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ZULFIQAR HASAN 2
Course and Text
Additional Readings
1. Ross, Westerfield & Jordan, “Fundamentals of Corporate Finance”
2. Ross, Westerfield & Jaffe, “Corporate Finance”, Edition ≥7th …….
3. Besley and Brigham, “Corporate Finance”
Text Book: Principles of Corporate Finance by Brealy and Myers
Course Code: FIN 437 Title: Corporate Finance
ZULFIQAR HASAN 3
Contact To The Course Teacher
01. Email:[email protected]
02. For your Emergency:01712 54 68 25
(Please don’t make a call after 10:30 pm)
03. Counseling: Everyday after 5:00 pm (Except the Weekend, Holiday, class and Departmental meeting time) by Taking prior appointment
ZULFIQAR HASAN 4
Required Computer Knowledge
1. MS-Excel Spread Sheet 2. MS-Word3. PowerPoint Presentation
Course Websites
www.teachmefinance.com www.studyfinance.comwww.investorwords.com www.Islamicfinance.com
ZULFIQAR HASAN 5
Required Instrument
A good Financial Calculator or a Good Scientific Calculator.
Your Calculate must have any of the following keys:
Xy or yx or Λ
ZULFIQAR HASAN 6
Evaluation Process
One Mid-Term 30
Final Exam 40
Class Test
a. Closed bookb. Open book c. Surprised Testd. Take Home exam
10
Assignment and Presentation/case study 10
Class Attendance and Performance 10
Total 100
ZULFIQAR HASAN 7
Points To Be Noted
• For Closed book class test, student will get one week prior notice.
• For open book class test, student will get 7 days prior notice.
• For Assignment/presentation/case study, student will get maximum 2 months to submit it.
• For take home exam, student will get 7 days to submit the (hand written) answer scripts.
ZULFIQAR HASAN 8
Topic 01: Basics of Corporate Finance
What is Corporate Finance? Decisions involve in Corporate Finance, Corporate Securities as Contingent Claims on Total Firm Value, The Corporate Firm, Goals of the Corporate Firm, Agency Problems, Set-of-Contract perspectives, Financial Markets
ZULFIQAR HASAN 9
What is a Corporation?
A corporation is a legal entity, meaning it is a separate entity from its owners who are called stockholders. A corporation is treated as a “person” with most of the rights and obligations of a real person. A corporation is a separate and distinct legal entity. This means that a corporation can open a bank account, own property and do business, all under its own name. A corporation is managed by a board of directors, which is responsible for making major business decisions and overseeing the general affairs of the corporation.
ZULFIQAR HASAN 10
Types of Corporation
1. Based on Taxation
a. C-Corporation: Double Taxation
b. S-Corporation: Single Taxation
2. Based on Location and Operation
a. Domestic Corporation
b. Foreign/International/Multinational Corporation
3. Based on Participation in the Share Market
a. Public Limited Company
b. Private Limited Company
ZULFIQAR HASAN 11
Characteristics of a Corporation1. Centralized management
in a board of directors2. Unlimited Life3. Separate legal entity4. May sue and be sued in
its corporate name. 5. It may acquire property
in its own name6. Enter into binding
contracts7. Pay taxes8. Limited liability:9. Ease of capital
acquisition10.Government regulations:
11. Relative ease of transferring ownership rights
12. Tax Exemptions Facilities
13. Government Incentives14. Arranging AGM15. Publishing periodic and
Annual Report16. Disclosing the
information17. Paying Dividends in
different forms18. Can issue Rights Share
and Preferred Stocks19. Can issue Debt Securities
(i.e. Bonds)
ZULFIQAR HASAN 12
Partnership vs. Corporation
EasyUneasyRaising of Fund
LargeMediumCapital Size
LimitedUnlimitedLiability
UnlimitedLimitedLife Duration
SeparateSameOwners and Mangers
DoubleSingleTaxation
EasyDifficultTransferability of ownership
HardEasyStarting
CorporationPartnershipIssues
ZULFIQAR HASAN 13
Managing a CorporationA corporation is managed by its board of directors, which must approve major business decisions. A director can be, but is not required to be, either a shareholder or an officer. Directors are elected by the shareholders and typically serve for a limited term. In Bangladesh, each corporation must have at least more than one director. Examples of procedures which must be approved by the board of directors include:
– Declaring a dividend – Electing officers and setting the terms of their employment – Amending bylaws or the articles of incorporation – Any corporate mergers, reorganizations or other significant corporate
transactions
Directors of a corporation owe "duties of loyalty and care" to the corporation. Generally, this means the directors must act in good faith, with reasonable care, and in the best interest of the corporation. If a director stands to personally gain from a transaction with the corporation, he or she must disclose this fact and refrain from voting on the matter, if possible
ZULFIQAR HASAN 14
Recalling: What is Finance?
