In order to raise money, businesses need capital to fund their operations.

They can usually get outside funding by offering shares of stock to investors or taking out a loan with a bank. Businesses can also invest their own profits into improvements, such as buying more equipment or hiring more people. Large corporations with a profitable history are able to get more from investors than small, newer ventures without a proven track record of corporate success. What is Corporation? A corporation is a separate legal entity that has been incorporated through a legislative or registration process established through legislation. Incorporated entities have legal rights and liabilities that are distinct from their shareholders, and may conduct business for either profit-seeking business or not for profit purposes. Corporate Finance Every decision made in a business has financial implications, and any decision that involves the use of money is a corporate financial decision. Corporate finance deals with the monetary decisions of a corporation with an objective of maximizing shareholders value by minimizing financial risk. It is the set of actions and policies that determine how cash is used in a business. The decisions are researched and recommended by lower-level employees, such as financial analysts, who report to executive officers. Corporate finance can also be defined as a body of knowledge that deals with the following three issues: What long-term strategic investments a firm should undertake? What long-term strategic financing alternatives that a firm should use to raise capital to finance its long-term strategic investments? How much short-term cash flow does a company need to ensure smooth day-to-day operations of the firm?

The discipline of corporate fianc mainly deals with two broad decisions Long term decisions (investment decisions/capital budgeting decisions) Short term decisions (financing decisions)

Real assets VS financial assets Real asset can be defined as assets that are tangible or physical in nature such as property, plants and equipments. As an example in our bank many real assets can be identified such as the buildings, computers, lands that we own, ATM machines, vehicles, machineries such as note counters and etc. Financial assets can be defined as assets in the form of stocks, bonds, rights, certificates, bank balances, etc., as distinguished from tangible, physical assets. For our bank financial assets can be identified as our investments in bonds issued government and companies, bills issued by government and companies, shares of other companies and debentures of other companies, loans we have lent, reserves we hold at Central bank and etc. Real assets are tangible and generates income whereas, financial assets are intangible in nature and these are basically claims on income generated by real assts. Real assets are used in day to business operations to produce/generate an output where as financial assets are used to generate a return by investing activities. In general by investing in real assets company generates an income by way of profits earned from production utilizing the asset, rent (from lands) and gain/loss on disposals. By investing in financial assets company earns dividends, interest income and capital gains/loss upon disposal of assets.

Investment decisions =purchase of real assets Financing decisions= sale of financial assts Investment decisions One of the most important finance functions is to intelligently allocate capital to long term assets. This activity is also known as capital budgeting. It is important to allocate capital in those long term assets so as to get maximum yield (return) in future. Following are the two aspects of investment decision a. Evaluation of new investment in terms of profitability b. Comparison of cut off rate against new investment and prevailing investment. Since the future is uncertain therefore there are difficulties in calculation of expected return. Along with uncertainty comes the risk factor which has to be taken into consideration. This risk factor plays a very significant role in calculating the expected return of the prospective investment. Therefore while considering investment proposal it is important to take into consideration both expected return and the risk involved. Investment decision not only involves allocating capital to long term assets but also involves decisions of using funds which are obtained by selling those assets which become less profitable and less productive. Financing Decision Financing decision is yet another important function which a financial manger must perform. It is important to make wise decisions about when, where and how should a business acquire funds. Funds can be acquired through many ways and channels. Broadly speaking a correct ratio of an equity and debt has to be maintained. This mix of equity capital and debt is known as a firms capital structure. A firm tends to benefit most when the market value of a companys share maximizes this not only is a sign of growth for the firm but also maximizes shareholders wealth. On the other hand the use of debt affects the risk and return of a shareholder. It is more risky though it may increase the return on equity funds. A sound financial structure is said to be one which aims at maximizing shareholders return with minimum risk. In such a scenario the market value of the firm will maximize and hence an optimum capital structure would be achieved. Other than equity and debt there are several other tools which are used in deciding a firm capital structure. Corporate hierarchy In any corporation Chief Executive Officer (CEO) is primarily responsible for giving instructions to carry out the operations and Chief Financial officer (CFO) performs those tasks that involve finance. This officer is also responsible for financial planning and record-keeping, as well as financial reporting to higher management. In some sectors the CFO is also responsible for analysis of data. However, main duties of CFO revolve around following heads; Planning the finance CFO is responsible to make financial planning about various projects that an organization wants to run in future. As he is the person who can increase the profitability of company therefore, he must watch out how much finance is required as well as sources to increase finance.

