Acquisition of resource means finance creation at smallest amount of achievable cost. Resource generation can be completed all the way through
Equity --- It includes income obtained from stock sellinbooked incomes and investment returns.
Liability --- It includes banks loan, warranty of goods and payable account.
• Allocation of funds
outlay of funds for profit maximization motive is known as allocation of resources.
Investment can be considered into two groups:-
Fixed Asset --- building, machinery
Current Asset --- Inventory, cash, receivable account, etc.
Corporate or business finance is all regarding raise and part of funds for growing profit. leading management chalks out long-term plan for satisfying future objectives. worth of the company's stock is a very important issue for the management because it is straight related to the assets of the share-holders of the company.
Functions of Corporate Finance are :-
increasing Capital or Financing
Budgeting of Capital
Corporate Governance
Financial management
Risk Management
All the above functions are consistent and co-dependent. For example, in order to materialize a project a company wants to raise capital. So, budgeting of capital and financing are co-dependent.
Decisions making of the corporate finance are mainly two types based on the time period for the same, namely, Long term and Short term.
i . Long term decisions :-
It is basically concerned with the capital investment decisions such as possibility measurement of the project, financing it during equity or debt, pay dividend or reinvest out of the profit.
Long term Corporate finance which are generally related to fixed assets and capital structure are called Capital Investment Decisions. leading managements always target to make the most of
value of the firm by investing in positive NPV (Net Present Value) projects. If such opportunities don't arise then reinvestment of profits should be delayed and the surplus cash should be returned to the shareholders in the form of dividends.
Capital Investment Decisions constitute three decisions:-
Decision on Investment
Decision on Financing
Decision on Dividend
ii. Short term decisions :-
These are also known as working capital management which try to beat a balance between current assets (cash, inventories, etc.) and current liabilities(a company's debts or obligations awaiting for less than one year).
Corporate finance is a little different from the accounting one. This can be understand by the help of the following example :-
A Gujarat Steel firm sells steel to a Tata car manufacturer at $200 per small amount (suppose) but has not received the payment for the same. Let the Steel firm's cost of production be $190.
Now, according to the accounting rule the profit will be calculated as $(200-190) = $10 per small amount.
But according to Corporate Finance the calculation disclaimer will be :-
Inflow of Cash = 0
Outflow of Cash = -190
http://www.economywatch.com/finance/corporate-finance/introduction-to-corporate-finance.html
Principle of Corporate Finance
Principle of Corporate Finance constitutes the theories and their performances by the managers of the companies in the practical field for maximization of profit.
Corporate Finance deals with a company's financial or financial activity (promotion, financing, investment association, capital budgeting etc.).
All these activities are talented with the sole objective of profit maximization.
For meeting the fund wants for any project of a company, a company can get it from a range of sources such as internal, external or equities at the lowest cost possible. This fund is then used for investment purpose for the production of the attractive asset.
Principle of Corporate Finance show how the changed corporate financial theory help to formulate the policies for the growth of a company.
Finance is a science of managing money and other assets. It is the development of channelization of funds in the form of invested money, credits, or loans to those economic agents who are in require of funds for creative investments or otherwise. Eg. On one hand, the consumers, business firms, and governments require funds for making their expenditures, pay their debts, or complete other transactions. On the other hand, saver build up funds in the form of savings deposits, pensions, insurance claims, savings or loan shares, etc which becomes a source of investment funds. Here, finance comes to the fore by channelling these savings into proper channels of investment.
Largely finance can be classified into three fields:-
Public Sector Finance : Financing in the government or public level is known as public sector finance. Government meets its expenditures mainly during taxes. Government budget generally don't balance, hence it has to make use of for these deficits which in turn gives rise to public debt
.
Corporate or Business Finance: It tries to optimize the goals (profit, sales, etc.) of a corporation or other business organization by estimating future asset wants and then allocating funds in agreement to the accessibility of funds.
Personal Finance: It mostly deals with the optimization of finances in the personality (single consumer, family, personal savings, etc.) level subjected to the budget control.
. Eg. A consumer can finance his/her purchase of a car by taking a credit from any bank or financial institutions.
Some of the conditions important in principle of Corporate finance are :-
Net Present Value (NPV)
Net Present Value = (Present Value of Inflow of Cash) - (Present Value of
Outflow of Cash)
NPV helps to calculate the value of a currency today with that of the future, after taking into consideration returns and price increases.
Positive Net Present Value for a project means that the project is practical because cash flows will be positive for the same.
Senior managements always aim to maximize the value of the firm by investing in positive NPV (Net Present Value) projects. If such opportunities don't happen then reinvestment of profits should be delayed and the surplus cash should be returned to the shareholders in the form of dividends.
