Professional Documents
Culture Documents
Finance”
Seminar Report
Supervised by:
Miss Hafza Hafsa
Nayab
Submitted by:
Zakia Abid
Roll# 06-54
BBA (Hons) 7th semester
Department of
Management Sciences
University of
Education Okara
Campus
DEDICATION
We dedicate it to respected and beloved parents. Without their
teacher Miss Hafza Hafsa Nayab, who helps us very much in finding
data.
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ACKNOWLEDGEMEN
T
We bow our heads to Almighty Allah with gratitude. We would
complete this assignment. We are greatly thankful and show the sincere
respect to our respected teacher Miss Hafza Hafsa Nayab. Without their
guidance, we were not able to understand it and achieve its basic goal.
Our teacher provides us the real guideline to accomplish this task. Her
We are also greatly thankful to our respected parents, who pray for us.
Without the support of our parents, we are nothing. With the guidance of
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Zakia Abid
FINAL APPROVAL
This is to certify that we have read project submitted by Zakia Abid
and it is our judgement that this report is of sufficient standard to
warrant its acceptance by University of Education Okara Campus for
BBA (Hons) degree.
Supervisor
1. Mr. Rai Imtiaz
Lecturer
UE Okara Campus. Signature
2. Miss Hafza Hafsa Nayab
Lecturer
UE Okara Campus. Signature
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Table of Contents
1. Introduction of Corporate Finance 2
1.1. Corporate Finance 2
1.2. Principles of Corporate Finance 3
1.3. Financial Manger’s Goals 4
1.4. Scope of Corporate Finance 5
2. Corporate Finance Functions 7
2.1. External Financing 7
2.2. Capital Budgeting 8
2.3. Financial Management 8
2.4. Corporate Governance 8
2.5. Risk Management 9
3. Forms of Organization 11
3.1. Sole Proprietorship 11
3.2. Partnership 11
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3.3. Company 12
4. Decisions made in Corporate Finance 14
4.1. Capital Investment Decision 14
4.2. Working Capital Management 14
4.3. Financial Risk Management 14
5. Capital Investment Decision 16
5.1. Investment Decision 16
5.1.1. Capital Budgeting 16
5.1.2. Key Motives of Capital Budgeting 16
5.1.3. Process of Capital Budgeting 17
5.1.4. Techniques of Capital Budgeting 18
5.2. Financing Decision 20
5.2.1. Capital Structure 20
5.2.2. Types of Capital 20
5.3. Dividend Decision 21
5.3.1. Forms of Dividend 22
5.3.2. Cash Payment Dividend Procedure 23
5.3.3. Residual Theory 24
5.3.4. Factors Affecting Dividend Policy 26
6. Working Capital Management 26
6.1. Cash Conversion Cycle 26
6.1.1. Funding Requirements of CCC 26
6.1.2. Strategies for managing CCC 27
6.2. Inventory Management 27
6.2.1. Different Viewpoints about Inventory Level 28
6.2.2. Techniques used in Inventory Management 28
6.3. Account Receivable Management 29
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6.3.1. Credit Selection and Standards 29
6.3.2. Credit Terms 30
6.3.3. Credit Monitoring 30
6.4. Cash Management 30
6.4.1. Motives for holding Cash 31
6.4.2. Speeding up Cash Receipts 31
6.4.3. Slowing down Cash Payouts 32
6.5. Short Term Financing 32
6.5.1. Spontaneous Liabilities 33
7. Financial Risk Management 35
7.1. Risk 35
7.2. Levels of Risk 36
7.3. Alternative Measures of Risk 36
8. Conclusion 38
9. References 40
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Corporate Finance
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Corporate Finance
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Corporate Finance
Foreign Interest
Tax
Investor
Other costs
Reinvestment
+
Owner
Dividends
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Corporate Finance
2. Compensation of risk
Risk is the chance of financial loss and variability of return. Investors
expected compensation forbearing risk.
3. Do not put your eggs in one basket
Investor can achieve a more favorable trade off between risk and return
by diversifying their portfolios.
High risk High return
Low risk Low return
4. Markets are smart
Competition for information tends to make market efficient.
