INTRODUCTION TO

CORPORATE FINANCE

Syed M. Abdur
Rehman Shah
CORPORATE FINANCE
Corporate finance is concerned with budgeting,
financial forecasting, cash management, credit
administration, investment analysis and fund
procurement of the business concern needs to adopt
modern technology and application suitable to the
global environment.
WHAT IS A CORPORATION?
A corporation is a business entity that is owned by its
shareholder(s), who elect a board of directors to
oversee the organization’s activities.
The corporation is liable for the actions and finances of
the business – the shareholders are not. Corporations
can be for-profit, as businesses are, or not-for-profit, as
charitable organizations typically are.
CONCEPT OF FINANCE
Finance is a field that is concerned with the allocation
(investment) of assets and liabilities over space and time.
Finance can also be defined as the science of money
management, often under conditions of risk or uncertainty
(Oxford Dictionary).
Market participants in the market aim to price assets based on their risk level,
fundamental value, and their expected rate of return.
Finance can be broken into three sub-categories: public finance, corporate finance
and personal finance.
Finance is cash flows between capital markets and firm’s operations (Mayer).
CONCEPT OF MANAGEMENT
The concept of management is as old as the human race itself.
The concept of ‘family’ itself required that life be organized
and resources of food be allocated in a manner so as to
maximize the utility of such resources.
F.W. Taylor: Management is an art of knowing what to do, when to do and see that it
is done in the best and efficient way.
Megginson, Mosley and Pietri: Management is working with human, financial and
physical resources to achieve organizational objectives by performing the planning,
organizing, leading and controlling functions.
BUSINESS FINANCE
Wheeler (2008) has documented that “Business finance” is that
business activity which concerns with the acquisition and
conversation of capital funds in meeting financial needs and
overall objectives of a business enterprise.
Parhter and Wert (2013) have defined that “Business finance”
deals primarily with raising, administering and disbursing
funds by privately owned business units operating in
nonfinancial fields of industry”.
PRIMARY GOAL OF CORPORATE FINANCE
The primary goal of corporate finance is to maximize the value of a firm.
To achieve this goal, managers of corporation must have a general
understanding of;
how businesses are organized?
how financial markets operate?
how interest rates are determined?
how the tax system operates?
how accounting data are used to evaluate a business’s performance?
All the above questions would be discussed in corporate finance.
QUALITY AND PRICE OF PRODUCTS
•All successful companies identify, create, and deliver products
or services that are highly valued by customers who choose
them, not that of their competitors.
•All successful companies sell their products/services at prices
that are high enough to cover costs and to compensate owners
and creditors for the use of their money and their exposure to
risk.
•It’s easy to talk about satisfying customers and investors, but
it’s not so easy to accomplish these goals.
 THE KEY ATTRIBUTES OF SUCCESSFUL
COMPANIES
There are three fundamental key attributes of successful
companies:
•Internal Skilled People: At all levels inside the company, including,
leaders, managers, and a capable workforce.
•Strong External Relationships: Suppliers and customer relationship
management.
•Sufficient Capital: to execute their plans and support their operations.
Most companies need cash to purchase land, buildings, equipment, and
materials. They use retained earning, Sell stocks and/or borrow from the
financial markets.
SCOPE OF CORPORATE FINANCE
Corporate Finance is one of the important parts of overall management,
which is directly related with various functional departments and with
multidimensional approaches.
Corporate Finance and Economics
Corporate Finance and Accounting
Corporate Finance and Mathematics
Corporate Finance and Production Management
Corporate Finance and Marketing
Corporate Finance and Human Resource
CORPORATE FINANCE AND ECONOMICS
Economic concepts like micro and macroeconomics are
directly applied with the financial management approaches.
•Investment decisions, micro and macro environmental factors are closely associated
with the functions of financial manager.
•Consumer’s preferences versus budget constraints in the theory of consumption and
production possibility frontier (PPF) versus Iso-Quant in the theory of production.
•Fiscal and Monetary Policy, International Trade
•Corporate Finance also uses the economic equations like money value discount
factor, economic order quantity etc.
 CORPORATE FINANCE AND
ACCOUNTING
Accounting records includes the financial information of the
business concern, especially financial accounting covers all
financial statements of a business.
•Previously, financial management and accounting were treated as a same discipline
with title of “Management Accounting”.

