Books On Corporate Finance & Course Materials

Financial books on corporate finance is most important for BBA & MBA students, it is the area of finance dealing with monetary decisions that business institution build & the tools & analysis used to make these decisions. By this post we will discus corporate finance chapter by chapter as like books on corporate finance. 
Chapter-01: Concepts of Corporate Finance

Introduction

Concepts of Corporate Finance

Finance dealing with the financial decisions of a corporate firm
is known as Corporate Finance. Now what is Finance? In narrow sense, finance deals with the raising /procurement of funds. In broad sense, finance delays with: a) procurement /rising of funds; b) utilization /use of funds and c) safe custody of surplus funds, if any. By corporate firms we mean the companies registered under the companies’ act 1993. Now, what is the corporate financial decision s of a firm? The corporate financial decisions are nothing but the decision making finance functions of a firm.

The finance functions involving decision-making are known as financial decision-making functions. The performance of these functions requires the professional knowledge and skill of the executives. Such decision making finance functions are broadly categorized into three groups namely: (i) investment decision; (ii) financing decision and (iii) dividend decision. The following sub-sections deal with these decisions briefly.

Investment Decision

The investment decision is the most significant of these three decisions when it is considered as the creation of value. Investment decision is the proper allocation of capital, both fixed and working to the investment projects whose benefits are to be realized in the future. Investment decision broadly includes the following main aspects:

investigating engineering and technical, financial, economic, marketing and management considerations to predict the consequences of accepting a investment proposal in order to examine whether the investment proposal viable. Any capital budgeting decision is a major financial decision Category – A: Long-term Investment Decision

i) Capital Budgeting Decision – It is a multi-dimensional activity which embraces searching for new and more profitable investment proposals; and it is significant for a company for the three basic reasons such as : (a) it entails a huge amount of cash outlays; (b) it involves risk and uncertainty and (c) it affects the company’s operation for a larger period of time.

ii) Analysis of risk and uncertainty

iii) Analysis of cost of the specific sources of fixed capital

Category – B: Short-term Investment Decision

i) Short-term financial objectives,

ii) Working capital investment policy namely cash, inventory and receivables policies and

iii) Working capital control.

Financing Decision

After investment decision, the question of financing decision arises. Such decision consists of the following two main aspects:

i) Capital structure decision which involves determining the best mix of equity, preferred stock, long-term debt and hybrid securities to employ. In such decision cost of each source of capital must be considered carefully. Moreover, the factors that affect the determination of capital structure must be given due weightage.

ii) Financial structure decision which is nothing but a financing mix consisting of shareholders’ equity preferred stock, long-term and short-term debts and hybrid securities. In case of such decision the cost of capital must be given due weightage.

While determining capital and financial structure of a firm its financial management should see whether the firm is under-capitalized or over-capitalized. Both the under-capitalization and over-capitalization have harmful effects on the form. Therefore, determination of an optimal capital and financial structure is a must for a firm if it would like to continue over a longer period of time.

Dividend Decision

The final important financial decision of an enterprise is dividend decision. It mainly involves: (i) formulation of profit plan, (ii) formulation of dividend policy, (iii) formulation of retention policy and (iv) investment of accumulated profits.

While taking dividend decision of a firm, its financial management must give due considerations on the following aspects:

a) Current earnings;

b) Preference of the shareholders as to the current dividend income or future capital gains;

c) Amount should pay as dividend, that is, dividend payout ratio;

d) Constraints on paying dividends;

e) Retention ratio, that is, amount to be retained;

f) Stable dividend policy – to follow or not;

g) Forms of dividend – cash or bonus share and

h) Stock split vs. stock dividend.

1.2       Financial Decision Making Process

The process with which the financial management of a firm will take the above discussed financial decisions is known as financial decision making process. The process starts from the initial establishment of the firm and ends with the closure of the firm. That is, the process continues during the life cycle of the firm. At the time of initial establishment i.e. at the gestation period; the firms have to take investment decision. During the operating period, the firms have to take new investment decision, if needed; financing decision and dividend decision.