5. No arbitrage
Arbitrage opportunities are extremely scarce. Arbitrates is the practices
of taking advantages of price differential b/w two or more markets. Arbitrates
opportunity means the opportunity to buy an assets at a low price then
immediately selling it on a different market for a higher price. Like as if one
person buys assets of Rs.100 and sale it to Rs.200, the difference of Rs.100
shows arbitrage profit.
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Corporate Finance
2. Maximize shareholder’s wealth
• Maximizes stock price, not profits.
• Shareholders as residual claimants, have better incentives to
maximize firm value.
• A firm’s stock price reflects the timing, magnitude, and risk of
cash flows that investors expect a firm to generate over time.
3. Stakeholders focus
• Stakeholders are those persons who have some economic
interest in the business like as government, employees, suppliers,
customers, etc.
• Many firms seek to preserve the interest of other stakeholders,
such as employees, customers, tax authorities and communities
where the firm operates.
• Doing so provide long term benefits to shareholders and is in
line with the primary goal of maximizing shareholders wealth.
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Corporate Finance
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Corporate Finance
Basic corporative finance functions are:
1. Financing (capital raising) or external financing
2. Capital budgeting
3. Financial management
4. Corporate governance
5. Risk management
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• Auditors
• Country’s legal environment
In other words, it hires and promotes qualified, honest people and
structure employees financial incentives to motivate them to maximize firm
value. The incentives of stockholders, managers and other stakeholders often
conflicts.
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3. Forms of Organization
There are three forms of organization
1. Sole proprietorship
2. Partnership
3. Corporation
3.2 Partnership
Partnership is the relationship between two or more persons who have
agreed to share profits and losses of business carried on by all or anyone of
them acting for all.
Merits:
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Corporate Finance
Some merits of partnership are:
Two or more owners
More capital available
Relatively easy to start
Income taxed once as personal income
Demerits:
Some demerits of partnership are:
Unlimited liability
Partnership dissolves when one partner dies or wishes to
sell
Difficult to transfer ownership
Difficult to raise equity capital
3.3 Company
A company is an artificial persons created by law which can be sue or
can be sued with its own name. In other countries, corporations are also called
joint stock companies, public limited companies and limited liability
companies. A distinct legal entity owned by one or more individuals is called
corporation.
Merits:
Some merits of company are:
Limited liability
Unlimited life
Transfer of ownership is easy
Easier to raise capital
Demerits:
Some demerits of company are:
More complicated
Double taxation (income is taxed at the corporate rate and then
dividends are taxed at the personal rate)
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3. Cash Management
4. Short term Financing
4.3 Financial Risk Management
It is vital for corporate finance. It basically highlights the risks that are
to be hedged by the use of different financial instruments. The financial
instruments are changes in commodity prices, interest rates, foreign exchange
rates and stock price.
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As a firm’s growth slows and it reaches to maturity. Most capital
expenditures will be made to replace or renew assets. Each time a machine
requires a major repair, the outlay for repair should be compared to outlay to
replace the machine and benefits of replacement.
3. Renewal
An alternative to replacement may involve rebuilding, overhauling an
existing fixed assets.
4. Other purposes
Heavy advertising, research and development, new products, installation
of pollution control and safety devices are other motives of capital budgeting.
5.1.3 Process of Capital Budgeting
It consists of:
• Proposal generation
• Review and analysis
• Decision making
• Implementation
• Follow up
1. Proposal generation
Proposals are made at all levels within a business organization and are
reviewed by finance personnel. Proposals that require large outlays are more
carefully inspected than less costly ones.
2. Review and analysis
Formal review and analysis is performed to access the appropriateness
of proposals to evaluate their economic viability. Once the analysis is complete,
a summary report is submitted to decision makers.
3. Decision making
Firms typically delegate capital expenditure decision making on the
basis of dollar limits. Generally the board of directors must authorize
expenditures beyond a certain amount. Often plant managers are given
authority to make decisions necessary to keep the production line moving.
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4. Implementation
Following approval, expenditures are made and projects implemented.
Expenditures for a large project often occur in phases.
