Corporate finance Assignment PDF

Preview

Summary

Assignment on the Basics of Financial Engineering and Derivatives...

Description

ASSIGNMENT ON

MANAGERIAL FINANCE AN ASSIGNMENT ON CORPORATE FINANCE SUBMITED TO

FAHMIDA AHMED Assistant Professor Faculty of business Administration (FBA) USTC SUBMITED BY

M. SHEIKH MUJIB ROLL : 982 BA BAT TCH : 24th REG NO : 960 PROGRAM : MBA NAME

:

DATE OF SUBMISSION: 30/06/2020

Faculty of business Administra Administration tion (FB (FBA) A) Univ Univer er ersity sity of Science and T Technology echnology Ctg

1

I. 1.

Importance of Corporate Finance

Research and Development: Corporate Finance is needed for Research and Development. Today, a company cannot survive without continuous research and development. The company has to go on making changes in its old products. It must also invent new products. If not, it will be get automatically thrown out of the market.

2.

Motivating Employees: Manager and employees must be continuously motivated to improve their performance. They must be given financial incentives, such as bonus, higher salaries, etc. They must also be given non-financial incentives such as transport facilities, canteen facilities (eatery), etc. All this requires finance.

3.

Promoting a Company: Finance is needed for promoting (starting) a company. It is needed for preparing Project Report, Memorandum of Association, Articles of Association, Prospectus, etc. It is needed for purchasing Land and Buildings, Plant and Machinery and other fixed assets. It is needed to purchase raw materials. It is also needed to pay wages, salaries and other expenses. In short, we cannot start a company without finance.

4.

Smooth Conduct of Business: Finance is needed for conducting the business smoothly. It is needed as working capital. It is needed for paying day-to-day expenses. It is needed for advertising, sales promotion, distribution, etc. A company cannot run smoothly without finance.

5.

Decision Making: If an organisation has to start a new project, then it has to consider whether it would be financially viable and if it would yield profits. So while investing in a new project or a new venture, a company has to consider several things like availability of finances, the time taken for its completion, etc. and then makes decisions accordingly

6.

Depreciation of Assets: When you invest in a new software or a new equipment, you would require to keep aside some amount to maintain it and upgrade it in the long run. Only then you could be assured that it would yield good results over a period of time. In the fast changing times of today, if this is not done, you might end up losing business if you do not have finances for it. 2

7.

Raising capital: When an organisation has to invest in a new venture, it is very important that it has to raise capital. This cab be done by selling bonds and debentures, stocks of the company taking loans from the banks etc. All this can be done only by managing corporate finances in a proper manner.

Scope of corporate finance:Corporate Finance broadly speaking business finance can be defined as the activity concerned with the raising and administering of funds used in business. 

Precedents: Corporate finance deals with precedents, practice and policies based or experience, accident or anticipation,



Financial Problem: Corporate finance deals with the financial problems of corporate. Also deal with distinction between capital and Income.



Capital required: It examine the extent form of Capital required by Corporate.



Income: It scrutinises the practice and policies of administering corporate Income.



Dividend: It looks into propriety of Dividend, Depreciation and reserve policies of the companies.



Financial Institution: It studies the importance of financial institutions Insurance, stock exchanges, investment bankers etc.

II.

Fundamental Rules Of Corporate Finance

Corporate finance is based on two fundamental rules. One of these rules relates to the concept of return while the other relates to the concept of risk. We have described both these rules in this article. They are as follows:

Rule 1: Money today is worth more than money tomorrow The fundamental rule of corporate finance is that the timing of cash flows is of paramount importance. Also, we want the timing of the cash flows to be as soon as possible. The sooner we get the cash, the better it is for our company. Every dollar that the company has in cash today is better than the same dollar in cash tomorrow because of the following reasons:

3



Inflation: Inflation eats into the purchasing power of the company’s funds constantly with the passage of time. Thus if the company had the same nominal amount of money today or a year from now, they would be able to purchase more goods and services with the money that they have today as compared to the same amount of money a year later. Thus, to offset the effect of inflation, companies must conduct their business in a manner that they ensure that cash is received as soon as possible.



Opportunity Cost: Also, every dollar that the company is not receiving has an opportunity cost of capital. Let’s say the company’s debtors owe it $100 and they pay $100 the next year. The nominal value of the money that they have paid is $100 however the real value is less. This is because had the debtors paid immediately, the company would have cash immediately on hand. They could then invest this cash in risk free securities and could have earned a year’s interest on the same. By accepting the same $100 a year later, the company has in effect loaned out $100 to its debtors and that too interest free! Rule 2: Risk free money is worth more than risky money



Return of Capital: Some projects are extremely risky. Here, the company is concerned about whether or not the money they are investing will be recovered. A higher rate of return must be demanded from such projects to offset the likelihood of losing their entire capital that the investors face.



