Corporate Finance

7 Key excerpts on "Corporate Finance"

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  eBook - ePub

  The Fundamental Principles of Finance

  • Robert Irons(Author)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  10  Finance Within the Firm

  This chapter is intended as an overview of how finance is used both in the economy and within the corporate structure. We will discuss the role finance plays in different industries as well as within a company. We will review the different forms of organization a business can take, along with the benefits and shortcomings of each form. Finally, we will discuss the goals financial managers should pursue in the decisions they make.

  The Role of Finance

  Within a business, the role of finance is to determine how money is to be raised, spent and invested. Funds raised from different sources have different costs and different associated risks. The chief financial officer decides whether to issue new bonds, for what maturity and paying what interest rate, or to issue equity, preferred or common, and what dividend to pay the shareholders. The ability to raise money quickly and at a reasonable cost directly impacts other decisions the firm will make, from what markets to enter to how many people to hire. The CFO will help to decide what products to make and how to make them, based on the costs associated with the production processes and the cash flows realized from the products. The CFO determines how much cash to make available for operations and where to invest any leftover cash. Credit policy, inventory valuation and dividend policy all fall under the responsibility of the head of the finance department.

  Within a corporation, money is followed carefully through the system, and it is managed both for the short term and the long term. In the short term, the firm must decide how much cash to keep on hand, how much inventory to keep on the shelves, how much credit to extend and to whom and whether to pay the bills quickly to get a discount or pay them later at full price. In the long term, decisions include which production assets to purchase, whether to use manual or automated processes, whether to build a production facility or rent one, whether to pay a trucking company to ship their goods or to purchase their own fleet of trucks, or any number of other decisions that will determine the nature of the firm’s cash flows for years to come.

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  eBook - PDF

  Advanced Introduction to Corporate Finance

  • James A. Brickley, Clifford W. Smith Jr, James A. Brickley, Clifford W. Smith Jr(Authors)
  • 2022(Publication Date)
  • Edward Elgar Publishing

    (Publisher)

  1 1 The theory of Corporate Finance: historical overview and basic building blocks 1 1.1 Introduction Corporate Finance is broadly concerned with three major decisions: (1) choosing projects in which to invest – capital budgeting, (2) choosing how to finance the firm’s investments and operations – capital structure/ financing policy, and (3) choosing how much and in what form (dividends or share repurchases) to distribute funds to the firm’s shareholders – payout policy. Prior to the middle of the 20th century, finance literature provided little systematic guidance for managers on any of these deci- sions. Rather, this literature consisted of a great deal of institutional detail, plus rules of thumb and ad hoc “theories.” Beginning in the late 1950s and early 1960s, the analytic methods and techniques traditional to economics began to be applied to problems in finance. This evolution was accompanied by a change in focus from normative questions such as What should investment, financing or dividend policies be? to positive theories addressing questions such as What are the effects of alternate investment, financing, or dividend policies on the value of the firm? This shift in emphasis was necessary to provide the scientific basis for the formation and analysis of corporate policy decisions. Financial executives understandably are focused on answering normative questions; providing these answers is at the very heart of their managerial responsibilities. But it is important to recognize that sound positive the- ories provide better answers to these normative questions – they provide decision makers a better understanding of the consequences of their choices. Purposeful decisions simply cannot be made without explicit (or at least implicit) use of positive theories. Managers cannot decide what action to take and expect to meet their objectives without some idea of how alternative actions might affect outcomes – and that is precisely

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  eBook - ePub

  Corporate Finance

  Theory and Practice

  • Pierre Vernimmen, Pascal Quiry, Maurizio Dallocchio, Yann Le Fur, Antonio Salvi(Authors)
  • 2017(Publication Date)
  • Wiley

    (Publisher)

  Chapter 1 What is Corporate Finance?

  To whet your appetite . . .

  The primary role of the financial manager is to ensure that his company has a sufficient supply of capital.

  The financial manager is at the crossroads of the real economy, with its industries and services, and the world of finance, with its various financial markets and structures.

  There are two ways of looking at the financial manager’s role:

  • a buyer of capital who seeks to minimise its cost, i.e. the traditional view;
  • a seller of financial securities who tries to maximise their value. This is the view we will develop throughout this book. It corresponds, to a greater or lesser extent, to the situation that exists in a capital market economy, as opposed to a credit-based economy.

  At the risk of oversimplifying, we will use the following terminology in this book:

  • the financial manager or chief financial officer (CFO) is responsible for financing the firm and acts as an intermediary between the financial system’s institutions and markets, on the one hand, and the company, on the other;
  • the business manager invests in plant and equipment, undertakes research, hires staff and sells the firm’s products, whether the firm is a manufacturer, a retailer or a service provider;
  • the financial investor invests in financial securities. More generally, the financial investor provides the firm with financial resources, and may be either an equity investor or a lender.

  Section 1.1 The financial manager is first and foremost a salesman . . .

  1. The financial manager’s job is not only to “buy” financial resources . . .

  The financial manager is traditionally perceived as a buyer of capital. He negotiates with a variety of investors – bankers, shareholders, bond investors – to obtain funds at the lowest possible cost.