5. Follow up
Results are monitored and actual costs and benefits are compared with
those that were expected. Action may be required if actual outcomes differ
from projected ones.
5.1.4 Techniques of Capital Budgeting
There are three techniques that are used to rank the projects and to
decide whether or not they should be accepted for inclusion in the capital
budget. These techniques are:
1. Payback Period
2. Net Present Value
3. Internal Rate of return
1. Payback Period
Payback period is the amount of time required for a firm to recover its
initial investment in a project.
Decision:
When payback period is used to make accept reject decision, the
decision criteria is as follows:
• If the payback period is less than the maximum acceptable
payback period, accept the project.
• If the payback period is greater than the maximum
acceptable payback period, reject the project.
Merits:
Some merits of payback period are:
1. It is used by large firms to evaluate the small projects and by
small firms to evaluate the most projects.
2. It considers the cash flows rather than the accounting profits.
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3. It measures that how quickly a firm recovers its initial
investment.
Demerits:
Some demerits of payback period are:
1. It considers the cash flows occurring after expiration of payback
period, it cannot be regarded as the measure of profitability.
2. It ignores the time value of money. It simply adds cash flows
without regard to timing of these flows.
3. It does not support the goal of wealth maximization.
4. The maximum acceptable payback period, which serves as the
cutoff standard, is a purely subjective choice.
2. Net Present Value
Net present value is the present value of an investment projects net
cash flow minus the projects initial cash outflows.
Decision:
When net present value is used to make accept reject decisions, the
decision criteria is as follows:
• If net present value is greater than zero, accept the project.
• If net present value is less than zero, reject the project.
Merits:
Some merits of net present value are:
1. A firm takes a project with positive cash flows; the
position of shareholders is improved.
2. It considers the time value of money and at some extent it
supports the goal of wealth maximization.
3. Internal Rate of Return
The discount rate that equates the present value of future net cash flows
from an investment projects with the projects initial cash outflows is called
internal rate of return.
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In other words, the interest rate where net present value is zero is called
internal rate of return.
Decision:
When internal rate of return is used to make accept reject decision, the
decision criteria is as follows:
• If internal rate of return is less than the cost of capital,
reject the project.
• If internal rate of return is greater than the cost of capital,
accept the project.
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All of the terms on the right hand side of the firm’s balance sheet,
excluding the current liabilities are sources of capital. It divides the capital into
two parts.
1. Debt Capital
2. Equity Capital
Debt
Current liabilities Capital
Long term debt
Stockholder’s equity
Preferred stock
Common stock equity Equity
Common stock Capital
Retained earning
1. Debt Capital
• Debt capital is borrowed money.
• The borrower is obliged to pay interest, at specified interest rate,
on the full amount borrowed, as well as, to repay the principle
amount the debt’s maturity.
2. Equity Capital
• An ownership interest usually in the form of common or
preferred stock.
• Common stockholders receive returns on their investments
only after creditors and preferred stockholders are paid in full.
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flows that accrue to the equity holders whereas retained earning are one of the
most significant sources of funds for financing the corporate growth.
Retained earnings are earnings not distributed to owners as dividends,
a form of internal financing.
Dividends are paid in cash and cash is something that everyone likes.
The question arises whether the firm should pay out cash now or invest the
cash and pay it out later. Dividend policy is the time pattern of dividend
payout. Firm either pays out the small percentage or large percentage of its
earnings.
5.3.1 Forms of Dividend
Dividend comes in several different forms. These forms are:
1. Regular cash dividend
2. Extra dividend
3. Special dividend
4. Liquidating dividend
1. Regular Cash Dividend
The most common type of dividend is a cash dividend. Commonly,
public companies pay regular cash dividend four times a year. These are cash
payments made directly to shareholders and they are made in regular course of
business.
2. Extra Dividend
Sometimes a firm will pay a regular cash dividend and extra cash
dividend. By calling part of payment “extra”, management is indicating that
part may or may not be repeated in future.
3. Special Dividend
This dividend is viewed as a truly unusual or one time event and it
would not be repeated.
4. Liquidating Dividend
If a firm is dissolved, at the end of the process, a final dividend of any
residual amount is made to shareholders. This is known as liquidating dividend.
