3/19/2023
Introduction to
Corporate
(Business)
Finance
Prepared and Presented by
Dr. Mahmoud Otaify
Intended Learning Outcomes (ILOs)
What Is Corporate (Business) Finance?
What are main functions of Financial managers?
Describe organizational structure of a corporation?
What are main differences of Accountant and financial managers?
What is objective of financial managers?
What is Principal – Agent Relationship?
How could Conflict arise?
Is there a cost of conflict?
How to minimize/control this cost?
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Corporate/Business/Managerial Finance
Borrow/Buy/Inv
est
Acquire Short-term
Sue/sued Corporation
Be
limited
Business Spend
and Long-
partner Firms Manage
term financial
resources
Enter in
contract
Decisions of FIN. Managers in company
Assets Liabilities and Shareholders Equity
Short-term
Financing
Working Current Assets XXXX Current Liabilities XXXX
Capital
Debt Financing
Capital Long-term Assets XXXX Long-term Liabilities XXXX
Budgeting
Equity Financing
Shareholders Equity XXXX
Total Assets XXXX Total Liabilities and XXXX
Shareholders Equity
Uses of Funds Sources of Funds
(Investing) (Financing)
Dr. Mahmoud Otaify - FMCS: Introductory Lecture 4
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How can Paying
manage inventory in
daily cash or on
Examples for operations credit
Working
capital Extend A/R How much
Decisions credit cash
period or available for
shorten paying A/P
Expand current operations
(new branches)
Examples for
Projects for Build new production line
which we
need Capital
Or Acquire existing firm
Budgeting
Decisions
Replace/upgrade old
machines
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Capital Structure Decisions
What is Capital What is Capital Structure
Source EGP Source Weight of each source
Debt 200/1000 = 20%
20% of long-term investments are
Debt 200 financed from debts
Equity 800/1000 = 80%
Equity 800 80% of long-term investments are
financed by equity
Capital 1000 Capital Structure Identifying suitable mix of debt
and equity to finance investments
Difference between Capital Structure and
Financial Structure
Capital Structure Financial Structure
Long
term Capital
Liabilities
Financial
Capital Structure
Short-
Equity term
loans
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Decisions of FIN. Managers in company
Capital budgeting. Taking long-term investment decisions
Identifying suitable mix of debt and
Capital structure. equity to finance investments
Working capital management. Managing daily financial operations
All shareholders votes to elect the directors in the board
Board of Directors
(Principal)
Chief Executive Officer (CEO) (Agent)
Vice President Marketing Chief Finance Officer (CFO) Vice President Production
Treasurer Controller
The same office/person in small firm
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Treasurer Vs Controller
Treasurer Controller
A key financial manager, who manages The firm’s chief accountant, who is responsible
the firm’s cash, for the firm’s accounting activities, such as
investing surplus funds when available and corporate accounting,
securing outside financing when needed. tax management,
financial accounting,
cost accounting.
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What is Relationship
between Finance and
Accounting?
The firm’s finance and accounting activities are closely
related and generally overlap. In small firms, accountants
often carry out the finance function; in large firms,
financial analysts often help compile accounting
information.
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Two differences between Finance and Accounting
Emphasis on Decision
Cash Flow Making
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Emphasis on Cash Flows – Example
A small Car Dealer who bought a car at EGP 250,000 and sold it for customer at EGP
300,000. Although the firm paid in full for the car during the year, at year’s end it did
not collected the EGP 300,000 from the customer.
Accounting view Financial view
(accrual basis) (cash basis)
income statement cash flow statement
for the year ended 12/31 for the year ended 12/31
Sales revenue EGP 300,000 Cash inflow EGP 0
Less: Costs 250,000 Cash Outflow 250,000
Net Profit + 50,000 Net cash flow - EGP 250,000
in terms of actual cash flow, it has a
In an accounting sense, the problem resulted from the uncollected
Corporation is profitable accounts receivable
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Emphasis on Cash Flows
Accountant Finance Managers
Is to make sure that the firm has enough cash
primary function is to develop and report data
to pay its bills and to make investments to
for measuring the performance of the firm
compete in the marketplace.
Use Accrual basis Use Cash Basis
recognizes revenues and expenses when they to recognize revenues and expenses only
occur (regardless of when cash actually when actual inflows and outflows of cash
exchanges hands) occur
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Decision Making
Accountants Financial managers
evaluate the accounting information and
focus on collecting and presenting
other data to influence business decisions
financial data
to create value for shareholders
This does not mean that accountants never influence
decisions or that financial managers never gather data
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What is objective
of financial
Management
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What is Objective of Financial Management?
Profit Wealth
Maximization Maximization
•Earnings Per •Stock Price
Share (EPS)
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Timing = investment with sooner
profits is better
Does profit
maximization
lead to the Profits do not necessarily result in cash flows available
highest Firms pay their bills with cash, not profits, so cash flow
matters most to financial managers and investors
share price?
Risk = A firm that earns a low but
reliable profit might be more valuable
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Objective of Financial Management Decisions
Financing Good decisions
Decisions increase the
Maximize stock value
Firm Poor decisions
Value decrease the
Investing stock value
Decisions
Dr. Mahmoud Otaify - FMCS: Introductory Lecture 21
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The Decision rule for managers
Only take actions that are expected to increase the
share price
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Are managers
always act in the
interest of
shareholders?
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Principal – Agent (Agency) Relationship
Investing
Decisions
Hire to
manage Maximize
firm Stock
price
Financing
Decisions
Conflict of Interest = Agency Problem
Interest of Interest of
Owners Managers
Why
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Decision on location of company subsidiary
• location’s appeal to a particular manager
• rather than on its potential benefits
Decision to expand business
• manager’s desire to receive more compensation
• rather than to enhance the value of the company
Decision on alternative Projects
• Choose less riskier projects
• Rather than higher expected cashflow and strategic goal
Decision on Acquisition Offer
• Fear of lose his job and the large salary
• Rather than accepting offer with highest price
Is there a cost of this conflict? Drop in Stock Price 25
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Principal – Agent Relationship
Agency
Relationship Problem Cost Control
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How can Agency Problem be
controlled?
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How can Agency Problem be controlled?
Corporate
Management
Control
Compensation
(Governance)
Government
Control
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Management
Compensation Plans
Incentive plans Performance plans
Cash
bonus
Stock options
Share
price
Performance
measure
EPS
Dr. M. Otaify - Lec. 4: Principal - Agent Relationship 29
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= the rules, processes, and
Corporate laws by which companies
Governance are operated, controlled,
and regulated.
rights and responsibilities of the Rules & Processes for making corporate
corporate stakeholders decisions
Dr. M. Otaify - Lec. 4: Principal - Agent Relationship
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Lost $ 6.2
billion
paid $1 billion
As penalties
Trader in London office made
risky trades
Investigation revealed that the
bank had maintained poor
internal control
Dr. M. Otaify - Lec. 4: Principal - Agent Relationship 31
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Provisions for civil or
Unethical acts
criminal actions of
Government Control
Individuals who illegal acts in the
conduct name of the firm
Dr. M. Otaify - Lec. 4: Principal - Agent Relationship 32
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Q&A
Next Lecture
Financial Analysis
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