•Although, nowadays financial management and accounting discipline are separate,

but interrelated in domain of Corporate Finance .
 FINANCIAL MANAGEMENT AND
MATHEMATICS
Modern approaches of the Corporate Finance applied large
number of mathematical and statistical tools and techniques.
They are also called as econometrics.
Economic order quantity, discount factor, time value of money, present value of
money, cost of capital, capital structure theories, dividend theories, ratio analysis
and working capital analysis, all of them are used as mathematical and statistical
tools and techniques in the field of Corporate Finance .
 CORPORATE FINANCE AND
PRODUCTION MANAGEMENT
Production management is the operational part of the business
concern, which helps to multiple the money into profit. Profit of
the concern depends upon the production performance.
Production performance needs finance, because production department requires raw
material, machinery, wages, operating expenses etc.
These expenditures are decided and estimated by the financial department and the
finance manager allocates the appropriate finance to production department.
The financial manager must be aware of the operational process and finance
required for each process of production activities in field of Corporate Finance .
 CORPORATE FINANCE AND MARKETING
Produced goods are sold in the market with innovative and
modern approaches. For this, the marketing department needs
finance to meet their requirements.
Finance department is responsible to allocate the adequate finance to the
marketing department.

Hence, marketing and Corporate Finance are interrelated and depends on each
other.
 CORPORATE FINANCE AND HUMAN
RESOURCE
Corporate Finance is also related with human resource
department, which provides manpower to all the functional
areas of the management.
Financial manager of a corporation should carefully evaluate the requirement of
manpower to each department and allocate the finance to the human resource
department as wages, salary, remuneration, commission, bonus, pension and other
monetary benefits to the human resource department.
Hence, Corporate Finance is directly related with human resource management.
BASIC TYPES OF FINANCE
CORPORATE FINANCE AND DECISIONS

Managerial Finance Function

Asset Investment Financing Dividend
Management Decision Decision Decisions
Decision
MANAGERIAL FINANCE FUNCTION:
ASSET MANAGEMENT DECISION
Asset Management Decision is about the efficient
management of the assets, once they have been
acquired and appropriate financing provided.
Varying degrees of operating responsibility is the charge
of the financial manager. The financial manager should
be more concerned with the management of current
assets than fixed assets.
MANAGERIAL FINANCE FUNCTION:
INVESTMENT DECISION
Investment Decision is the process in which the firm chooses the
most appropriate area of investment with scarce resources.
It concerns how distribute the assets between short and long-
term assets. Long-term proposal brings some uncertainties and
so some risks.
Investment decision must evaluate the balance between the risks
and the returns.
MANAGERIAL FINANCE FUNCTION:
FINANCING DECISION (CAPITAL STRUCTURE)
Financing Decision is also known as capital structure
decision. It allows to determine the sources of funds.
The sources of long-term funds include equity capital and
debt capital (Liability-Side of a Balance Sheet).
A particular combination of debt and equity may be more
beneficial. Financial management decides about the
optimal relative proportions.
MANAGERIAL FINANCE FUNCTION:
DIVIDEND DECISIONS
A dividend is a payment made by a corporation to
its shareholders, usually as a distribution of profit (Steven,
2003).
In financial history of the world, the Dutch East India Company (VOC) was the first
recorded (public) company ever to pay regular dividends. The VOC paid annual
dividends worth around 18 percent of the value of the shares for almost 200 years of
existence (1602–1800) (The Business Book-DK Publishing, 2014, ISBN 1465415858).
Dividends paid are not classified as an expense, but rather a deduction of retained
earnings. Dividends paid does not show up on an income statement but does appear
on the balance sheet.
OBJECTIVES OF CORPORATE FINANCE
Corporate finance is a goal-oriented activity. Broadly,
divided into two such as:
1. Profit maximization (Traditional Approach)
2. Shareholder’s Wealth maximization (Modern Approach)

Assignment: The pros and cons of Profit Maximization and

Shareholder’s Wealth Maximization (CR is supposed to submit all the assignments in
very next session).
ROLE OF CHIEF FINANCIAL OFFICER (CFO)
CFO is one of the important role players in the field of finance. In
modern world, he/she must have entire knowledge in the area of
accounting, finance, economics and management because he has to
deal with personal function, marketing function, production function
and research and development activities of the business.
1. Financial Analysis 5. Investment Decision

2. Financial Planning 6. Financial Control

3. Forecasting Financial Requirements 7. Cash Management

4. Acquiring Necessary Capital 8. Interrelation with Other Departments

 IMPORTANCE OF FINANCIAL
MANAGEMENT
Finance is the lifeblood of business organization. It needs to
meet the requirement of the business entity. We can’t neglect
the importance of finance at any time at and at any
situation.
1. Financial Planning 5. Profitability
2. Acquisition of Funds 6. The Value of the Firm
3. Efficient Use of Funds 7. National Savings
4. Financial Decision 8. Financial Inclusion
HOW CORPORATIONS MAKE FINANCIAL
DECISIONS?
• Investments:
- What projects to invest in?
• Financing:
- How to finance a project?
• Payout:
- What to pay back to shareholders?
• Risk management:
- What risk to take or to avoid and how?
FINANCIAL
ENVIRONMENT
In this course, we
are concerned to
talk about
Financial Planning
through financial
reporting and
value
measurement in an
innovative system
under sound
governance.