Financial Risk management
According to Financial Economics which, increase those projects the value of the shareholders assets should be taken on. Financial Risk Management is the creation of value of the shareholders of a firm by managing the contact to risk by the use of financial instruments (loans, deposits, bonds, equity stocks, future and options, etc.).
Financial risk management involves:-
classification of the resource of risk
Risk capacity
Financial Risk Management always tries to find out possible opportunity to get around the costly risk exposure by with financial instruments
http://www.economywatch.com/finance/corporate-finance/principle-of-corporate-finance.html
Q1. Calculate PepsiCo's net debt ratio, assuming that the present value of operating leases is five times the annual rental expense and that remitting the cash and marketable securities to the United States reduces them by 25% due to taxes and transaction costs.
Calculation Net debt ratio :
L* = (D + PVOL - CMS)/(NP + D + PVOL - CMS)
Where D is the total market value of debt = $9453
PVOL is the present value of operating lease commitments = 479 * 5 times annual rent = $2395
CMS is cash and marketable securities (net of the cost of remitting these funds to the United States) = $1498 reduce 25% taxes and cost = $1123.5
N is the number of common shares = total share 788 (millions)
And P is the common stock price = $55.875
L* = (D + PVOL - CMS)/(NP + D + PVOL - CMS)
=($9453+$2395-$1123.5)/($44029.5+$9453+$2395-$1123.5)
=$10724.5/ $54754
= 0.1958
L = 19.58%
Net debt ratio :
Q2. For each firm in Exhibit 5, calculate the interest coverage ratio, the fixed charge coverage ratio, the long-term debt ratio, the total debt to adjusted total capitalization (recall that adjusted capitalization includes short-term debt), the ratio of cash flow to long-term debt, and the ratio of cash flow to total debt.
DEFINATION :
Interest coverage ratio : these ratio shows no of times the company can cover the interest amount. A higher ratio indicates that the company can more comfortable in planning the interest amt and lower ratio shows in adequate profit to cover interest amount.
Fixed charge coverage ratio:
Fixed charge coverage ratio shows a ability and efficiency of firm to satisfy fixed expenses like, interest and leases. Following is the calculation of fixed charge coverage ratio of all companies.
Pepsi co.
Fixed charge coverage ration = EBIT+fixed charge
Fixed charge+ interest
=3114+479
479+682
=3.09
Long term debt ratio:
The debt related to long term such as notes and bonds which have more than one year is considered as long term debt. Other long term debt is T-bills and commercial papers but which maturities is less than one year.
The ratio analysis of long term debt(loan) of different companies are as under.
Long term debt= long-term debt
total assets
Cash flow:
Cash movement in the business or out of business is indicates the cash flow
Cash flow is the movement of cash into or out of a business, project, or financial product. (Note that the word cash is used here in the broader sense, where it includes bank deposits.) It is usually measured during a specified, finite period of time. Measurement of cash flow can be used for calculating other parameters that give information on the companies' value and situation. Cash flow can e.g. be used for calculating parameters:
to determine a project's rate of return or value. The time of cash flows into and out of projects are used as inputs in financial models such as internal rate of return, and net present value.
to determine problems with a business's liquidity. Being profitable does not necessarily mean being liquid. A company can fail because of a shortage of cash, even while profitable.
as an alternate measure of a business's profits when it is believed that accrual accounting concepts do not represent economic realities. For example, a company may be notionally profitable but generating little operational cash (as may be the case for a company that barters its products rather than selling for cash). In such a case, the company may be deriving additional operating cash by issuing shares, or raising additional debt finance.
cash flow can be used to evaluate the 'quality' of Income generated by accrual accounting. When Net Income is composed of large non-cash items it is considered low quality.
to evaluate the risks within a financial product, e.g. matching cash requirements, evaluating default risk, re-investment requirements, etc.
Total debt ratio:
CALCULATION OF PEPSI CO :
Interest coverage ratio = EBIT
interest expenses
= $3114
$682
= 4.57
Fixed charge coverage ratio = EBIT + Fixed charge
Fixed charge + interest
= $3114 + $479
$479 + $682
= 3.09
Long term debt ratio = long term debt
Total assets
= $8747
$25432
= 0.34
Cash Flow to Long-Term Debt Ratio = Cash Flow
Long Term Debt
= $3742
$8747
= 0.43
Cash Flow to Total Debt Ratio = Cash Flow
Total Debt
= $3742
$9453
= 0.40
The total debt to adjusted total capitalization = total debt
.
