4. What is money market? Its characteristics? And its importance? 5
5. What is capital market? Its characteristics? And its importance? 6
6. Your understanding of a Sole proprietorship? Its characteristics? Its
advantages and disadvantages? 7
7. Your understanding of a Partnership? Its characteristics? Its advantages and
disadvantages? 8
8. Your understanding of a Corporation? Its characteristics? Its advantages
and disadvantages? 9
9. Make the comparison between partnership and corporation? 10
10.What is the NPV? The advantages and disadvantages of NPV? 11
11.Your understandings of financial analysis. How important is it? 12
12.What are the corporate finance decisions? How important are they? 13
13.What is the Equivalent Annual Cost? Its rule? and the advantages of
calculating EAC?
14
14.What is the Internal Rate of Return (IRR)? Its advantages and
disadvantages? 15

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1. What is finance? Difference between pubic finance & corporate finance
Finance is a branch of economics concerned with resource alloccation as well
as resource mangament, acquisition and investment. Simply, finance deals with
matters related to money and the markets.
Finance is a science of mobilizing, allocating, managing and using financial
resources efficiently
Finance is science of how finance is mobilized, allocated, managed and used
FR eficiently

Public finance Corporate finance

Definition Public finance is a science/an Corporate finance is a

art of studying how a science/an art of studying how
government/state mobilizes, a corporation/company
allocates, uses and manages mobilizes, allocates, uses and
capital/monetary resources manages capital/monetary
efficiently resources efficiently The
primary goal: to maximize
corporate value while managing
the firm's financial risks.

characteristic It is concerned with: - corporate finance deals with

s decisions financial decisions
 Identification of required
that is divided in both long term
expenditure of a public
and short-term
sector entity
+ in long-term: it is capital
 Source of that entity’s
investment decision including
revenue
investing decision, financing
 The budgeting process decision and dividend decision

 Debt issuance for public + in short-term: it is working

works projects capital decisions.
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2. What is corporate finance? Characteristics? Goals?
- Corporate finance: Corporate finance is a science/an art of studying how a
corporation/company mobilizes, allocates, uses and manages capital/monetary
resources efficiently
- Characteristics: corporate finance deals with decisions financial decisions
that is divided in both long term and short-term
+ in long-term: it is capital investment decision including investing decision,
financing decision and dividend decision
+ in short-term: it is working capital decisions.
- Goals: to maximize corporate value while managing the firm’s financial risks

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3. Who is financial manager? Roles?
Financial manager: an individual who is in charge of planning, directing,
monitoring, organizing & controlling of the monetary resources of an org
*Roles:

− Financial manager must be a person who has much knowledge about

different fields such as: financial market, banking, accounting, taxation,
economic-financial laws
− The role of the FM is to consult and decide how to maximize the asset
value of shareholders
− Financial manager need to understand economic policies of nation to give
out appropriate forecast for the assessment of financial policies’
effectiveness
− Financial managers face 3 basic problems concerned with investment
decisions, financing decisions & dividend decisions.

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4. What is money market? Characteristics? Importance?
Money market also trades in highly liquid financial instruments with maturities
less than 90 days to one year, and government securities with maturities less
than 3 years, foreign exchange and bullion
*Characteristics:

● Includes transactions with large value

● Has Stability securities prices

● Has High liquidity but low risk 🡪lower return

● is Short duration (less than 1 year)

*Importance

● Regulating short-term capital and liquidity for the background economy,

contributing to the national monetary policy
● Meeting the demand of short-term loans with low cost for gov, businesses
and intermediary organizations
● Creatingopportunities of investing idle capital, income and liquidity for
investors

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5. What is capital market? Characteristics? Importance
Capital market: 1 of financial market in which long-term debt and long-term
equity are traded
Capital market is a financial market that works as a conduit for demand and
supply of debt and equity capital. It channels the money provided by savers and
depository institutions to borrowers and investors through a variety of financial
instruments (bonds, notes, shares) called securities
- Capital market: include primary market and secondary market

● Primary market: a part of the capital market that deals with issuing of
new securities
● Secondary market: a part of the capital market, dealing with the securities
that are already issued in the primary market. in secondary market, just
ownership transfer happens, there is no effect on the company.
- Characteristics:

● The securities price is significantly fluctuated due to the fluctuation of

interest rate in long-term period
● The secondary market does not develop as much as the primary