They don't know how to invest/utilize this money
They don't know how to collect this money
03
They don't know in where they can invest/utilize this money
They don't know from where they can collect this money
02
They are the individual /organization/government who have excess/surplus of money
They are the individual /organization/govt. who have shortage/deficit of money
01
Surplus SectorDeficit Sector
Finance is the process of transferring fund from surplus economic unit to deficit economic unit.
ZULFIQAR HASAN 15
Concept of Corporate Finance
Corporate Finance is the study of a business's money-related decisions, which are essentially all of a business's decisions. Corporate finance applies to all businesses, not just corporations.
– The primary goal of corporate finance is to figure out how to maximize a company's value by making good decisions about investment, financing, and dividends.
– In other words, how should businesses allocate scarce resources to minimize expenses and maximize revenues?
– How should companies acquire these resources – through stock or bonds, owner capital or bank loans?
– Finally, what should a company do with its profits? How much should it reinvest into the company, and how much should it pay out to the business's owners?
ZULFIQAR HASAN 16
What is Corporate Finance?
• The function in a company which manages policy and strategy for (and the implementation of) capital structure, budgeting, acquisition and investment, financial modeling and planning, funding, dividends and taxation is called Corporate Finance.
• Corporate Finance is a specific area of finance dealing with the financial decisions corporations make and the tools as well as analyses used to make these decisions.
• The discipline as a whole may be divided among long-term and short-term decisions and techniques with the primary goal being the enhancing of corporate value by ensuring that return on capital exceeds cost of capital, without taking excessive financial risks.
ZULFIQAR HASAN 17
Functions of Corporate Finance1. Planning and analyzing the financial performance of a business2. Raising of Capital or Financing: raising capital to support
company operations and investments3. Budgeting of Capital: selecting those projects based on risk and
expected return that are the best use of a company's resources4. Corporate Governance: developing a company governance
structure to encourage ethical behavior and actions that serve the best interests of its stockholders
5. Financial Management: management of company cash flow and balancing the ratio of debt and equity financing to maximize company value
6. Risk Management: management of risk exposure to maintain optimum risk-return trade-off that maximizes shareholder value
7. Payout DecisionAll the above functions are interrelated and interdependent. For example, in order to
materialize a project a company needs to raise capital. So, budgeting of capital and financing are interdependent.
ZULFIQAR HASAN 18
Corporate Governance• Corporate governance is the system by which corporations are
directed and controlled. • Corporate governance is the set of process, customs, policies, laws, and
institutions affecting the way a corporation (or company) is directed, administered or controlled.
• Corporate Governance is a relationship among stakeholders that is used to determine and control the strategic direction and performance of organizations
Corporate Governance
Why is Corporate Governance Important?1. Good corporate governance supports effective decision making 2. relationships among the many stakeholders involved3. the goals for which the corporation is governed. 4. corporate governance is to ensure the accountability 5. to reduce or eliminate the principal-agent problem. 6. economic efficiency7. strong emphasis shareholders' welfare.
ZULFIQAR HASAN 19
Corporate Social Responsibility (CSR)
Corporate social responsibility (CSR, also called corporate conscience, corporate citizenship, social performance, or sustainable responsible business) is a form of Corporate self-regulation integrated into a business model. CSR policy functions as a built-in, self-regulating mechanism whereby business monitors and ensures its active compliance with the spirit of the law, ethical standards, and international norms.
ZULFIQAR HASAN 20
Agency Relationships
One party, the principal, delegates decision-making authority to another party, the agent.– In a company:• managers = agents• shareholders = principals
Agency costs: conflict of interest between parties creates costs
• reduced value due to managers acting in their own best interests
• costs associated with monitoring managers’ behavior
• bonding costs