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5.3.2 Cash Payment Dividend Procedure
The decision to pay a dividend rests in the hands of the board of
directors of the corporation. When the director has been declared dividend, it
becomes the liability of the firm and cannot be rescinded easily. Sometimes
after it has been declared, a dividend is distributed to all shareholders as of
some specific date. It consists of three types of dates. These are:
1. Declaration date
2. Record date
3. Payment date
1. Declaration Date
The date on which the board of director declares the payment of
dividend is called declaration date.
2. Record Date
The declared dividends are distributable to those who are shareholders
of the record as of specific date is known as record date.
3. Payment Date
The date at which the dividend checks are mailed to shareholders of
record is called payment date.
5.3.3 Residual Theory
A school of thoughts says that “amount of dividend is residual”.
A residual is generally a quantity left over at the end of a process.
Determine level of capital expenditures.
Using the optimal capital structure.
Use the retained earnings to meet equity requirements
determined previous.
5.3.4 Factors Affecting Dividend Policy
Dividend policy is the firm’s plan of actions to be followed whenever a
divided decision is made. There are several factors affecting dividend policy.
These factors are:
Legal constraints
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Corporate Finance
Contractual constraints
Internal constraints
Growth prospects
Owner’s considerations
Market considerations
1. Legal Constraints
Firm’s legal capital which is typically measured by the par value of
common stock is legal constraint. It also not only includes the par value of the
common stock, but also any paid-in capital in excess of par is also included.
2. Contractual Constraints
It includes that these constraints prohibit the payment of cash dividend
until a certain level of earnings has been achieved or they may limit the
dividend to a certain dollar amount or percentage of earnings.
3. Internal Constraints
The firm’s ability to pay cash dividends is generally constrained by the
amount of liquid assets (cash, marketable securities, etc) available.
4. Growth Prospects
The firm’s financial requirements are directly related to how much it
expects to grow and what asset it will need to acquire. It must evaluate its
profitability and risk to develop insight into its ability to raise capital
externally.
5. Owner’s considerations
The firm must establish a policy that has a favorable effect on the wealth
of majority of owner.
6. Market Consideration
A final market consideration is the informational content. Stockholders
are believed to value a policy of continuous dividend payment.
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Operating Cycle
The time from the beginning of the production process to the collection
of cash from the sale of finished products is called operating cycle.
6.1.1 Funding Requirements of Cash Conversion Cycle
Funding requirements of cash conversion cycle are:
1. Seasonal funding needs
2. Permanent funding needs
3. Aggressive funding strategy
4. Conservative funding strategy
1. Seasonal Funding Needs
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If the firm sales are cyclic, then its investment in operating asset will
vary over time with its sale cycle. It is called seasonal funding needs.
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tends to act as an advisor or watching dog in matters of concerning inventory,
he or she does not have direct control over the inventory but does provides
input to inventory management process.
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largest investment in inventory and uses periodical inventory system. Group C
includes those items which require small investment and uses unsophisticated
technique which is called two-bin method.
2. EOQ Model
EOQ is Economic Order Quantity and it determines how much to order.
Inventory management technique for determining an item’s optimal order size,
which is the size that minimizes the total of its order costs and carrying cost is
called EOQ Model.
3. Just In Time Inventory
Inventory management technique that minimizes inventory investment
by having materials arrive at exactly the time they are needed for production is
called Just in Time (JIT) Inventory. Safety stock is maintained in this system.
4. Material Requirement Planning
A computerized system that provides the information about inventory
and determines when orders should be placed for various items on a product
bill of materials is called Material Requirement Planning (MRP) System.
Bill of materials is the list of raw materials, components, parts and the
quantities of each needed to manufacture an end item (final product).
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accept /reject decision. It ensures that the firm’s credit customer will pay,
without being pressured, within the stated credit terms. These are:
1. Character
The applicant’s record of meeting the past obligations is character.
2. Capacity
The applicant’s ability to repay the requested credit is capacity.
3. Capital
The applicant’s debt relative to equity is capital.
4. Collateral
Collateral is security, the amount of assets for securing the loan.
