“Corporate

Finance”
Seminar Report

Supervised by:
Miss Hafza Hafsa
Nayab
Submitted by:
Zakia Abid
Roll# 06-54
BBA (Hons) 7th semester
Department of
Management Sciences
 University of
Education Okara
Campus

DEDICATION
We dedicate it to respected and beloved parents. Without their

patience, understanding support, and most of love all, the completion of

this work is not possible. We dedicate it to our respected and honorable

teacher Miss Hafza Hafsa Nayab, who helps us very much in finding

data.

ii
ACKNOWLEDGEMEN
T
We bow our heads to Almighty Allah with gratitude. We would

like to express gratitude to all those who gave me the possibility to

complete this assignment. We are greatly thankful and show the sincere

respect to our respected teacher Miss Hafza Hafsa Nayab. Without their

guidance, we were not able to understand it and achieve its basic goal.

Our teacher provides us the real guideline to accomplish this task. Her

spiritual personality and kindness gave us courage to do this assignment.

We are also greatly thankful to our respected parents, who pray for us.

Without the support of our parents, we are nothing. With the guidance of

our parents, we accomplish this task easily.

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 Zakia Abid

FINAL APPROVAL
This is to certify that we have read project submitted by Zakia Abid
and it is our judgement that this report is of sufficient standard to
warrant its acceptance by University of Education Okara Campus for
BBA (Hons) degree.

Supervisor
1. Mr. Rai Imtiaz
Lecturer
UE Okara Campus. Signature
2. Miss Hafza Hafsa Nayab
Lecturer
UE Okara Campus. Signature

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Table of Contents
1. Introduction of Corporate Finance 2
1.1. Corporate Finance 2
1.2. Principles of Corporate Finance 3
1.3. Financial Manger’s Goals 4
1.4. Scope of Corporate Finance 5
2. Corporate Finance Functions 7
2.1. External Financing 7
2.2. Capital Budgeting 8
2.3. Financial Management 8
2.4. Corporate Governance 8
2.5. Risk Management 9
3. Forms of Organization 11
3.1. Sole Proprietorship 11
3.2. Partnership 11

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 3.3. Company 12
4. Decisions made in Corporate Finance 14
4.1. Capital Investment Decision 14
4.2. Working Capital Management 14
4.3. Financial Risk Management 14
5. Capital Investment Decision 16
5.1. Investment Decision 16
5.1.1. Capital Budgeting 16
5.1.2. Key Motives of Capital Budgeting 16
5.1.3. Process of Capital Budgeting 17
5.1.4. Techniques of Capital Budgeting 18
5.2. Financing Decision 20
5.2.1. Capital Structure 20
5.2.2. Types of Capital 20
5.3. Dividend Decision 21
5.3.1. Forms of Dividend 22
5.3.2. Cash Payment Dividend Procedure 23
5.3.3. Residual Theory 24
5.3.4. Factors Affecting Dividend Policy 26
6. Working Capital Management 26
6.1. Cash Conversion Cycle 26
6.1.1. Funding Requirements of CCC 26
6.1.2. Strategies for managing CCC 27
6.2. Inventory Management 27
6.2.1. Different Viewpoints about Inventory Level 28
6.2.2. Techniques used in Inventory Management 28
6.3. Account Receivable Management 29

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 6.3.1. Credit Selection and Standards 29
6.3.2. Credit Terms 30
6.3.3. Credit Monitoring 30
6.4. Cash Management 30
6.4.1. Motives for holding Cash 31
6.4.2. Speeding up Cash Receipts 31
6.4.3. Slowing down Cash Payouts 32
6.5. Short Term Financing 32
6.5.1. Spontaneous Liabilities 33
7. Financial Risk Management 35
7.1. Risk 35
7.2. Levels of Risk 36
7.3. Alternative Measures of Risk 36
8. Conclusion 38
9. References 40