● The securities have low liquidity but high risk🡪higher return

- Importance

● Help firm and gov raise cash by selling securities

● Allow investors with excess fund to invest and earn return

● Channel funds from savers to borrowers

● Allocate resources optimally

● Help to allocate cash to where it is most productive

● Lower the cost of exchange

● Secondary market allows investors can quickly sell their securities if the
need arises

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6. Understanding of a sole proprietorship? Characteristics? Advantages &
disadvantages?
A Sole proprietorship is a type of business entity that is owned and run by one
natural person and in which there is no legal distinction between the owner and
the business. The owner is in direct control of all elements and is legally
accountable for the finances of such business and this may include debts, loans,
losses,..
- Characteristics:

● Owned by one person

● Relatively limited control

● Easy to form

● Owner is the manager

● No separation of owner from business

● Owner is responsible for all debts and liabilities

● Business and personal property can be seized in case ongoing bankrupt

advantages Dis

(1) Easy to establish Difficult to raise money

(2) Full control over all business Responsible for all aspect of the
decisions business

(3) Owners keep all profit Limited skills and knowledge

(4) Flexibility Limited life

(5) Tax advantage Unlimited personal liability

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7, Understanding of partnership? Characteristics? Ad and disad?
Partnership: a type of business organization in which two or more individuals
pool money, skills and other resources, and share profit and loss in accordance
with terms of the partnership agreement.
- Characteristics:
+ The owners are also the managers. The firm and partners are the same
+ Partnership agreement sets out: responsibilities in making decisions & how
profits are divided
+ The profit is divided into partners as ratio as agreed
+ No partner can sell/transfer his interest in the firm to anyone without the
consent of other partners
+ Each partner has unlimited liability on debts
Adv Disadv

(1) Easy and low cost to be (1) Unlimited liability

established
(2) Life is limited to the life of owners
(2) Risks are spread among partners
(3) Difficulties in transferring ownership
(3) Profits are taxed once as personal
(4) Equity raised is limited to the
income tax
owner’s personal wealth
(4) Profits belong to the partners
(5) Disagreement between partners in the
(5) Share risks with others issues of business management

(6) Be good choice when not having

enough money to start business

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8. Understanding of corporation? Characteristics? Ad and dis?
Corporation is a firm that meets certain legal requirements to be recognized as
having legal existence, as an entity separated and distinct from its owners.
Corporations are owned by their stockholders who share in profits and losses
generated through the firm’s operations.
- Characteristics:

● Legal existence

● Limited liability

● Continuity of existence

ad Dis

-Limited liability of the shareholders -Most complex and expensive form

-Can easily raise capital -Conflicts between shareholders

requirements and management decisions
-Have unlimited life
Double-taxation
-Ease of transfer of ownership

2 types: Private company and Public comp

● private company:

✔ closely held by a few people

✔ quantity: 3-50 of shareholder

✔ stocks cannot be traded on exchanges and private equity cannot be

raised
✔ less regulations as compared to public companies

● public company

✔ stock are held by a large number of people

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✔ at least 7 shareholders

✔ can be listed on stock exchange and can go public

✔ have to follow many laws with regards to the board composition

and AGM

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9. Compare partnership & corporation
Compare sole trader & partnership
Partnership: a type of business organization in which two or more individuals
pool money, skills and other resources, and share profit and loss in accordance
with terms of the partnership agreement.
Corporation: is a firm that meets certain legal requirements to be recognized as
having legal existence, as an entity separated and distinct from its owners.
corporations are owned by their stockholders who share in profits and losses
generated through the firm’s operations.
partnership Corporation

Similar: Owners or shareholders share profits and losses generated through

business operation

Conflicts between owners and shareholders in business management

The firm and partners are the same A separate and distinct entity from its
owners

Easy and low cost to establish Most complex and expensive form

Be taxed once – personal income tax Double-taxation: corporate tax on

profits and personal income tax on
dividend

Unlimited liability Limited liability

Difficult to transfer ownership Easy to transfer ownership

Equity raised is limited to owner’s Raise capital easily

personal wealth

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10. What is NPV? Ad and dis?