Return on Capital: In other cases the cash flow may be a little less uncertain. In these cases, companies must consider the low risk before making their decision.

III.

What is IPO:

Initial public offering is the process by which a private company can go public by sale of its stocks to general public. It could be a new, young company or an old company which

decides

to

be

listed

on

an

exchange

and

hence

goes

public.

Companies can raise equity capital with the help of an IPO by issuing new shares to

4

the public or the existing shareholders can sell their shares to the public without raising any fresh capital.

The process of IPO:An initial public offering is the process of structuring a firm's shares for sale, establishing stakeholders, and establishing regulatory compliance chiefly cantered around financial disclosures and transparency. Most of this process exists to protect the general public from purchasing shares in fraudulent companies.

While the full process of an IPO involves a significant amount of both legal and accounting detail, here is the general framework: The firm hires an underwriter, almost always an investment bank, to advise and fund the IPO. This bank will typically approach institutions and investors to create initial interest in the IPO in what is called the "road show" and will help with the disclosures and regulatory process. The underwriter may also guarantee the initial public offering by purchasing the company's entire offering at an agreed-upon price, then selling that stock publicly itself. This is called a firm commitment. The alternative is a best efforts agreement, in which the underwriter sells the initial shares but does not provide any financial guarantees.

The company hires a third party accounting firm to conduct a complete audit of its finances. The company, aided by its underwriter, assembles SEC registration documents. These include a prospectus, which is circulated to all potential investors, and private filings, which are for the SEC's eyes only.

5

The registration documents include detailed financial information (including the third party audits), information on the company's management, its potential liabilities, private share ownership and its business plan.

The SEC conducts due diligence to ensure that all information in the registration documents was accurate and complete.After the SEC approves the filing the prospectus is circulated to potential investors and a date for the IPO is set. If the company and the underwriter have not yet agreed upon an initial price or quantity of shares, they do so now. Once these steps have been met, the stock is issued for public sale. Profit from the sale of shares depends on the agreement between the company. Finally, once a company has gone public it gains ongoing disclosure requirements regarding its finances, taxes, liabilities, business operations and more. This is often seen as one of the chief downsides to an IPO along with handing over control of a portion of the company. It is also the consequence of an initial public offering; once a firm is in ongoing compliance with public disclosure requirements, a subsidiary offering is far less significant.

IV.

Objectives of Financial Planning

Financial Planning has got many objectives to look forward to: 1.

Determining capital requirements- This will depend upon factors like cost of current and fixed assets, promotional expenses and long- range planning. Capital requirements have to be looked with both aspects: short- term and long- term requirements.

2.

Determining capital structure- The capital structure is the composition of capital, i.e., the relative kind and proportion of capital required in the business. This includes decisions of debt- equity ratio- both short-term and long- term.

3.

Framing financial policies with regards to cash control, lending, borrowings, etc.

6

4.

A finance manager ensures that the scarce financial resources are maximally utilized in the best possible manner at least cost in order to get maximum returns on investment.

Importance of Financial Planning:Financial Planning is process of framing objectives, policies, procedures, programmes and budgets regarding the financial activities of a concern. This ensures effective and adequate financial and investment policies. The importance can be outlined asAdequate funds have to be ensured. Financial Planning helps in ensuring a reasonable balance between outflow and inflow of funds so that stability is maintained. Financial Planning ensures that the suppliers of funds are easily investing in companies which exercise financial planning. Financial Planning helps in making growth and expansion programmes which helps in long-run survival of the company. Financial Planning reduces uncertainties with regards to changing market trends which can be faced easily through enough funds. Financial Planning helps in reducing the uncertainties which can be a hindrance to growth of the company. This helps in ensuring stability an d profitability in concern.

V.

Essentials of sound financial plan:

Some of the important characteristics of a sound financial planning are: 1.

Simplicity

2.

Foresight

3.

Flexibility

4.

Optimum use of funds

5.

Liquidity

7

6.

Anticipation of contingencies and

7.

Economy While preparing the plan of capitalisation in a company, the following canons or factors should always be kept in view: (1) Simplicity: A sound financial structure should provide simple financial structure which could be managed easily and understandable even to a layman. “Simplicity’ is an essential sine qua non which helps the promoters and the management in acquiring the required amount of capital. It is also easy to work out a simple financial plan. 2) Foresight: Foresight must be used in planning the scope of operation in order that the needs for capital may be estimated as accurately as possible. A plan visualised without foresight spells disaster for the company, if it fails to meet the needs for both fixed and working capital. 3)Flexibility: Financial readjustments become necessary often. The financial plan must be easily adaptable to them. There should be a degree of flexibility so that financial plan can be adopted with a minimum of delay to meet changing conditions in the future. 4)Optimum use of fund:There should be optimum utilisation of available financial resources. If this is not done, the profitability will decline. There should be a proper balance between the fixed capital and the working capital.