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 Corporate Finance

1. Introduction of Corporate Finance

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 Corporate Finance

1.1 Corporate Finance

Corporate finance can be defined as a body of knowledge that deals
with the following three issues.
• What long term strategic investments a firm should undertake?
• What long term financing alternatives that a firm should use to
raise capital to finance its long term strategic investments?
• How much short term cash flow does a company need to ensure
smooth day you day operations of firm?
Long term strategic investments decisions are also known as the capital
budgeting decisions.
Long term strategic financing decisions involve a decision on mix of
debt and equity financing for the company and are known as capital structure
decision. Dividend policy decision also falls into this category.
Management of short term cash flows relate to working capital
management.
The above mentioned three issues are discussed and analyzed within the
basic framework of time value of money and principle of risk and return.
Moreover, the financial statement analysis helps the management moving
toward the right path in interest of shareholders.
Thus we can define corporate finance as a study of the principles,
policies and institution that shape corporate financial decision.
Corporate finance displays the movements of funds (money, capital,
and other financial assets,), by which the company gets involved into
quantitative and qualitative money relations with different entrepreneurial
subjects, employees and all other subjects of its financial environment.

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Foreign Interest
Tax
Investor
Other costs

Firm Output Revenue - Profit

Market

Reinvestment
+

Owner
Dividends

Corporate Money Flow

Corporate finance is a segment of finance which deals with the

decision taken by the different corporations. Corporate finance studies and
analyzes the tools that mandatory in arriving at such corporate finance is the
maximization of corporative value by minimizing corporate risk. In corporate
finance, we analyze the long term and short-term decision. It includes:
• Capital investments decision
• Working capital management
• Financial risk management

1.2 Principles of Corporate Finance

Some principles of finance are:
• Time value of money
• Compensation of risk
• Do not put your eggs in one basket
• Markets are smart
• No arbitrage
1. Time value of money
The opportunity to earn a return on invested funds means that a dollar
today is worth more than a dollar in future. A dollar today represents present
value and a dollar in future represents future value.

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 Corporate Finance
2. Compensation of risk
Risk is the chance of financial loss and variability of return. Investors
expected compensation forbearing risk.
3. Do not put your eggs in one basket
Investor can achieve a more favorable trade off between risk and return
by diversifying their portfolios.
High risk High return
Low risk Low return
4. Markets are smart
Competition for information tends to make market efficient.
5. No arbitrage
Arbitrage opportunities are extremely scarce. Arbitrates is the practices
of taking advantages of price differential b/w two or more markets. Arbitrates
opportunity means the opportunity to buy an assets at a low price then
immediately selling it on a different market for a higher price. Like as if one
person buys assets of Rs.100 and sale it to Rs.200, the difference of Rs.100
shows arbitrage profit.

1.3 Financial Manager’s Goals

There are some goals of financial managers.
 Maximize profit
 Maximize shareholder’s wealth
 Stakeholders focus
1. Maximize profit
• Earning reflect past performance, rather than current or future
performance.
• Ignore the timings of profit.
• Ignore cash flows.
• Ignore risk.
• Earning per shares is backward looking, dependent on accounting
principles.

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2. Maximize shareholder’s wealth
• Maximizes stock price, not profits.
• Shareholders as residual claimants, have better incentives to
maximize firm value.
• A firm’s stock price reflects the timing, magnitude, and risk of
cash flows that investors expect a firm to generate over time.
3. Stakeholders focus
• Stakeholders are those persons who have some economic
interest in the business like as government, employees, suppliers,
customers, etc.
• Many firms seek to preserve the interest of other stakeholders,
such as employees, customers, tax authorities and communities
where the firm operates.
• Doing so provide long term benefits to shareholders and is in
line with the primary goal of maximizing shareholders wealth.

1.4 Scope of Corporate Finance

Financial managers should seek to maximize shareholder’s wealth by
performing the basic functions of corporate finance. Select instruments for
which the marginal benefits exceed the marginal cost.

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 Corporate Finance

2. Corporate Finance Functions

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 Corporate Finance
Basic corporative finance functions are:
1. Financing (capital raising) or external financing
2. Capital budgeting
3. Financial management
4. Corporate governance
5. Risk management

2.1 External Financing

Business can raise money in two ways.
1. Externally from investors or creditors
• IPO (Initial Public Offerings)
• Primary market transactions
• Secondary market transactions
2. Internally by retaining operating cash flows
Raising capital to support companies operations and investments
programs externally form
• Either shareholders (equity), or
• Creditors
Corporation can raise equity capital privately, or they may go public by
conducting an initial public offering of a stock.
Key facts of raising capital
There are some key facts of raising capital.
 Most financing from internal rather than external
sources.
 Most external financing in debt.
 Financial intermediaries acting as a source of
capital for large firms.
 Security marketing growing.