Net Present Value (NPV) is the difference between the present value of the
future cash inflows from an investment and the amount of investment.
Present value of the expected cash flows is computed by discounting them at the
required rate of return.
C1 C2 Cr
NPV= -C0 + 1+ r + ( 1+r ) 2 + …+ (1+ r ) r

-C0: initial investment

C=cash flow
R=discount rate
T: time

ad dis

NV allows for the time value of the cash • It's very difficult to identify the correct
flows and consider all the cash flows discount rate to use.
arising during the project • NV do not determine profitability rate
of capital.
• NV compares mutually exclusive
• NV do not show the relationship
projects, NPV gives the most correct between profitability rate of capital and
ranking. With specific capital weight average cost of capital.
investment, it is the most reliable • Investors can not select projects that
method are not the same period of investment
and the capital of projects are limited
• NV do not provide an overall picture
of gain or loss of executing a certain
project.

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 11. Understanding of Financial analysis

Financial analysis is the process of evaluating business, projects, budgets, and other
finance-related entities to determine their suitability for investment

- Importance: understanding the financial analysis helps financial managers decide to

 Continue or discontinue its main operation or part of its business

 Make or purchase certain materials in the manufacture of its products
 Acquire or rent certain machinery and equipment in the production of its goods
 Issue stocks or negotiate for a bank loan to increase its working capital
 Make decisions regarding investing or lending capital
 Make an informed selection on various alternatives in the conduct of its
business

-goals: financial analysts often access the firm’s profitability, solvency, liquidity,
stability

Profitabilit Its ability to earn income and sustain growth in both short-term and long-term. A
y company’s degree of profitability is usually based on the income statement, which
reports on the company’s results of operations

Solvency Its ability to pay its obligation to creditors and other third parties in long term

Liquidity Its ability to maintain positive cash flow, while satisfying immediate obligations

stability The firm’s ability to remain in business in the long run, without having to sustain
significant losses in the conduct of its business. assessing a company’s stability requires
the use of both income statement and balance sheet, as well as other financial and non-
financial indicators

- Methods: financial analysts compare the financial ratios: past performance, future
performance, comparative performance

Financial analysts also use: ratios analysis, percentage analysis (horizontal analysis,
vertical analysis)

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12. What are the corporate finance decisions? How important are they?

● Investment decisions: the process of planning and management of long-

term investment of an organization.

The importance: Financial manager has to always consider to the time value of
money and risk factors because the analysis and assessment is to select financial
decision in the future.

● Financing decision: the decisions concerning the liabilities and the

stockholders’ equity side of the balance sheet

The importance:

- affect the company in the long term

- involve a large number of funds as they include capital budgeting and

investing the funds

● Dividend decision: is the distribution of a portion of a company, decided

by the board of directors, to a class of its shareholders, including

+ Paying dividends

+ Reinvesting in profitable projects regarding business growth, the increase

of share price, and increasing of shareholder’s return.

The importance: affect on the availability and the cost of capital

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13. What is equivalent annual cost? Its rules? Advantages of calculating
each EAC

The equivalent annual cost is the annual (annuity or payment) project cost that
equates the present value cost of the project (outlay and annual costs) at the
opportunity rate of return.
The equivalent annual cost is the level annual charge or cost necessary to
recover the present value of investment outlays and operating costs.
Equivalent annual cost - FORMULA
present value of costs
EAC= annuity factor

1 1
Annuity factor = r - t
r (1+r )

- Decision rules :When comparing mutually exclusive projects that have

unequal project lives, one must analyze the costs of the projects, the outlays and
the annual costs of the projects.
Calculate the equivalent annual cost of both machines => Accept the project
with the lowest equivalent annual cost.
- Advantage
+ compare two or more assets having different life span
+ determine the cost price for the old machine by including depreciation and
other such factors while calculating the cost
+ compare the cost of old machine with the new one
+ compare the cost of 2 machines that perform same work but function
altogether different

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14. What is Internal rate of return? Its rules? Ad and dis?
IRR is the rate of return that would make the present value of future cash flows
plus the final market value of an investment or business opportunity equal the
current market price of the investment or opportunity
- Decision rules

● The NPV rule: invest in any project that has a positive NPV when its cash
flows are discounted at the opportunity cost of capital
● The Rate of Return rule: invest in any project offering a rate of return that
is higher than the opportunity cost of capital

Ad Disad

+ tells whether an investment + requires an estimate of the cost of capital to

increases the firm’s value make a decision
+ considers all cash flows of + may not give the value maximizing
the project decision when used to compare mutually
exclusive projects.
+ considers the time value of
money + may not give the value maximizing
decision when used to choose projects when
+ considers the risk of future there is a capital shortage
cash flow (through the cost of
capital in the decision rule) + cannot be used in situations in which the
sign of the cash flows of a project change
more than once during the project’s life

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