Corporate Finance: Basic Areas, Decisions, and Financial Markets

This report provides a comprehensive overview of corporate finance, covering essential areas such as capital markets, investment, and business finance. It defines corporate finance, outlines the roles of financial managers, and explores key financial management decisions, including capital budgeting, capital structure, and working capital management. The report also delves into the goal of financial management, emphasizing stock price maximization and its impact on social welfare. It examines managerial actions to maximize stockholder wealth, agency relationships, and the evolution of financial management trends. Additionally, the report highlights the importance of financial markets, differentiating between primary and secondary markets, and discussing the impact of globalization and information technology. Finally, it summarizes the core concepts of corporate finance and the role of the financial manager.

Learning outcomes
 Basic areas of financial management
 What is corporate finance ?
 Who is financial manager and his works?
 What are financial management decisions ?
 The goal of financial management
 Stock price maximization and social welfare
 What are the management action to maximize the stock holder wealth ?
 Managers act and stockholders interest
 Financial management trends
 Financial markets
Abstract
Companies from the enormous multibillion multinational to the local shop around the
corner,are largely confronting finance decisions.Whether it is to decide on a specific
investment,to be active on the securities exchange,or for a investment firm,to create the most
ideal portfolio of assets.Each future manager ought to have the ability to get a handle on the
essential corporate finance principles in order to succeed in the business world. hence, in this
chapter there are lots of fundamentals of corporate finance which is useful for all the future
managers to succeed their business.This chapter will cover the Basic areas of financial
management,financial management decisions,goals of financial managers,management
actions to maximize the stockholder wealth,financial management trends and financial
markets.
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01.Basic areas of financial management
 Capital markets and financial institution
 Investment
 Corporate finance
01.1.Capital markets and financial institution
 Many finance majors go to work for financial institutions,including banks,insurance
companies,brokerage firms,mutual funds.
 Capital markets facilitates the transfer of money between the two parties in an
effective manner
 For success here ones need a knowledge of
 Valuation techniques(Comps,precedent transactions)
 interest rates rise & falls
 regulatory environment of the financial institutions
01.2.Investment
 A financial investment I any assets or instrument purchased with the intention
of selling said asset for a price higher than the purchase price at some future
point in time
 Main function in investment
 Sales
 The analysis of individual securities
 Determining the optimal mix of securities for given investor
01.3. Business finance or financial management
01.3.1. Definition
The determination, acquisition,allocation and utilization of financial resources usually
with the aim of achieving some particular goals or objectives (the ways & means of
managing money)
01.3.2.What is corporate finance?
 What long term investment should take on? That is,what lines of business will
you be in & what sorts of building,machinery & equipment will you need
 Where will you get the long term financing pay your investment? Will you
bring in other owners or will you borrow the money
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 How will you manage your everyday financial activities such as collecting
from customers & paying suppliers ( Ross, Westerfield, & Jordan )
Corparate finance broadly speaking I the study of ways to answer these 3 questions
01.3.3.Financial manager
 Person who tries to answer some or all of these questions
 Vice president of finance coordinate activities of treasurer and controller
 The controler’s office handles
 Cost & financial accounting
 Tax payment
 Tax payment
 Treasurer office responsible for
 Its financial planing
 Its capital expenditure
01.3.4.Financial management decisions
 Capital budjeting-
 The 1st question is concern the firms long term investment
 The process of planing & managing the firms long term investment is
called capital budjeting
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Board of
directors
Chairman of
the board
&CEO
President &
chief operation
officer
Vice president
marketing
vice president
finance
Treasurer Controller
vice president
production
 Data processing
 Internal control
 Preparing budjet
 Divident disbursement
 Insurance or risk management
Figure 1

