FUNCTION AND OBJECTIVES OF CORPORATE FINANCE

Question 1

WHAT IS CORPORATE FINANCE?

Answer 1

Specific area of finance dealing with the financial
decisions by corporations, tools and analysis used to
make the decision

Answer 2

1. Capital Budgeting
2. Financing Capital Exp
3. Financing Working Capital

Question 3

WHAT KIND OF LONG-TERM ASSETS
SHOULD THE FIRM INVEST ON?

Answer 3

• type and proportions of assets the firm needs tend to be set by the nature
  of the business
• Relates to firm’s capital expenditure and capital budgeting

Question 4

HOW SHOULD THE FIRM RAISE FINANCING
FOR THE REQUIRED CAPITAL EXPENDITURES?

Answer 4

• Concerns with the equity and liability of the statement of financial position
• Involves the firm’s capital structure which represents the proportion of the
  firm’s financing from current debt, long-term debt and equity

Question 5

HOW DOES THE FIRM MANAGE THE
SHORT-TERM OPERATING CASH FLOWS FOR
DAY-TO-DAY BUSINESS OPERATION?

Answer 5

Associated with the firm’s** working capital management (CA – CL)**

• Relates to liquidity position.
• Short term cash flow problems are the result from the:
  1. mismatch between the timing of cash inflows and cash outflows
  2. uncertainty of the amount and timing of operating cash flows

Question 6

OBJECTIVES OF CORPORATE
FINANCE

Answer 6

financial manager’s primary goal is to increase the value of the firm to
**maximise shareholders’ wealth ** > maximising the total of:
**The share price + Dividends **(a transfer of cash from the company to
shareholders)
- Short-term: Share price increase and paying dividends.
- Long term: these depend on the company earning profits that generate a strong
net cash inflow (EARNING GROWTH & DIVIDEND GROWTH)

Question 7

How to maximise shareholders’ wealth?

Answer 7

1. Selecting value-creating projects
- Value is created if the cash paid to shareholders and bondholders is greater
than the cash raised in the firm. In other words, the net present value of the
decisions must be positive

2. Making smart investment and financing decisions
- Try to make smart investment decisions  buy assets that generate more
cash than they cost.
- Try to make smart financing decisions  sell bonds and stocks and other
financial instruments that raise more cash than they cost

Profit Maximization ≠ Wealth Maximization

Question 8

How to Maximize Shareholders’ Value ?

Answer 8

1. Maximize Sales & Minimize Cost
   - to improve the financial performance and
   cash flow of the firm
2. Maximize Profit & Market Share
3. Beat Competition
4. Maximize Market Share
   - Product are well accepted by the customers and able to beat the competitors’ product on
   price and quality
5. Survival –smart investment &
   financing decision
   - management need to consider the investment if that investment
   favorably impact the share value
6. Earnings Growth EPS, DPS
7. Avoid Financial Distress &
   Bankruptcy
   - unnecessary borrowings could lead to high leverage and bankruptcy
8. Corporate Governance
   - good set of system, process and principles affecting the way
   a firm is managed for the survival of the business and
   benefit the stakeholders in the long run

Management must act in accordance with the shareholders’ best interests