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2.2 Capital Budgeting

Capital budgeting means selecting the best project in which to invest
the resources of the firm based on each projects perceived risk and expected
return. It consists of some steps.
Step 1 Identify potential investments.
Step 2 Analyzing those investments to identify which will create
shareholder value.
Step 3 Implementing and monitoring the investments selected in step 2.
Select that investment for which the marginal benefit exceeds the
marginal cost.

2.3 Financial Management

It consists of:
1. Managing daily cash inflows and outflows
2. Forecasting cash balance
3. Building a long term financial plan
4. Choosing the right mix of debt and equity
5. Managing firm’s internal cash flows and its mix of debt and
equity financing to maximize the values of debt and equity claims
on firm, and to ensure that companies can pay off their
obligations when they come due.
6. It involves obtaining seasonal financing, managing inventories,
paying suppliers, collecting from customers, and investing
surplus cash.

2.4 Corporate Governance

Developing ownerships and corporate governance structure for
companies to ensure that manages behave ethically and make decision that
benefits shareholders.
Dimensions:
• Board of directors
• Compensation packages

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• Auditors
• Country’s legal environment
In other words, it hires and promotes qualified, honest people and
structure employees financial incentives to motivate them to maximize firm
value. The incentives of stockholders, managers and other stakeholders often
conflicts.

2.5 Risk Management

It identifies measures and manages all types of risk exposures. Some
risks are insurable (such as loss caused by fire or food) and others can be
reduced through diversification. In order to maintain optimum risk return trade
offs, maximize shareholders values. Modern risk management focuses on
adverse interest rate movements, commodity price change and currency value
fluctuation.

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Corporate Finance

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3. Forms of Organization
There are three forms of organization
1. Sole proprietorship
2. Partnership
3. Corporation

3.1 Sole Proprietorship

A business which is owned and run by a single person is named as sole
proprietorship.
Merits:
Some merits of sole proprietorship are:
 Easiest to start
 Least regulated
 Single owner keeps all the profits
 Taxed once as personal income
 Owner keeps all profits
Demerits:
Some demerits of sole proprietorship are:
 Unlimited liability
 Limited to life of owner
 Equity capital limited to owner’s personal wealth
 Difficult to sell ownership interest
 Cannot raise equity beyond the owner’s wealth
(limits growth)

3.2 Partnership
Partnership is the relationship between two or more persons who have
agreed to share profits and losses of business carried on by all or anyone of
them acting for all.
Merits:

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Some merits of partnership are:
 Two or more owners
 More capital available
 Relatively easy to start
 Income taxed once as personal income
Demerits:
Some demerits of partnership are:
 Unlimited liability
 Partnership dissolves when one partner dies or wishes to
sell
 Difficult to transfer ownership
 Difficult to raise equity capital

3.3 Company
A company is an artificial persons created by law which can be sue or
can be sued with its own name. In other countries, corporations are also called
joint stock companies, public limited companies and limited liability
companies. A distinct legal entity owned by one or more individuals is called
corporation.
Merits:
Some merits of company are:
 Limited liability
 Unlimited life
 Transfer of ownership is easy
 Easier to raise capital
Demerits:
Some demerits of company are:
 More complicated
 Double taxation (income is taxed at the corporate rate and then
dividends are taxed at the personal rate)

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Corporate Finance

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4. Decisions made in Corporate Finance

Decisions made in corporate finance are:
1. Capital Investment Decision
2. Working Capital Management
3. Financial Risk Management
4.1 Capital Investment Decision
 They are long term corporate finance decisions relating to
fixed assets and capital structure.
 Corporate Management seeks to maximize the value of
firm by investing in projects which have positive net present value.
 These projects must be financed appropriately.
 If no such opportunities exist, maximizing shareholders
value dictate that management must return excess cash to
shareholders.
It consists of:
1. Investment Decision
2. Financing Decision
3. Dividend Decision
4.2 Working Capital Management
It is used the management of the current assets of the company. It deals
with the short term financing such that the cash flows and returns are
acceptable. It consists of:
1. Inventory management
2. Debtor Management

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3. Cash Management
4. Short term Financing
4.3 Financial Risk Management
It is vital for corporate finance. It basically highlights the risks that are
to be hedged by the use of different financial instruments. The financial
instruments are changes in commodity prices, interest rates, foreign exchange
rates and stock price.

