CORPORATE FINANCE (5585)

Lecture 1 (Based on Block 1)

Presenter: ISMATULLAH BUTT

Corporate Finance (5585)

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Objectives:
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Explain what the study of Finance means. Identify the various business forms and their implications for obtaining financing. Identify agency problems and steps that companies can take to overcome them. Describe the role of a financial manager and how it related to other areas in an organization. Explain why wealth maximization as opposed to profit maximization should be the goal of the firm. Describe the relationship between financial institutions, regulators, and markets.

Corporate Finance (5585)

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Lecture Plan: Introduction to Finance Forms of Business Organizations Role of the Financial Manager Finance & Accounting Finance & Economics

Introduction to Finance
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Finance means the study of money and money arrangements through investment and financing decisions. Finance activities vary from organization to organization. Tools and practices used to determine financial needs depend on the size and depth of operations. Money management in small organizations focuses on cash management. Money management in larger organizations deals with cash flow, raising capital for investment & ongoing operations, risk & reward decisions, insurance/hedging arrangements and evaluation of capital projects.

Forms of Business Organizations

Sole proprietorship, partnership & Corporations are the three forms of business organizations from legal angle. Sole Proprietorship; owned and operated by one personprofit/loss goes to owner- easy to start- a few employees- capital generated by personal sources/borrowing-limited access to resources-unlimited liability. Partnership; formed on the basis of partnership deed-two or more partners operate a business together-general or limited partnerships- debts equally shared in general partnership. Corporations; a legal entity created by law-managed by hired employees-access to capital resources-limited liability of share holders.

Role of the Financial Manager

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Job duties vary from organization to organization. Main responsibilities include; financial analysis, financial planning & control, Working capital management, Financing & investment decisions Above activities concern every area of organization. Solid understanding of organization is a must for a financial manager.

Finance & Accounting (A)

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The finance and accounting managers work closely together. Same skill set required for both roles yet they differ in focus. The finance manager interested in cash flows whereas accounting manager in accrual basis of financial reporting. The accounting manager needs to report on the companys financial performance and prepare financial statements observing GAAP. Financial manager obliged to ensure that organization is able to satisfy its financial obligations as they come due. Accountant more interested in reading the latest financial

Finance & Accounting (B)

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Both the financial manager and accounting manager use accounting information as generated by accounting system but to different ends. Example ;information on outstanding obligations to suppliers. What invoices have not been paid or recorded at the end of a reporting period to make accruals for their payment (accounting manager). What invoices have not been paid or recorded at the end of a reporting period to ascertain when the said invoices/financial claims are to paid to make cash flow projections (financial manager).

Finance & Economics

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Disciplines of Economics and Finance do overlap to some extent. Changes in economic environment impact the organizational ability to raise funds, the cost of funds, return on investments. Financial manager, in the role of investor and borrower, needs to understand the current state of the economy both locally and globally. The world is a global village and events in foreign countries can have significant impact on interest rates, exchange rates, and the general level of consumer confidence. Financial managers obliged to assess the implications of