The proposition of the theory of a firm’s finance is the capital structure theorem which specifies the relationship between the firm’s capital structure and its cost of capital. From the theorem follow other propositions concerning the relationship between the firm’s investment decision, financing decision and dividend decision, its cost of capital and market value. The process is shown in Chart-1, explaining the relationship between firm’s financial decisions. Stay with books on corporate finance & course materials. Books On Corporate Finance chart-1

Chart – 1

Relationship between Firm’s Major Financial Decisions

 

The following chart shows the financial decision making process of a firm.

Chart - 2

Major Process of Financial Decision Making

The following sub-sections deal with the major steps involved in each of the financial decision making  process:

Financial Planning

Financial planning involves the following three fundamental steps :

i)                   Determining both long-term and short-term financial goals and objectives;

ii)                Formulating as well as promulgating both long-term and short-term financial policies;

iii)              Developing strategies and procedures that aid in the promulgation of the financial policies;

Financial Organization

This financial organization process involves the following main steps :

i)                   Grouping of financial functions into divisions, departments and sections etc.;

ii)                Allocation of financial functions amongst financial executives;

iii)              Entrusting financial powers and duties amongst the financial executives and

iv)              Fixing financial accountability and responsibilities of the financial executives

Financial Coordination and Control

This process of financial management involves the following main steps :

i)                   Coordination of financial functions between the financial executives;

ii)                Determination of operational standards relating to financial functions;

iii)              Evaluation of the enterprises’ actual performances in relation to pre-determined standards;

iv)              Instigation of corrective actions in case of deviations and

v)                Follow-up actions to ascertain if corrective actions are effective

Financial Reporting

The following major steps are involved in this process of financial management :

i)                   Collection and recording of financial data;

ii)                Processing and analyzing of financial data;

iii)              Preparation and publication of financial reports and statements;

iv)              Circulation of financial reports and statements to interest groups.

Financial Merger

The following major steps are included in this process of financial management :

i)       Determining legal framework and also identifying legal process involved in mergers;

ii)      Determining the price considerations of the acquired or merged company;

iii)     Identifying the methods to be followed in mergers;

          iv)     Determining the mode of payment of purchase consideration.

Tax Management

This process includes the following main steps of financial management :

i)                   Following the appropriate tax policy by the government of the country;

ii)                Proper assessing of the enterprises in respect of income tax, VAT, etc. and

iii)              Evolving appropriate tax accounting system in the enterprises.

Insurance Management

The following major steps are involved in this process of financial management :

i)                   Introducing and following appropriate insurance system and

ii)                Determining appropriate insurance policy to be taken by the enterprises.

1.3     Role of Financial Executives in Decision Making Process

Financial executives starting from finance director down to cashier, a junior financial executive have a great role to play in the corporate firms. Their roles are discussed in the following sub-sections :

Status of the Top level Financial Executives

Financial executives are those personnel of the organization who are involved in the finance functions of that organization. That is, financial executives are responsible for the performance of financial functions. The financial executives who are involved in the executive or decision making finance functions are known as top level financial executives. In the performance of these executive finance functions, the financial executives have to possess executive skill i.e. specialized knowledge and skill. But, the financial executives who are involved in the incidental or non-decision making finance functions are known as mid and / or low level financial executives. In the performance of these finance functions the executives need not have to possess specialized knowledge and skill.

Top level financial executives are the key and responsible personnel of the organizations since they are involved in the decision makings. All the financial decisions are taken by the top level financial executives. Their status is exhibited in Chart-2 in case of a large private industrial enterprise in Bangladesh

Chart - 3

Status of Top Level Financial Executives in Financial Organization Structure

Source: Organization Manual of the Selected Private Sector Industrial Enterprises in Bangladesh.