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  Financial Management and Real Options

  • Jack Broyles(Author)
  • 2003(Publication Date)
  • Wiley

    (Publisher)

  9, No. 4, 30–45. QUESTIONS AND PROBLEMS 1 What are the major responsibilities of a company’s CFO? 2 What kinds of competitive condition in the marketplace for the firm’s products are most likely to increase the wealth of shareholders? FINANCIAL MANAGEMENT AND CORPORATE GOVERNANCE 15 3 Why is maximizing the value of the firm not necessarily the same as maximizing the value of the shareholders’ investment? 4 Should managers try to maximize market value of equity or to maximize the accounting value of equity in the balance sheet? Why? 5 Describe the different methods of financing the firm and characteristics of the main sources of finance. 6 Why might conflicts arise between shareholders and lenders? 7 What is your understanding of the relationship between risk and the cost of funds available for investment by managers? 8 If management thinks that it can increase shareholder wealth to the detriment of debt holders, employees, or suppliers, is it duty bound to do so? 9 To what extent can senior managers justify becoming very wealthy by granting themselves high salaries, bonuses, and stock options? 16 INTRODUCTION TO FINANCIAL MANAGEMENT Fundamental Methods of Financial Analysis The engine of the financial market is the flow of funds from savings. People need to provide for their retirement through investment in real property, investment plans, and pension funds. Once retired, these savers need investment income to pay for consumption. They depend, at least in part, on dividend income and realized capital gains from shares in companies in which they and their pension funds invested. Shareholders expect the managers of their companies to invest at rates of return commensurate with the risk of the investments. Managers can often obtain abnormally high rates of return by investing in new products and operations that are more efficient. By investing in such projects, managers add value for their shareholders.

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  Essentials of Logistics and Management

  The Global Supply Chain.

  • Philippe Wieser(Author)
  • 2012(Publication Date)
  • EPFL PRESS

    (Publisher)

  Chapter 19 Financial elements Corynne Jaffeux 19.1 Introduction Corporate governance is an approach widely used in the United States and one that is starting to acquire a certain reputation among companies in Europe. The need to obtain greater effi- ciency within each individual company department has been pursued for many years. Faced with the growing multiplicity and complexity of these structures, improvements in productiv- ity are also looked for each company level. Corporate governance goes beyond the strategy of the firm, and it involves the entire company. At a technical level, the role of the logistician is to guarantee the maximum degree of shared interests between the parties involved and to avoid any breakdown in this relationship that could lead to losses. At a strategically level, it is incumbent on management to divide the powers of responsibility. This is written into the strategic and performance plan of the company. It is the concept of corporate governance that relates back to that of value man- agement. Thus it is necessary to implement tools to evaluate projects, and to analyze the conse- quences and to account for them, in relation with the means employed to finance a project. Of course, any project must create actors out of all the stakeholders – such as the sharehold- ers, the bondholders or, in a general sense, the creditors, i.e., those people who receive divi- dends or interest payments, for instance. Finally, we will study the securitization process to analyze how the traditional techniques of flow optimization can be surpassed. 19.2 Principles in Corporate Finance There are three principles that govern Corporate Finance: • the investment principle; • the financing principle; and • the dividend principle. All three of these represent constraints for companies, but they provide opportunities to identify organizational weaknesses.

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  Corporate Finance

  Theory and Practice in Emerging Economies

  • Sunil Mahajan(Author)
  • 2020(Publication Date)
  • Cambridge University Press

    (Publisher)

  Corporate Finance A Conceptual Introduction Our goal is to make finance the servant, not the master, of the real economy. —Alistair Darling Tata Motors Limited (TML) has a capacity to produce 790,000 cars annually. Based on the projected growth of the economy, it must estimate the future demand and decide whether to add another half a million to its capacity. The additional half million vehicles will require substantial investment. If the economy grows at the rate projected by the company’s corporate planning department, the investment will prove extremely lucrative. On the other hand, if the growth slackens and other factors do not turn out to be favourable, it can spell doom for the company. A decision to go ahead with the project would necessitate arrangement of funds for investment. The funds may be raised through either equity or debt. The debt can be short term, to be rolled over on maturity, or for a longer duration. Alternatively, the company can mobilize funds through instruments that are a combination of both debt and equity, as it had done in 1991 by issuing partially convertible bonds. The company can either directly approach a financial institution or it can undertake a public issue whereby it invites the public at large to participate in the financing. There are numerous options available and a choice must be made regarding the best possible combination with which the project can be financed. An appropriate dividend policy is critical to the company’s future success. Shareholder earnings comprise dividends as well as capital gains. Shareholders keenly look forward to receiving dividends from the company. At the same time, the distribution of dividend reduces the cash flows available with the company for investment, besides its implications for capital structure and valuation.

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  Economics of Banking

  • Hans Keiding(Author)
  • 2017(Publication Date)
  • Red Globe Press

    (Publisher)

  Because most of these activ-ities have been or will be commented upon in other contexts, we concentrate on those aspects of investment banking that involve direct contact with customers in connection with capital structure of the firm. In the present chapter, we take a closer look at Corporate Finance , which is the environ-ment in which the investment bank has to do business. The subject of this study is capital 174 Chapter 9: Investment banking and Corporate Finance 175 structure of the firm, ways of attracting capital and types of contracts needed to regulate the behaviour of entrepreneurs and investors, and the role of the investment bank in this con-text. In the following section, we outline the celebrated Modigliani-Miller theorem about the irrelevance of capital structure; then we turn in Section 9.3 to a discussion of finan-cial contracting. We then proceed in Section 9.4 with a treatment of the decision about going public and the much debated underpricing issue. Section 9.5 deals with mergers and acquisitions, and finally, we deal with a topic which is only slightly related to the other issues of the chapter, namely Islamic banking , where the financial intermediary should avoid loan contracts with interest payments and instead enter into a partnership agree-ment with the entrepreneur, thereby arranging a relationship akin to what is considered in Section 9.3. 9.2 Capital structure The capital structure of an investment project, or of a firm, describes the sources of financ-ing for the project of the firm. In most cases, a project will need external capital, and this external capital may take the form of either shares or debt. In the first case, the suppliers of capital become owners of the firm or project, participating in the risk in the sense that they share in the profits and losses which may occur. In the second case, the lenders are entitled to a fixed payment or an agreed part of the outcome, depending on the loan contract (cf. Chapter 5).

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