Corporate Finance

Finance
1. A branch of economics concerned with resource allocation as well as resource management,
acquisition and investment. Simply, finance deals with matters related to money and the markets.

2. To raise money through the issuance and sale of debt and/or equity.

3 inflow and outflow of funds

4 decision making power with numbers

Role of financial manager

Raising of Funds
Allocation of Funds
Profit Planning
Understanding Capital Markets

Levered firm
A company that uses debt in its capital structure. The term often refers to firms that have a large
percentage of debt relative to equity when compared against peers in the same industry

unlevered firm
A company that has no debt is called an unlevered firm. They use equity to raise their capital.

Difference between Accounting and Finance

The simplest way to differentiate the two is that accounting is more focused on the past and finance is
more focused on the future.

Accounting is a system for the delivery of financial information. It involves the recording of transactions
and preparation of the financial statements, along with financial statement analysis regarding financial
health of firms

Finance takes the organized information provided by accounting and uses it to help run a company on a
daily basis and make long term financing and budgeting decisions. Finance is dedicated to ensuring that
there will be sufficient cash flowing into a business in the future to achieve the goals of the business.
Because Finance deals with the future, it must deal with risk and uncertainty. Anticipating, evaluating,
and managing these risks and uncertainties is a large part of the responsibility of financial managers."

Capital structure
Capital structure refers to a companys outstanding debt and equity. It allows a firm to understand what
kind of funding the company uses to finance its overall activities and growth.
Common stocks
Common stock

the fundamental ownership claim in a public corporation

Common stock represents ownership in a company and a portion of profits (dividends)

Investors also have voting rights (one vote per share) to elect the board members who oversee
the major decisions made by management.

Characteristics of Common Stock

Dividends

payment and size of dividends is determined by the board of directors of

the issuing firm.

Residual Claim

in the event of liquidation, common stockholders have the lowest

priority in terms of any cash distribution.

Limited Liability

common stockholders losses are limited to the amount of their original

investment in the firm.

Characteristics of Preferred Stock

Similar to common stock in that it represents an ownership interest but, like bonds, pays a fixed
periodic dividend

Senior to common stock but junior to bonds

Generally, do not have voting rights

Nonparticipating preferred stock

dividend is fixed regardless of any increase or decrease in the firms value

Cumulative preferred stock

missed dividend payments go into arrears and must be made up before common stock dividends can be
paid

Bonds

Bonds, in general, have certain basic features that are common to this
asset class. Listed below are some of the distinguishing characteristics of
bonds:

Maturity date: this is the date on which the bond will mature
and the bond issuer will repay the bondholder the face value of
the bond.
Face (par) value: is the principal amount the bond will be
worth at maturity. The face value is also the reference amount
used by the bond issuer to calculate interest (coupon)
payments i.e. the coupon payments are always calculated
based on face value regardless of the initial issue price.

Coupon rate: is the rate of interest, expressed as a percentage,

which the bond issuer will pay on the face value of the bond.

Coupon dates: are the dates on which the bond issuer makes
the interest payments. The frequency of interest payments can
vary from bond to bond. But typical payment intervals are
annual (once a year) or semi-annual (twice a year).

Currency denomination: the currency in which the bond

issuer, issues the bond. E.g. dollars, euros, yen etc.
 Issue price: this is the price at which the bond issuer will
originally issue the bond. The bond can be issued at a discount
or premium to face value.

Capital expenditures (CAPEX)

A capital expenditure is the use of funds or assumption of a liability in order to obtain or
upgrade physical assets. The intent is for these assets to be used for productive purposes
for at least one year. This type of expenditure is made in order to expand the productive or
competitive posture of a business. Examples of capital expenditures are funds paid out for
buildings, computer equipment, machinery, office equipment, vehicles, and software

If the asset's useful life extends more than a year, then the CAPEX is recorded
as an asset in the balance sheet and is expensed using depreciation to spread
the cost of the asset over its designated useful life as determined by tax
regulations.

An operational expenditure (Opex) is the money a company spends on

an ongoing, day-to-day basis in order to run a business or system.
Depending upon the industry, these expenses can range from the ink
used to print documents to the wages paid to employees. The
counterpart, Capex, is the money spent on the improvement or
purchase of fixed assets.