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 Corporate Finance

5. Capital Investment Decision

They are long term corporate finance decisions relating to fixed assets
and capital structure. It consists of:
1. Investment Decision
2. Financing Decision
3. Dividend Decision

5.1 Investment decision

Investments decisions are made through capital budgeting techniques.
5.1.1 Capital Budgeting
Capital budgeting is the long term strategic plan. Capital Budgeting is
the process of evaluating and selecting the long term investments that are
consistent with the firm’s goal of maximizing owner’s wealth.
5.1.2 Key Motives of Capital Budgeting
Some key motives of capital budgeting are:
• Expansion
• Replacement
• Renewal
• Other purposes
1. Expansion
Expand the level of operations usually through acquisition of fixed
assets.
2. Replacement

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As a firm’s growth slows and it reaches to maturity. Most capital
expenditures will be made to replace or renew assets. Each time a machine
requires a major repair, the outlay for repair should be compared to outlay to
replace the machine and benefits of replacement.
3. Renewal
An alternative to replacement may involve rebuilding, overhauling an
existing fixed assets.
4. Other purposes
Heavy advertising, research and development, new products, installation
of pollution control and safety devices are other motives of capital budgeting.
5.1.3 Process of Capital Budgeting
It consists of:
• Proposal generation
• Review and analysis
• Decision making
• Implementation
• Follow up
1. Proposal generation
Proposals are made at all levels within a business organization and are
reviewed by finance personnel. Proposals that require large outlays are more
carefully inspected than less costly ones.
2. Review and analysis
Formal review and analysis is performed to access the appropriateness
of proposals to evaluate their economic viability. Once the analysis is complete,
a summary report is submitted to decision makers.
3. Decision making
Firms typically delegate capital expenditure decision making on the
basis of dollar limits. Generally the board of directors must authorize
expenditures beyond a certain amount. Often plant managers are given
authority to make decisions necessary to keep the production line moving.

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4. Implementation
Following approval, expenditures are made and projects implemented.
Expenditures for a large project often occur in phases.
5. Follow up
Results are monitored and actual costs and benefits are compared with
those that were expected. Action may be required if actual outcomes differ
from projected ones.
5.1.4 Techniques of Capital Budgeting
There are three techniques that are used to rank the projects and to
decide whether or not they should be accepted for inclusion in the capital
budget. These techniques are:
1. Payback Period
2. Net Present Value
3. Internal Rate of return
1. Payback Period
Payback period is the amount of time required for a firm to recover its
initial investment in a project.
Decision:
When payback period is used to make accept reject decision, the
decision criteria is as follows:
• If the payback period is less than the maximum acceptable
payback period, accept the project.
• If the payback period is greater than the maximum
acceptable payback period, reject the project.
Merits:
Some merits of payback period are:
1. It is used by large firms to evaluate the small projects and by
small firms to evaluate the most projects.
2. It considers the cash flows rather than the accounting profits.

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3. It measures that how quickly a firm recovers its initial
investment.
Demerits:
Some demerits of payback period are:
1. It considers the cash flows occurring after expiration of payback
period, it cannot be regarded as the measure of profitability.
2. It ignores the time value of money. It simply adds cash flows
without regard to timing of these flows.
3. It does not support the goal of wealth maximization.
4. The maximum acceptable payback period, which serves as the
cutoff standard, is a purely subjective choice.
2. Net Present Value
Net present value is the present value of an investment projects net
cash flow minus the projects initial cash outflows.
Decision:
When net present value is used to make accept reject decisions, the
decision criteria is as follows:
• If net present value is greater than zero, accept the project.
• If net present value is less than zero, reject the project.
Merits:
Some merits of net present value are:
1. A firm takes a project with positive cash flows; the
position of shareholders is improved.
2. It considers the time value of money and at some extent it
supports the goal of wealth maximization.
3. Internal Rate of Return
The discount rate that equates the present value of future net cash flows
from an investment projects with the projects initial cash outflows is called
internal rate of return.

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In other words, the interest rate where net present value is zero is called
internal rate of return.
Decision:
When internal rate of return is used to make accept reject decision, the
decision criteria is as follows:
• If internal rate of return is less than the cost of capital,
reject the project.
• If internal rate of return is greater than the cost of capital,
accept the project.

