Corporate Finance

Irfan Nepal
Corporate Finance
Corporate finance is the subfield of finance that deals with how
corporations address funding sources, capital structuring,
accounting, and investment decisions.
Corporate Finance
• Corporate finance is the process of obtaining and managing
finances in order to optimize a company’s growth and value
for its shareholders.
• The concept focusses on investment, financing and dividend
principle.
• The main functional areas are capital budgeting, capital
structure, working capital management and dividend
decisions.
Corporate Finance
• Corporate finance is concerned with how businesses fund their
operations in order to maximize profits and minimize costs.

• It deals with the day-to-day operations of a business' cash

flows as well as with long-term financing goals (e.g., issuing
bonds).

• In addition to capital investments, corporate finance is

concerned with monitoring cash flows, accounting, preparing
financial statements, and taxation.
Elements of Corporate Finance
Principles of Corporate Finance
The corporate finance principles work as a guideline for the
corporate to ensure better application of finance. This helps to
ensure the smooth business operation and also to maximize the
return of the stockholders. The task of corporate finance is
mainly related to financing, investment, and dividend payment.
And a better and safe financial decision is followed by the core
principles of corporate finance.
Principles of Corporate Finance
Examples of Corporate Finance

1- Financial modeling:

Financial modeling helps to analyze the value and risk associated

with investment options.
2- Bank loan:
Taking a loan from a bank to meet business needs and associated
due diligence to analyze the cost of loan and repayment capacity.
3- IPO: Initial public offering
(IPO) generally helps to raise capital through equity financing.
Examples of Corporate Finance
4- Refinancing and renegotiating all debts and payments: 
As the market changes, corporations may strategically negotiate
to update the terms of loans or other payment agreements.
5- Dividend distribution: 
Dividend distribution depends on the policy set by the
management. It can be regular or irregular.
Corporate Governance
• Corporate governance is the structure of rules, practices, and
processes used to direct and manage a company.
• A company's board of directors is the primary force
influencing corporate governance.
• The basic principles of corporate governance are
accountability, transparency, fairness, responsibility, and risk
management.
Corporate Governance
• Bad corporate governance can cast doubt on a company's
operations and its ultimate profitability.
• Corporate governance covers the areas of environmental
awareness, ethical behavior, corporate strategy,
compensation, and risk management.
Corporate Governance
Corporate governance refers to the internal controls and
procedures for managing companies.
Objectives of Corporate Governance
Benefits of Corporate Governance

• Good corporate governance creates transparent rules and

controls, provides guidance to leadership, and aligns the
interests of shareholders, directors, management, and
employees.
• It helps build trust with investors, the community, and public
officials.
• Corporate governance can provide investors and stakeholders
with a clear idea of a company's direction and business
integrity.
Benefits of Corporate Governance

• It promotes long-term financial viability, opportunity, and

returns.
• It can facilitate the raising of capital.
• Good corporate governance can translate to rising share prices.
• It can lessen the potential for financial loss, waste, risks, and
corruption.
• It is a game plan for resilience and long-term success.
Forms of Business
The 4 Major Business Organization Form

• Sole Proprietorship
• Partnership

• Corporation
• Limited Liability Company (LLC)
Sole Proprietorship

The simplest and most common form of business ownership, sole

proprietorship is a business owned and run by someone for their
own benefit. The business’ existence is entirely dependent on the
owner’s decisions.
Advantages of Sole Proprietorship

• All profits are subject to the owner

• There is very little regulation for proprietorships
• Owners have total flexibility when running the business
• Very few requirements for starting—often only a business
license
Disadvantages of Sole Proprietorship

• Owner is 100% liable for business debts

• Equity is limited to the owner’s personal resources
• Ownership of proprietorship is difficult to transfer
• No distinction between personal and business income
Partnership

These come in two types:

• General partnerships
• Limited partnerships
General Partnerships

In general partnerships, both owners invest their money, property,

labor, etc. to the business and are both 100% liable for business
debts. In other words, even if you invest a little into a general
partnership, you are still potentially responsible for all its debt.
General partnerships do not require a formal agreement—
partnerships can be verbal or even implied between the two
business owners.
Limited Partnerships

Limited partnerships require a formal agreement between the

partners. They must also file a certificate of partnership with the
state. Limited partnerships allow partners to limit their own
liability for business debts according to their portion of
ownership or investment.
Advantages of Partnerships
• Shared resources provides more capital for the business
• Each partner shares the total profits of the company
• Similar flexibility and simple design of a proprietorship
• Inexpensive to establish a business partnership, formal or
informal
Disadvantages of Partnerships
• Each partner is 100% responsible for debts and losses
• Selling the business is difficult—requires finding new partner
• Partnership ends when any partner decides to end it
Corporation