In Chart-1, it is evident that the topmost financial executive in the private sector industrial enterprises is the Director – Finance. Although he ranks equal status of other Directors viz., Production, Marketing, HRM and Technical; he holds central position among the directors in the organizational hierarchy. This is because of the fact the Director – Finance is the head of finance functions of the enterprise and in all the other directorates finance is involved, directly or indirectly. Under the Finance Director, there is the Chief Accountant under whose direct supervision and control there are departmental heads namely Senior Accountant for General Accounts, Finance Manager for Finance and Cost Accountant for Cost,, Stores and Budget Departments. Although they possess the same status like other departmental heads under the Production, Marketing, HRM and Technical Directorates; they hold comfortable positions in the organizational hierarchy, since they are entrusted with the financial decision making functions, the key functions of the enterprises. Under the direct supervision and control of the departmental heads, there are sections namely Accounts (General), Audit (Internal), Cash, Banking, Foreign Exchange, Cost, Store and Budget. Although these section chiefs have the same status like other section chiefs under Production, Marketing, HRM and Technical Departments; their positions in the organizational hierarchy are higher since they deal with the finance.

Functions and Responsibilities of the Top Level Financial Executives

The finance functions of an enterprise can be grouped into two namely executive finance function or treasury finance function and incidental finance function or controllership finance function. All the executive finance functions are decision making finance functions and some of the controllership functions are also decision making functions. These functions have to be performed by the top level financial executives.

The important executive finance functions are mentioned below :

i)                   Determination financial goals and objectives;

ii)                Formulation of financial policies;

iii)              Forecasting of cash flows;

iv)              Determination of fixed assets management policies;

v)                Determination of current assets management policies;

vi)              Determination of capital and financial structure;

vii)           Selection of sources of capital;

viii)         Raising of funds;

ix)              Credit management;

x)                Cash management;

xi)              Inventory management;

xii)           Receivable management;

xiii)         Control of cost of capital;

xiv)         Control of working capital;

xv)           Control of inventory;

xvi)         Profit planning and control;

xvii)      Cost control;

xviii)    Determination of dividend policy;

xix)         Insurance  and tax management;

xx)           Financial merger and acquisition and

xxi)         Product/ service pricing.

1.4            . Significance of Corporate Finance (CF)

CF is the hard core of financial management since every decision in an enterprise is ultimately a financial decision. The complex nature of the business enterprises demands that management is expected to give greater emphasis upon C.F of any enterprise whether trading, manufacturing, service rendering, government or non-government organizations, educational and charitable institutions and the like. Therefore, the following sub-sections examine the significance of C in the context of these organizations.

1.4.1    Industrial Organizations

In case of industrial organizations whether public or private sectors and whether small, medium and large; CF is significant for the following main reasons :

(i)                Determining financial goals and objectives of both the short-term and long-term;

(ii)             Formulating financial policies both short-term and long-term;

(iii)           Financing both short-term and long-term;

(iv)           Determining proper capital and financial structure;

(v)             Determining cost capital of each of the sources;

(vi)           Formulating capital investment policy;

(vii)        Selecting proper methods and techniques of capital budgeting;

(viii)      Formulating working capital policy including cash, receivables and inventory policies;

(ix)           Formulating profit planning and control policies including dividend policies;

(x)             Developing proper financial information system and

(xi)           Formulating policies relating to maintenance of funds, insurance and tax and mergers, combinations and acquisitions.Books On Corporate Finance

1.5            CF in the 21^st  (Growth of CF) 

a) In early 1900s: CF emerges as a separate field of study and it was concentrated to rising of funds.

b) In the Depression 130s: Business failures caused emphasis in finance to shit to bankruptcy and re-organization.

c) During1940-50s: Finance continued as a descriptive and institutional subject.

d) During 1960s: The focus of CF shifted to managerial; decisions.

e) During 1970-80s: Focus n valuation.

f) During 1980-2005s Emphasize on global finance and environmental finance

Books On Corporate Finance may help you to learn important term and technique financial books on corporate finance.