5.2 Financing Decision

It consists of capital structure concepts.
5.2.1 Capital Structure
Capital structure is one of the most complex areas of the financial
decision making because of its interrelationship with other financial decision
variables. Poor capital structure decision can result in higher cost of capital,
thereby lowering the net present value of a project and making more of them
unacceptable. Effective capital structure decision can lower the cost of capital,
resulting in higher net present value and more acceptable projects and thereby
increasing the value of the firm.
Cost of capital is the rate of return that a firm must earn on the projects
in which it invest to maintain its market value and attract funds.
Sources of Capital
Sources of capital are:
1. Long term debt
2. Stockholder equity
• Preferred stock
• Common stock equity
 Common stock
 Retained earning
5.2.2 Types of Capital

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All of the terms on the right hand side of the firm’s balance sheet,
excluding the current liabilities are sources of capital. It divides the capital into
two parts.
1. Debt Capital
2. Equity Capital

Debt
Current liabilities Capital
Long term debt

Assets Total Capital

Stockholder’s equity
Preferred stock
Common stock equity Equity
Common stock Capital
Retained earning

1. Debt Capital
• Debt capital is borrowed money.
• The borrower is obliged to pay interest, at specified interest rate,
on the full amount borrowed, as well as, to repay the principle
amount the debt’s maturity.
2. Equity Capital
• An ownership interest usually in the form of common or
preferred stock.
• Common stockholders receive returns on their investments
only after creditors and preferred stockholders are paid in full.

5.3 Dividend Decision

It includes the dividend policy. Dividend policy determines what
portion of earnings will be paid out to stockholders and what will be retained in
the business to finance the long term growths. Dividend constitutes the cash

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flows that accrue to the equity holders whereas retained earning are one of the
most significant sources of funds for financing the corporate growth.
Retained earnings are earnings not distributed to owners as dividends,
a form of internal financing.
Dividends are paid in cash and cash is something that everyone likes.
The question arises whether the firm should pay out cash now or invest the
cash and pay it out later. Dividend policy is the time pattern of dividend
payout. Firm either pays out the small percentage or large percentage of its
earnings.
5.3.1 Forms of Dividend
Dividend comes in several different forms. These forms are:
1. Regular cash dividend
2. Extra dividend
3. Special dividend
4. Liquidating dividend
1. Regular Cash Dividend
The most common type of dividend is a cash dividend. Commonly,
public companies pay regular cash dividend four times a year. These are cash
payments made directly to shareholders and they are made in regular course of
business.
2. Extra Dividend
Sometimes a firm will pay a regular cash dividend and extra cash
dividend. By calling part of payment “extra”, management is indicating that
part may or may not be repeated in future.
3. Special Dividend
This dividend is viewed as a truly unusual or one time event and it
would not be repeated.
4. Liquidating Dividend
If a firm is dissolved, at the end of the process, a final dividend of any
residual amount is made to shareholders. This is known as liquidating dividend.

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5.3.2 Cash Payment Dividend Procedure
The decision to pay a dividend rests in the hands of the board of
directors of the corporation. When the director has been declared dividend, it
becomes the liability of the firm and cannot be rescinded easily. Sometimes
after it has been declared, a dividend is distributed to all shareholders as of
some specific date. It consists of three types of dates. These are:
1. Declaration date
2. Record date
3. Payment date
1. Declaration Date
The date on which the board of director declares the payment of
dividend is called declaration date.
2. Record Date
The declared dividends are distributable to those who are shareholders
of the record as of specific date is known as record date.
3. Payment Date
The date at which the dividend checks are mailed to shareholders of
record is called payment date.
5.3.3 Residual Theory
A school of thoughts says that “amount of dividend is residual”.
A residual is generally a quantity left over at the end of a process.
 Determine level of capital expenditures.
 Using the optimal capital structure.
 Use the retained earnings to meet equity requirements
determined previous.
5.3.4 Factors Affecting Dividend Policy
Dividend policy is the firm’s plan of actions to be followed whenever a
divided decision is made. There are several factors affecting dividend policy.
These factors are:
 Legal constraints

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 Contractual constraints
 Internal constraints
 Growth prospects
 Owner’s considerations
 Market considerations