 Capital structure-
 The 2nd question concerns ways in which the firm obtains & manages
the long term financing it nedds to support its long term investment
 A firm capital structure is the specific mixture of long term debts &
equity the firm uses to finance its operations
 Working capital management-
 3rd question concern working capitala management
 Working capital means firm’s short term assets
01.3.5.The goal of financial management
 There are lot of goals in financial management.such as
 Survive
 Beat the competition
 Minimize cost
 These goals must encompasses profit as well as safety
The goal of financial management is to maximize the current value per share of existing
stockholders ( Ross, Westerfield, & Jordan )
01.3.6.Stock price maximization & social welfare
 Stock price maximization is good for society
 Because,
Stock price maximization requires
I. Efficient,low cost plant that produce high quality good & services at
the lowest possible cost
II. Development of product that customer want & need
profit motive leads to new technology,new product & new jobs
Profit maximization nessacities efficient & courteous service,adiquate stock of
merchandise & well located business eshtablished. (DEFINITION, n.d.)
01.3.7.Managerial action to maximise stockholders wealth
 Factors that determine the stock price,
 Any financial asset including company’s stock is valuable only to the
extend thatit generates cash flow.
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 Avoid financial distress & bankruptcy
 maximize sales or market share
 maximize profit

 The timing of the cashflow matters
 Investors are generally averse to risk,so all else equal
 Agency relationship
The relationship between stockholders & management
 Agency problem
Conflict of interest between principal(shareholders) and agent(management)
 Agency cost
Cost of conflict of the interest between stockholders & management
01.3.8.Do managers Act in the stockholders interest
 Depend on two factors
I. How closely are management goals aligned with stockholders goal
II. Can manager be replaced if they do not pursue stockholder goals
 Significant incentive for management to act in the interest of stockholders
 Managerial compensation
 Control of the firm
 Other stockholders
01.3.9.Financial management in 1900’s
 Early 1900
 Formation of new firms
 Securities issued to raise capital
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Agency cost
Direct
corporate
expenditure
Expenses arise from
need to monitor
management
Indirect
 During depression 1930
 Bankrupycy and reorgarnisation
 Security market regulation
 In late 1950
 Goal of maximizing the value of
the firm
Figure 2

 During 1940 & late 1950
 Descriptive thought about finance
 Institutional subject
 Through out the 1990
 Much attention to value
maximization
 Implementing compensation plan
01.3.10.Important trends in recent years
 Globalization-
 Factors affect to increased globalization
 Improvement of transportation & communication which lowered the
shipping cost & made international trade more feasible
 The increase political clout of consumers who desire low cost high
quality product
 Advancement of technology and formation of joint ventures
 World populated with multinational firms able to wherever costs are
lowest
 Information technology
01.3.11.Financial markets
 Markets place that provides an avenue for the sale & purchase of assets
 Two types of financial markets
I. Primary market-
 where securities are created
 Two type of primary market transactions
 Public offering
 Private offering
II. Secondary market-
 where these securities are traded by investors
 two types of secondary market
 dealer market
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 In 2000
 Cross border listing
 Integrated reporting
 auction market

References
Ross, S. A., Westerfield, R. W., & Jordan , B. D. (n.d.). FUNDAMENTALS OF CORPORATE FINANCE.
DEFINITION. (n.d.). Retrieved from the-definition.com: https://the-definition.com/term/how-to-
maximize-stock-price-and-also-benefit-society
Summary
1. Corporate finace has three primary regions to cover
 Capital budjeting-what long term investment should the firm take
 Capital structure-where will the firm get the long term financing to pay for its
investment
 Working capital management-how firm manage its everyday financial
activities
2. The financial manager is liable for the finance movement inside a firm.The main
significant task is to make value from the company’s capital budgeting,financing, and
net working capital exercises.
3. The goal of the financial management is to maximize the share price of the company
or more generally increase the market value of equity
4. The relationship between stockholders and management is called Agency
relationship.The conflict of interest between stockholders and agent is called Agency
problem.Agency cost means costv of conflicts of the interest between stockholders
and management.
5. Stock price maximaization is positively affect to the social welfare
6. There are two types of financial markets.they are primary market and secondary
market
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