(5) Liquidity: It means that a reasonable percentage of the current assets must be kept in the form of liquid cash. Cash is required to finance purchases, to pay salaries, wages and other incidental expenses. The degree of liquidity to be maintained is determined by the size of the company, its age, its credit status, the nature of its operations, the rate of turnover etc. 6) Anticipation of contingencies: 8

The planners should visualise contingencies or emergency situations in designing their financial plan. This may lead to keeping of some surplus capital for meeting the unforeseen events. It would be better if these contingencies are anticipated in advance.

7) Economy: Last but not the least, the financial open be made in such a manner that the cost of capital procurement should be minimum. The capital mobilised should not impose disproportionate burden on the company. The fixed interest payments should not reduce the profits of the company and hamper its sustained growth.

VI.

Purpose of a valuation of a firm:-

Although the primary purpose of business valuation is preparing a company for sale, there are many purposes. The following are a few examples:-

Shareholder dispute:sometimes a bReakup of the company is in the shareholder’s best interests. This could also include transfers of shares from shareholders who are withdrawing. Estate and Gift: a valuation would need to be done prior to estate planning or a gifting of interests or after the death of an owner. This is also required by the IRS for Charitable donations.

Merger, acquisition and Sales:valuation is necessary to negotiate a merger, acquisition, or sale, so the interested parties can obtain the best fair market price. Purchase price allocation: this involves reporting the company’s assets and liabilities to identify tangible and intangible assets For insurance cover: this is largely concerned with the costs of replacing the relevant assets. 9

Security against loan: The lender is concerned with the realizable value of the assets of a firm.

For estate duty purpose: An unquoted business requires a value to be placed upon its shares for duty purpose ,since in this case no market price is available. Acquiring assets: The purpose here is to acquire a business or a part thereof in order to obtain the assets which it holds.

VII.

Factors that influencing valuation techniques:

Financial Performance What are the projected profits and cash flow and how well have costs been controlled to date? When valuing a business, it will be important to take into account any capital expenditure that has been planned for or will be needed in the future. Future profitability is obviously of the utmost importance Assets and Liabilities:Ifyou add up all the assets, take away the liabilities and you are left with the asset valuation. There is a need to consider the current situation with orders and the value of any property and equipment. What is the situation with debtors? Does the business own any patents?

Intangibles:This is sometimes one of the major considerations when valuing a business. It includes considering the strength of the customer base of a business. This can be a very valuable aspect as a sound customer base can provide opportunities for potential buyers to use them as a target audience for other goods or services. Equally important

10

is the strength of the brand as this can dictate the potential for other spin off benefits associated with the brand. The current financial position:An enterprise should be in a good financial position to maintain its profitability and earnings for the common stockholders.The basic financial problem of the corporate management is to maintain a balance between liquidity and profitability.Too much cash or liquidity on the other hand does nit help the profit of the enterprise.Idle funds are not productive funds.The ideal current financial position is the balance between excess liquidity and illiquidity. Capital structure characteristics:The method that management uses in financing the companys growth will have the influence upon the stability of earnings.As long as the earnings of the enterprise are above the costs of borrowed funds,the earning per share of common stock are increased.The use of large large amount of debt in the capital structure is higher than that of debt Management: The quality and depth of management is essential to the future profitability of a business enterprise.Many analysts consider the quality of corporate management as the single most important factor influencing the future earnings and overall success of the enterprise.Without efficient management an enterprise could not maintain its comparative position or introduce new products

VIII.

Valuation techniques:

Essentially, there are three recognised approaches to value: 1.

The market approach

2.

The income approach

3.

The asset approach (also called the cost approach)

4.

Under each approach are several common business valuation methods.

11

The market approach:-is based on the principle of substitution. The fundamental basis of this approach is predicated on the theory that the fair market value of a closely-held company can be estimated based on the prices investors are paying for the stocks of similar, publicly traded (or private) companies.Methods under the market approach include: 

Dividend-Paying Capacity Method



Guideline Merged & Acquired Company Method



Guideline Publicly-Traded Company Method



Transaction Database Method From these methods, value is determined through market multiples of either publiclytraded or privately-held companies. These multiples are ratios of specific financial metrics (e.g. share price/sales per share), which allow businesses to compare financial information across similar companies. The dividend paying capacity Method and the Guideline Company Method These business valuation methods use financial and market information gleaned from publicly-traded securities of other companies with similar business pursuits. The premise of this data assumes that prevailing investor attitudes and expectations can be applied to ascertain value for the subject company Income Approach Methods:The income approach is based upon the economic principle of expectation. This approach assumes that the value of the business is equal to the present value of the economic inc...