1. Legal Constraints
Firm’s legal capital which is typically measured by the par value of
common stock is legal constraint. It also not only includes the par value of the
common stock, but also any paid-in capital in excess of par is also included.
2. Contractual Constraints
It includes that these constraints prohibit the payment of cash dividend
until a certain level of earnings has been achieved or they may limit the
dividend to a certain dollar amount or percentage of earnings.
3. Internal Constraints
The firm’s ability to pay cash dividends is generally constrained by the
amount of liquid assets (cash, marketable securities, etc) available.
4. Growth Prospects
The firm’s financial requirements are directly related to how much it
expects to grow and what asset it will need to acquire. It must evaluate its
profitability and risk to develop insight into its ability to raise capital
externally.
5. Owner’s considerations
The firm must establish a policy that has a favorable effect on the wealth
of majority of owner.
6. Market Consideration
A final market consideration is the informational content. Stockholders
are believed to value a policy of continuous dividend payment.

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6. Working Capital Management

The administration of the firm’s current assets and financing needed to
support current assets is named as working capital management. ‘Working
Capital’ term near the financial analyst is the gross working capital and near
the accountant is the net working capital.
When the working capital increases, liquidity and solvency increases,
but the risk decreases.
Liquidity is the ease with which an asset can be converted into cash or
cash equivalent with loosing minimum value. Solvency is the ability of an
entity or individual to pay debts.

6.1 Cash Conversion Cycle

Inventory Account Cash

Receivable

Operating Cycle
The time from the beginning of the production process to the collection
of cash from the sale of finished products is called operating cycle.
6.1.1 Funding Requirements of Cash Conversion Cycle
Funding requirements of cash conversion cycle are:
1. Seasonal funding needs
2. Permanent funding needs
3. Aggressive funding strategy
4. Conservative funding strategy
1. Seasonal Funding Needs

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If the firm sales are cyclic, then its investment in operating asset will
vary over time with its sale cycle. It is called seasonal funding needs.

2. Permanent Funding Needs

If the firm sales are constant, then its investment in operating assets
should also be constant. It is called permanent funding needs.
3. Aggressive Funding Strategy
A funding strategy under which the firm funds its seasonal requirements
with short term debt and its permanent requirements with long term debt is
called aggressive funding strategy.
4. Conservative Funding Strategy
A funding strategy under which the firm funds both its seasonal and its
permanent requirements with long term debt is called conservative funding
strategy.
6.1.2 Strategies for managing Cash Conversion Cycle
There are some strategies that are used to minimize the length of cash
conversion cycle.
1. Turnover inventory as quickly as possible without stock outs that
result in lost sales.
2. Collect account receivable as quickly as possible without loosing
sales from high pressure collection techniques.
3. Manage mail, processing and clearing time to reduce them when
collecting from customers and to increase them when paying
suppliers.
4. Pay account payable as slowly as possible without damaging the
firm’s credit rating.

6.2 Inventory Management

The objective for managing inventory is to turn over the inventory as
quickly as possible without loosing sales from stock outs. The financial manger

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tends to act as an advisor or watching dog in matters of concerning inventory,
he or she does not have direct control over the inventory but does provides
input to inventory management process.

6.2.1 Differing Viewpoints about Inventory Level

Different managers gave their viewpoints about inventory. These
viewpoints are:
 Financial Manager keeps it low to ensure that money is not
being unwisely invested in excess resources.
 Marketing Manager keeps it in large quantity. To ensure that all
orders should be filled quickly, eliminating the needs of backorders
due to the stock outs.
 Production Manager keeps large production runs for sake of
lower unit production costs, which would result in high finished
good inventory.
 Purchasing Manager needs correct quantities at the desired
times at a favorable price.
6.2.2 Techniques used in Inventory Management
There are some techniques that are used in inventory management.
These techniques are:
• ABC system
• EOQ model
• Just in time inventory
• Material requirement planning
1. ABC System
Inventory management techniques that divides inventory into three
groups A, B, C in descending order of importance and level of monitoring on
the basis of dollar investment in each is named as ABC System.
Group A includes those items with high dollar investment and uses
perpetual inventory system. Group B includes those items which are the next

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largest investment in inventory and uses periodical inventory system. Group C
includes those items which require small investment and uses unsophisticated
technique which is called two-bin method.

