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Corporate Finance - Lecture 1
Transcript of Corporate Finance - Lecture 1
Risk and Return Two key concepts Time Value of Money 3 Long Term Strategic Concepts Allocating Funds
Investment Dec Raising Funds
Financing Dec Dividend Dec so Investment Decisions Financing Decisions LONG TERM Long Term is regarding the purchase of a major asset eg. Factory/ Machinery SOCIAL MEDIA } INBOUND MARKETING Yes. But to publish? where Photobucket, Facebook, YouTube, viddler, flickr, vimeo... Get your content ! found When you start creating tons of content, don't forget to... Content creation creates an abundance of Search Engine Optimization (SEO) opportunities. A well-optimized website will attract more traffic and generate leads for your business. Optimize. On-Page & Off-Page SEO Page title Keywords in URL
Keywords in headings
Inbound links Social media is like a . reception. No time & space restrictions
Meet people & start conversations
Answer some questions
Ask questions business cocktail How do you social media in inbound marketing? Meet industry leaders
Promote your content use videos For example, use social media to promote your . What can I use? tools RSS feeds
Google Alerts Inbound links Feed for this query SEO Include relevant
when hyperlinking. anchor text SEO benefits of publishing Interesting content is a link magnet. VS Attract links from
. sites. trusted For example, blogs, media outlets and other well-established sites. respected But what about promotion? HOLISTIC. Corporate Finance In this Prezi I will go through the main points of Corporate Finance Lecture 1 Notes Hopefully by the end the topic will be clearer! Only take higher risk
if higher rewards
are there to
compensate! £100 today is worth more than
£100 in a years time due to
Inflation, Risk and Time What long-term assets should the business invest in? That is, having decided what areas of business you will operate in, what are the assets (e.g. buildings, machinery and equipment) that will be needed? Eg. You may need to invest in a Computer System. Which do you get? They may all have different costs to buy, different costs to run, run at different speeds, different breakdown rates etc... Where should the money come from to pay for your long-term investments? E.g. should you provide all the money (capital) from savings, take out a loan or will you ask other people (perhaps family and friends) to provide some money and become part owners? Plan, implement and manage Long Term Investment (Capital Budgeting)
Required to identify investment opportunities that are worth more to the firm than the cost of acquiring them - ie. creating value Businesses need assets to operate, but they can't acquire assets without Finance! Any operating plan needs to become a Financial Plan How much money and when?
Short or Long Term requirement of Funds? Short term relates to the money required for the day to day running of the Business, but as for the... Long term funds are given the name CAPITAL And capital is raised in Capital Markets, which comes from one of two sources; Owners When you first set up a business you may use some of your own money, or money borrowed from family and friends in exchange for part ownership in the business, or SHARES. The more profit the firm makes, the more profit the owners share between them! Capital provided by owners is called EQUITY CAPITAL Borrowed From Banks or other Financial Institutions, or from Friends and Family. Lenders are not part owners of the firm but are entitled to their money back, usually with interest, by a set date, and the amount won't vary with profit (eg. same amount payable whether a £2m profit or a £500k loss is made Funds from borrowing is called DEBT CAPITAL Decisions on raising Finance are largely Interdependant eg. If a firm wants to raise funds for a large investment project, it will either need to increase its finance OR decrease its dividends eg. If a firm wants to raise its dividends (possibly to show false hope) then it may need to raise finance if it doesn't already have it there, OR delay future investment projects Financial Managers - Primary Objectives Agent of Shareholder Work for Shareholders benefit Responsible for achieving objectives of the firm, therefore objectives of shareholder Ultimate Objective!!! TO MAXIMISE SHAREHOLDER WEALTH However, financial Managers should not ignore other factors such as Profit Max, enhanced market share, or employees wealfare as well as othe social responsibilities THINK! Bakery Example.. Limitations on Value Creating Activities Identification of Cash Flows Transactions Basis - NOT Cash Flow
Depn - Recorded in cash flow as £2k per year over 5 years, whereas actually £10k today
Creative Accounting - Simply changing rate of depn or Inventory Valuation (FIFO, LIFO etc) can change reported profit So; profit can't be taken as representing the Cash Flows of the firm or project. (For VCA Managers should have info on actual cashflows) Timing of Cash Flows Risk of Cash Flows Sum of money received today worth more than a sum of money received tomorrow
Credit Transactions common, payment date uncertain
Uncertainties mean managers have a tough time working out the value they've created The timing risk - the company may not be able to collect the cash at the pre-arranged date. This involves the loss in the time value of money.
The default risk - the expected sum may never be received from the debtors. Do Managers Still need controlling? The extent to which Shareholders can control managers depends on 3 things;
The cost of monitoring management
The cost of implementing the control devices
The benefit of control
Corporate Gov systems of modern firms allows them to control managers activities using various mechanisms; Shareholders have voting rights
to elect the Directors Directors can hire or fire managers Directors have incentives to ensure managers take decisions which increase value To be re-elected, Directors need to have Shareholders trust, so need to have created value! Incentive Packages Agency theory at its highest when run by managers who don't own Therefore, any incentive scheme designed to share the ownership of the firm with the managers (such as performance shares, share options, etc.) is expected to motivate managers to create value & reduces the agency cost. Takeovers A poor performing company will be a target of a takeover During Takeovers, Managers and other senior personnel will lose jobs So, fear of takeover encourages performance Managerial Labour
Market Very competitive If a job lost to poor performance, going to be hard to get hired again.. Own encouragement to increase shareholder wealth!