5. Condition
Condition consists of the both economic and transaction conditions
6.3.2 Credit Terms
Credit terms are the terms of sales from customers who have been
extended credit by the firm. A firm’s regular credit term are strongly influenced
by the firm’s business. It includes
Cash discount which is the reduction in price of goods, given to
customers to encourage early payment.
Credit period which is the length of time a company gives its
customer to pay.
6.3.3 Credit Monitoring
Credit monitoring is the ongoing review of a firm’s account receivable
to determine whether customers are paying according to the stated terms. It
consists of:
• Average collection period consists of early collection with
minimum loss.
• Popular collection techniques are:
1. Letters
2. Telephone calls
3. Personal visits
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4. Collection agencies
5. Legal actions
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2. Processing float is the time between receipt of a payment and its
deposit into the firm’s account.
3. Clearing float is the time between deposit of a payment and
when spend able funds becomes available to the firm.
• Lockbox system means a post office is maintained by a firm’s bank that
is used as a receiving point for customer remittances. The main
advantage of a lockbox system is that checks are deposited at a bank
sooner and become collected balances sooner than if they were
processed by the company prior to deposit. The disadvantage is cost
because cost is directly proportional to the number of checks deposited
and is not profitable.
2. Concentration Banking
It consists of cash concentration. Cash concentration is the movement
of cash from lockbox or field banks into the firm’s central cash pool residing in
a concentration bank. The process used by the firm to bring lockbox and other
deposits together into one bank called concentration bank.
It improves control over inflows and outflows of cash.
It allows for more effective investments.
It reduces balances.
6.4.3 Slowing down Cash Payouts
There are various disbursement methods that a firm employs to improve
its cash management efficiency. The firm wants to pay accounts as late as is
consistent with maintaining the firm’s credit standing with suppliers so that it
can make the most use of money it already has. The objective is to slow down
cash disbursements as much as possible. It consists of:
1. Controlled disbursing
Controlled disbursing is the strategic use of mailing points and bank
accounts to lengthen mail float and clearing float respectively. This approach
should be used carefully because longer payment periods may strain supplier
relations.
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7.1 Risk
It is defined as the chance of financial loss. Assets having the greater
chance of loss are viewed as more risky than those with lesser chances of loss.
More formally, the term risk is used with uncertainty to refer the variability of
returns associated with the given asset.
Risk may be good — that is when the results are better than expected
higher return or bad — that is when the results are worse than the expected
lower returns. Risk is divided into two parts.
Unsystematic risk
Systematic risk
1. Unsystematic Risk
It is also known as “Market Risk” or “Non-diversifiable Risk”. It is
the risk that results from the movement in factors that affect the economy as
whole. This risk cannot be diversified fully.
Examples:
• Increase in inflation rate
• War
• Changes in interest rate
2. Systematic Risk
It is also called “Firm Specific Risk” or “Diversifiable Risk”. It is the
risk that is caused by the actions that are specific to the firm. It can be
eliminated through diversification.
Examples:
• Management decision
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• Labor strike
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It is the reliable tool because it considers the relative size and expected
return of the asset.
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8. Conclusion
Corporate finance is a segment of finance which deals with the
decision taken by the different corporations. Financial managers should seek to
maximize shareholder’s wealth by performing the basic functions of corporate
finance. Select instruments for which the marginal benefits exceed the marginal
cost. Basic corporative finance functions are Financing (capital raising) or
external financing, Capital budgeting, Financial management, Corporate
governance, and Risk management. Also there discussed the different forms of
organization. Decisions made in corporate finance are Capital Investment
Decision, Working Capital Management, and Financial Risk Management.
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9. References
Principles of Managerial Finance by Lawrence J. Gitman
11th edition
Fundamentals of Financial Management by Van Horne
12th edition
http://en.wikipedia.org/wiki/Corporate_finance
http://www.economywatch.com/finance/corporate-finance/
www.pitt.edu/~czutter/if/ch01.ppt
ocean.otr.usm.edu/~w785587/Chap001.ppt
www.ef.umb.sk/upload/zamestnanec/575/Corporate
%20finance.ppt
www.emu.edu.tr/nozatac/fin%20301/chap01ppt.ppt
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