• A corporation is a legal entity that is separate and distinct from

its owners. Under the law, corporations possess many of the
same rights and responsibilities as individuals. They can enter
contracts, loan and borrow money, sue and be sued, hire
employees, own assets, and pay taxes.
• Some refer to a corporation as a "legal person."
Structure of Corporation
Advantages of a corporation
• Limits liability of the owner to debts or losses
• Profits and losses belong to the corporation
• Can be transferred to new owners fairly easily
• Personal assets cannot be seized to pay for business debts
 Disadvantages of a corporation:
• Corporate operations are costly
• Establishing a corporation is costly
• Start a corporate business requires complex paperwork
• With some exceptions, corporate income is taxed twice
Limited Liability Company (LLC)

Similar to a limited partnership, an LLC provides owners with

limited liability while providing some of the income advantages
of a partnership. Essentially, the advantages of partnerships and
corporations are combined in an LLC, mitigating some of the
disadvantages of each.
Advantages of an LLC
• Limits liability to the company owners for debts or losses
• The profits of the LLC are shared by the owners without
double-taxation
 Disadvantages of an LLC
• Ownership is limited by certain state laws
• Agreements must be comprehensive and complex
• Beginning an LLC has high costs due to legal and filing fees
Conflict of Interest

A conflict of interest occurs when an entity or individual

becomes unreliable because of a clash between personal (or self-
serving) interests and professional duties or responsibilities.
Conflict of Interest
Specific sources of conflict
There are several sources of conflict. However, these sources
depend on the mode (mindset) of the parties involved in a situation.
Their mutual understanding, trust and openness determine the
mode. The mode influences their perception which may cause
conflict. For example, a difference in the goals of two individuals
in a group of a potential source of conflict. One member's goal may
be to turn out the maximum number of product; the goal of other
member may be to ensure quality of the product.
Specific sources of conflict
What is meant by ethics
• An ethic is a moral principle or set of moral values held by an
individual or a group.
• Ethical behaviour is behaviour which is considered to be right
and moral.
• Business ethics are the values and principles which operate in
the world of business. They form the moral framework of the
organisation
Business Ethics
Business ethics are the principles that are deemed necessary for
fair business practices. These principles in terms of business
ethics apply to both companies and individuals. Business ethics
address a variety of concerns that affect the internal
organizational culture and external dealings associated with a
business. It includes how a company deals with its employees,
vendors and consumers, government, watchdogs, shareholders,
and other pressure groups.
Unethical Business Practices

Individuals can make unethical choices like:

• Conflict of Interest
• Bribery, gift-giving and receiving
• Invasion of privacy or confidentiality

• Dishonest hiring practices

• Insurance Fraud / Credit Card Fraud
• Internet Abuse
Financial Management
Financial Management means planning, organizing, directing and
controlling the financial activities such as procurement and
utilization of funds of the enterprise. It means applying general
management principles to financial resources of the enterprise.
Basic Concept of Financial Management

In simple concept financial management means,

If you save me today – I will save you

tomorrow.
Functions of Financial Management

• Estimation of capital requirements

• Determination of capital composition
• Choice of sources of funds
• Investment of funds

• Disposal of surplus
• Management of cash
• Financial controls
Why is Financial Management important

• Helps organizations in financial planning;

• Assists organizations in the planning and acquisition of funds;
• Helps organizations in effectively utilizing and allocating the
funds received or acquired;
• Assists organizations in making critical financial decisions;
• Helps in improving the profitability of organizations;
• Increases the overall value of the firms or organizations;
• Provides economic stability;
• Encourages employees to save money, which helps them in
personal financial planning.
The Role of Financial Managers
Financial managers perform data analysis and advise senior
managers on profit-maximizing ideas. Financial managers are
responsible for the financial health of an organization. They
produce financial reports, direct investment activities, and
develop strategies and plans for the long-term financial goals of
their organization.
Key Financial Decisions
Financial decisions are the backbone of any organization’s
success. The main aim and the key efficiency of the professional
managers is the maximization of the financial worth/value of the
company and its stakeholders and also to minimize the risk level
of the company.
Key Financial Decisions

There are three decisions that financial managers

have to take:
• Investment Decision
• Financing Decision
• Dividend Decision
1-Investment Decisions
• Long-Term Investment Decisions
• Short-Term Investment Decisions
• Factors Affecting Investment Decisions
• Return on Investment (ROI)

• Cash Flows
• Availability of Capital
2- Financing Decisions
• Capital Structure
• Optimal Mix of Debt and Equity
3- Dividend Decision
Whenever a company makes a profit, it decides to reward its
shareholders in return for their investment, trust, and confidence in
the company. This reward is called a dividend. At the same time,
managers must make the decision to retain part of the profit for the
future needs of the company. This is known as retained earnings
TIME VALUE OF MONEY