Corporate Finance

CIFA Certified Investment and Financial Analysts - Corporate Finance Study Text Notes

Page 1: Introduction to Corporate Finance

Page 2: Objectives and Learning Outcomes

• General Objectives:

  • Equip students with knowledge and skills for corporate finance decisions.

• Learning Outcomes: Upon completion, candidates should be able to:

  • Make capital budgeting decisions.

  • Compute the cost of capital for firms.

  • Select the optimal capital structure.

  • Manage working capital.

  • Conduct corporate restructuring.

  • Evaluate mergers and acquisitions.

  • Make financial decisions in the context of Islamic finance.

• Content Outline:

  1. Overview of Corporate Finance

  2. Cost of Capital

  3. Capital Structure

  4. Capital Investment Decisions (Certainty and Uncertainty)

  5. Management of Working Capital

  6. Mergers and Acquisitions

  7. Dividend Policy

  8. Analysis of Corporate Growth and Restructuring

  9. Islamic Finance

  10. Emerging Issues and Trends

Page 3: Cost of Capital

• Concept and Significance:

  • Minimum required return on funds committed to a project.

  • Crucial for:

    • Long-term investment decisions.

    • Capital structure decisions.

    • Performance appraisal.

• Components:

  • Cost of debt (using various methods).

  • Cost of equity (using different models).

Page 4: Capital Structure

• Sources of Capital:

  • Equity, debt, and preference shares.

• Capital Structure Factors:

  • Influencing capital structure decisions including risk considerations, tax implications, and financial distress.

• Measurement of Leverage:

  • Overview of operational and financial leverage.

Page 5: Capital Investment Decisions Under Certainty

• Nature:

  • Focus on evaluating and selecting capital projects.

• Basic Principles of Capital Budgeting:

  • Estimating project cash flows and methods of evaluation (mutually exclusive projects, sequencing, capital rationing).

Page 6: Capital Investment Decisions Under Uncertainty

• Measurement of Risk:

  • Investment decisions may involve risk assessment techniques like sensitivity and scenario analysis.

• Accounting Income vs. Economic Income:

  • Different methods for capital budgeting evaluations.

Page 7: Management of Working Capital

• Liquidity Management:

  • Primary and secondary sources of liquidity.

  • Financial ratios to evaluate effectiveness against peer companies.

  • Assessment of receivables, inventories, and payables management.

Page 8: Mergers and Acquisitions

• Classification of M&A Activities:

  • Based on integration forms and relatedness (horizontal, vertical, conglomerate).

• Motivations for M&A:

  • Growth opportunities, strategic reasons, synergy values, etc.

Page 9: Dividend Policy

• Forms of Dividends:

  • Cash, stock, bond, and property dividends.

• Factors Influencing Dividend Policy:

  • Profitability, liquidity, market conditions, government regulations, etc.

Page 10: Islamic Finance

• Principles and Guidelines:

  • Prohibition of interest (Riba), adherence to ethical standards, the importance of liability and business risk.

• Components:

  • Banking, insurance (Takaful), market practices complying with Sharia law.

Page 11: Corporate Growth and Restructuring

• Sustainable Growth:

  • Maintaining growth without excess leveraging, considering expected return for stakeholders.

• Restructuring Factors:

  • Changes in business environments, downsizing, technology improvements, etc.