2. EOQ Model
EOQ is Economic Order Quantity and it determines how much to order.
Inventory management technique for determining an item’s optimal order size,
which is the size that minimizes the total of its order costs and carrying cost is
called EOQ Model.
3. Just In Time Inventory
Inventory management technique that minimizes inventory investment
by having materials arrive at exactly the time they are needed for production is
called Just in Time (JIT) Inventory. Safety stock is maintained in this system.
4. Material Requirement Planning
A computerized system that provides the information about inventory
and determines when orders should be placed for various items on a product
bill of materials is called Material Requirement Planning (MRP) System.
Bill of materials is the list of raw materials, components, parts and the
quantities of each needed to manufacture an end item (final product).

6.3 Account Receivable Management

The objective for managing account receivable is to collect account
receivable as quickly as possible without losing sale from high pressure
collection techniques. It consists of:
6.3.1 Credit Selection and Standards
Credit Selection involves application of techniques for determining
which customers should receive credit. This process involves evaluating the
customer’s creditworthiness and comparing it to the firm’s credit standards.
Credit Standards is the minimum requirements for extending credit to a
customer. It consists of five C’s of credit. Five C’s of credit is used to make

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accept /reject decision. It ensures that the firm’s credit customer will pay,
without being pressured, within the stated credit terms. These are:
1. Character
The applicant’s record of meeting the past obligations is character.

2. Capacity
The applicant’s ability to repay the requested credit is capacity.
3. Capital
The applicant’s debt relative to equity is capital.
4. Collateral
Collateral is security, the amount of assets for securing the loan.
5. Condition
Condition consists of the both economic and transaction conditions
6.3.2 Credit Terms
Credit terms are the terms of sales from customers who have been
extended credit by the firm. A firm’s regular credit term are strongly influenced
by the firm’s business. It includes
 Cash discount which is the reduction in price of goods, given to
customers to encourage early payment.
 Credit period which is the length of time a company gives its
customer to pay.
6.3.3 Credit Monitoring
Credit monitoring is the ongoing review of a firm’s account receivable
to determine whether customers are paying according to the stated terms. It
consists of:
• Average collection period consists of early collection with
minimum loss.
• Popular collection techniques are:
1. Letters
2. Telephone calls
3. Personal visits

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4. Collection agencies
5. Legal actions

6.4 Cash Management

It is the third component of cash conversion cycle. It consists of:
6.4.1 Motives for holding Cash
There are three motives for corporation to hold cash. These motives are:
1. Transaction motive
2. Speculative motive
3. Precautionary motive
1. Transaction motive
It is used to meet payments, such as purchase, wages, taxes, dividends
arising in ordinary course of business.
2. Speculative motive
It is used to take advantage of temporary opportunities, such as sudden
decline in the price of raw materials.
3. Precautionary motive
It is used to maintain a safety cushion to meet unexpected cash needs.
6.4.2 Speeding up Cash Receipts
There are various collection methods that a firm employs to improve its
cash management efficiency. The firm wants to speed up the collection of
account receivable so that it can have the use of money sooner. It consists of:
1. Collections
It includes the step taken by the firm from the time a product or service
is sold until customer’s checks are collected and become usable funds for the
firm. It consists of:
• Floats that are funds that have been sent by the payer but are not yet
usable funds to the payee. It further has three components.
1. Mail float is the time delay between when payment is placed in
the mail and when it is received.

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2. Processing float is the time between receipt of a payment and its
deposit into the firm’s account.
3. Clearing float is the time between deposit of a payment and
when spend able funds becomes available to the firm.
• Lockbox system means a post office is maintained by a firm’s bank that
is used as a receiving point for customer remittances. The main
advantage of a lockbox system is that checks are deposited at a bank
sooner and become collected balances sooner than if they were
processed by the company prior to deposit. The disadvantage is cost
because cost is directly proportional to the number of checks deposited
and is not profitable.
2. Concentration Banking
It consists of cash concentration. Cash concentration is the movement
of cash from lockbox or field banks into the firm’s central cash pool residing in
a concentration bank. The process used by the firm to bring lockbox and other
deposits together into one bank called concentration bank.
 It improves control over inflows and outflows of cash.
 It allows for more effective investments.
 It reduces balances.
6.4.3 Slowing down Cash Payouts
There are various disbursement methods that a firm employs to improve
its cash management efficiency. The firm wants to pay accounts as late as is
consistent with maintaining the firm’s credit standing with suppliers so that it
can make the most use of money it already has. The objective is to slow down
cash disbursements as much as possible. It consists of:
1. Controlled disbursing
Controlled disbursing is the strategic use of mailing points and bank
accounts to lengthen mail float and clearing float respectively. This approach
should be used carefully because longer payment periods may strain supplier
relations.