Raising the finance Being the most responsible person CFO must have knowledge about all financial institutions that are offering loans at considerable low interest rate. He is also responsible to maintain long-term relationships with all financial parties that are giving finance to corporation. Moreover, CFO must know under what conditions it will be more beneficial for company to issue shares for raising finance rather than taking loans. Investing the finance CFO is responsible to evaluate the feasibility of various projects which a particular organization is considering and then decide that which project will give more profits. He must handle the long term as well as short term financing. Monitoring the finance The Chief Financial Officer is held accountable for the analysis of financial data and the decisions that result from that analysis. He must monitor the usage and try to reduce any wastage or misuse of finance. Taking a More Strategic Role As organizations continue to adjust to market volatility and economic uncertainty, CFOs must increasingly provide expert advice to support boardroom decisions. In fact, many CFOs feel that they are in an exceptional position to offer this level of strategic counsel because of their ability to gather information from disparate parts of the company. CFOs must nonetheless maintain a laser focus on vital finance responsibilities, which remain particularly essential in the wake of the financial crisis. "Ensuring business decisions are grounded in sound financial criteria is a key role that CFOs must put first. Treasurer The treasurer`s function is primarily external. The treasurer obtains and manages the corporation`s capital and is involved with creditors (e.g., bank loan officers), stockholders, investors, underwriters of equity (stock) and bond issuances, and governmental regulatory bodies (e.g., the SEC). The treasurer is responsible for managing corporate assets (e.g., accounts receivable, inventory) and debt, planning the finances and capital expenditures, obtaining funds, formulating credit policy, and managing the investment portfolio. The treasurer concentrates on keeping the company afloat by obtaining cash to meet obligations and buying assets to achieve corporate objectives. CEO

CFO

Controller

Treasurer

Controller

The controller`s functions are primarily of an internal nature and include record keeping, tracking, and controlling the financial effects of prior and current operations. The internal matter of importance to the controller includes financial and managerial accounting, taxes, control, and audit functions. The controller

is the chief accountant and is involved in the preparation of financial statements, tax returns, the annual report, and Securities and Exchange Commission (SEC) filing. The controller`s function is primarily assuring that funds are used efficiently. He or she is primarily concerned with collecting and presenting financial information. The controller usually looks at what has occurred rather than what should or will happen. Goals of the corporation A corporation might have many goals like Maximizing Accounting Profits, Maximizing Market Share, Maximizing Revenue, Minimizing Expenses or Maximizing shareholders wealth. The natural financial objective of the corporations is to maximize the current market value because all other objectives gives benefit for short run. Managers who consistently ignore this objective are likely to be replaced. Profit Maximization stresses the efficient use of capital resources, but it is not specific (or ignore) with respect to the time frame over which the profits are to be measured. In short- term executives may used different assets to sell-off and turn the cash to increase liquidity on corporate balance sheets and then could easily increase profits. But this short run profit taking strategy is not in the best long-term objective and interest of the owners of the public corporation. Maximization of Shareholders Wealth means maximization of the market value of the existing shareholders common stock price. This should be the primary objective of every corporation. Control of the corporation ultimately rest with stockholders. They elect the board of directors, who, in turn, hire and fire management. An important mechanism by which unhappy stockholders can replace existing management is called a proxy fight. A proxy fight develops when a group solicits proxies in order to replace the existing board and thereby replace existing management. The Boards of Directors is the body that oversees the management of a public corporation. The Board of Directors is elected representatives of the shareholders; the directors are obligated to ensure that managers are looking out for stockholders interests. They have the power to change the top management of the firm and have a substantial influence on how the corporation is run and how the dividends are distributed. Agency problem An agency problem occurs when the interests of stockholders, the board of directors and/or the management of the company are not perfectly aligned or when these entities conflict. In publicly held companies, there are a variety of individuals with an interest in the performance of the company. The managers and executives who run the company on a day-to-day basis, the shareholders who own stock and the board of directors who oversees the company's business development all may have different aims or ideas of how the business can be run. Since each of these entities has a vested interest in the corporation, an agency problem occurs when there is conflict among them. Executives of a corporation may, for example, be interested in achieving good long-term growth of the company. Since their performance is measured by how the company does in the short run and the long run, the decisions they make are based on the goals of generating profit both now and in the future. This may mean they wish to engage in capital expenditures now to secure a possible benefit or gain in the future. Many stockholders, on the other hand, may be focused on the immediate earnings and returns of a company, as these are important metrics in the valuation of the price of a share of stock on the open market. A stockholder who doesn't intend to hold the company long term may prefer a dividend be paid

instead of that the money be reinvested to achieve a long-term gain for the company. This is just one example in which the interests of the shareholders may not be perfectly aligned with those of the corporate governance. A more dramatic example of an agency problem may occur when the corporate executives are out to maximize their own compensation, sometimes at the expense of the company or shareholders. The board of directors as well may have a difference of opinion from the shareholders or the executives, aiming to take the company in a different direction still. The board may have the power to remove a chief executive or manager from power, but the shareholders may disapprove of this decision. Conflicts can abound among all three entities, creating issues that are difficult to resolve. When an agency problem exists, it can be difficult for a company to resolve. Shareholders generally get a vote and can vote with the board of directors against the executives, for example. When the agency problem is resolved in this manner, the executives could end up forced to follow a course of action they do not entirely agree with, as the majority rules