Finance
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Why is corporate finance important to all managers?
Corporate finance is a specific area of finance dealing with the financial decisions corporations make and the tools as well as analyses used to make these decisions. The primary goal of corporate finance is to enhance corporate value, without taking excessive financial risks.
A corporations managements primary responsibility is to maximize the shareholders wealth which translates to stock price maximization.
Corporate finance provides the skills managers need in order to:
Identify and select the corporate strategies and individual projects that add value to their firm- Capital Budgeting
Forecast the funding requirements of their company, and devise strategies for acquiring those funds- Capital Structure
An appropriate capital structure is a critical decision for any business organization. The decision is important not only because of the need to maximize returns to various organizational constituencies, but also because of the impact such a decision has on an organizations ability to deal with its competitive environment.
Capital budgeting is the planning process used to determine a firms long term investments such as new machinery, replacement machinery, new plants, new products, and research and development projects. Many formal methods are used in capital budgeting, including discounted cash flow techniques such as net present value, internal rate of return using the incremental cash flows from each potential investment, or project.
Describe the organizational forms a company might have as it evolves from a startup to a mayor corporation. List advantages and disadvantages of each form.
A startup company implies the companies that have been in business for about ten years or less. It cease to be a startup as it passes various milestones, such as becoming profitable, or becoming publicly traded in an IPO, or via a merger or acquisition.
In practice business operations are financed by the owners, but sometimes businesses are financed by venture capital firms.
Venture capital is capital typically provided by outside investors for financing of new, growing or stagnating businesses. They are characterized as risky investments.
Before developing a final product, venture capitalists do not invest into business.
In the first stage the financing venture has finally launched and achieved initial traction. Sales are trading upwards. The funding from this stage is used to fuel the sales, reach the breakeven point, increase productivity, and cut unit costs. At this point the company is two or three years old. This is the stage when the venture capitalists get into business.
At second stage of financing, sales are starting to grow rapidly. The company is also rapidly accumulating accounts receivable and inventory. Capital from this stage is used for funding expansion in all its forms from meeting increasing marketing expenses to entering new markets to finance rapidly increasing accounts receivable.
At third stage sales are climbing. Customers are happy. The second level of managers is in place. Money from this financing is used for increasing capacity, marketing, working capital, and product improvement or expansion.
After this stage company is at “Mezzanine or Bridge financing” point when investment bankers agreed to take it public within 6 months. “Mezzanine” is used to prepare a company for its IPO (Initial Public Offering). This includes cleaning up the balance sheet to remove debt that may have accumulated. Purpose of selling the IPOs (first sale of a corporations common share to public investor) is to raise capital for the corporation.
Successful startups grow rapidly with having limited investment of capital, labor or land. Startups are distinguished by their risk/reward profile and scalability. Investing in startups is very risky because of their uncertainty. If it survived, return is high because the growth is fast and profit is big. Risk is also related to the workers in the way that they cannot be sure about tomorrows work place.
Investing in corporation is much safer, but return is lower. Employees are safer. Some corporation businesses are limited to no more than 75 shareholders and none of them may be a nonresident alien. Some corporations income flows without the “double taxation” as well as providing a tax advantages for certain corporations.
What three aspects of cashflows affect the value of any investment?
There are 3 main aspects of cashflows that affect the value of any investment. The first is the amount of expected cash flows. The second is the timing of when the cash flows come in. The third is the risk of the cash flows.
The amount of cash flows are important to any investment. If more cash is coming in it is good for the investor for two reasons. First, it is more likely that the investor will receive dividends from the investment. Second, the cash flows can be used by the company to grow and make the stock more valuable, which will lead to a greater return in the future. If there are not many flows in the company, then there will probably not be much of a return.
The sooner that cash flows start coming in the better it is for the investor. This will lead to a faster return. If the investor is waiting for a return on an investment for a long period of time, they may have been better off putting their money in a savings account. The faster cash flows start coming in the faster the investor can make dividends and the company can start expanding.
The less risk of cash flows is better for an investor as well. If there is a high risk that cash flows will not come in there is more of a chance that the investor will not make money on dividends and that the company will not be able to expand. With less risk it is more certain that the investment will pay off.
What are free cashflows? What are the three determinants of free cashflows?
Free cashflow is defined as the cashflow from operations available to all financial