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6.5 Short Term Financing

It includes:

6.5.1 Spontaneous Liabilities

Spontaneous liabilities are those liabilities that arise from the normal
course of business. The two major sources are:
• Account payable
• Accruals
1. Account Payable
Management of the firm when we purchase the raw material from the
supplier, then managing of time for paying the bills is called account payable
management.
In other words, management by the firm of the time that elapses between
its purchases of raw material and its mailing payment to the supplier is called
account payable management.
Role in Cash Conversion Cycle
The firm’s goal is to paying bills as slowly as possible without losing the
firm’s credit rating. Average payment period consists of two parts.
1. The time from the purchase of raw material until the firm mails its
payment.
2. The time it takes after the firm mails its payment until the supplier has
withdrawn the amount from the firm’s account.
Stretching Account Payable
Stretching account payable is paying the bills as late as possible without
damaging the firm’s credit rating.
2. Accruals
Accruals for services received for which payment has yet to be made.
These are free from interest. It includes wages, taxes, and employee’s payment
in terms of wages.

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7. Financial Risk Management

It includes the concepts of risk.

7.1 Risk
It is defined as the chance of financial loss. Assets having the greater
chance of loss are viewed as more risky than those with lesser chances of loss.
More formally, the term risk is used with uncertainty to refer the variability of
returns associated with the given asset.
Risk may be good — that is when the results are better than expected
higher return or bad — that is when the results are worse than the expected
lower returns. Risk is divided into two parts.
 Unsystematic risk
 Systematic risk
1. Unsystematic Risk
It is also known as “Market Risk” or “Non-diversifiable Risk”. It is
the risk that results from the movement in factors that affect the economy as
whole. This risk cannot be diversified fully.
Examples:
• Increase in inflation rate
• War
• Changes in interest rate
2. Systematic Risk
It is also called “Firm Specific Risk” or “Diversifiable Risk”. It is the
risk that is caused by the actions that are specific to the firm. It can be
eliminated through diversification.
Examples:
• Management decision

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• Labor strike

7.2 Levels of Risk

Feeling about risk differs among manager and firms. Thus it is important
to specify a generally acceptable level of risk. There are three levels of risk.
1. Risk indifferent
2. Risk averse
3. Risk seeking
1. Risk Indifferent
It is the attitude towards risk in which no change in return would be
required for an increase in risk.
2. Risk Averse
It is the attitude toward risk in which an increase return would be
required for an increase in risk.
3. Risk Seeking
It is the attitude toward risk in which an decrease return would be
accepted for an increase in risk.

7.3 Alternative Measure of Risk

The risk of an asset can be measured quantitatively using statistics. The
standard deviation and coefficient of variation is used to measure the variability
of return. The measures of risk are:
1. Expected rate of return that is the weighted average of various
possible returns
2. Variance is the squared of standard deviation.
3. Standard Deviation is the square root of variance.
4. Coefficient of variation is the relationship between risk and
return.

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It is the reliable tool because it considers the relative size and expected
return of the asset.

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8. Conclusion
Corporate finance is a segment of finance which deals with the
decision taken by the different corporations. Financial managers should seek to
maximize shareholder’s wealth by performing the basic functions of corporate
finance. Select instruments for which the marginal benefits exceed the marginal
cost. Basic corporative finance functions are Financing (capital raising) or
external financing, Capital budgeting, Financial management, Corporate
governance, and Risk management. Also there discussed the different forms of
organization. Decisions made in corporate finance are Capital Investment
Decision, Working Capital Management, and Financial Risk Management.

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9. References
 Principles of Managerial Finance by Lawrence J. Gitman
11th edition
 Fundamentals of Financial Management by Van Horne
12th edition
 http://en.wikipedia.org/wiki/Corporate_finance
 http://www.economywatch.com/finance/corporate-finance/
 www.pitt.edu/~czutter/if/ch01.ppt
 ocean.otr.usm.edu/~w785587/Chap001.ppt
 www.ef.umb.sk/upload/zamestnanec/575/Corporate
%20finance.ppt
 www.emu.edu.tr/nozatac/fin%20301/chap01ppt.ppt

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