 Hello and welcome to this session. This is Professor Farhad and this session we're going to look at corporate finance and the financial manager. This topic is covered in an introduction to corporate finance or simply introduction to finance depending on which university you are using. This topic is also covered on the CPA BEC exam as well as the ACCA exam. As always I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1500 lectures which including corporate finance so I do have a complete course not a complete course but a course for corporate finance. I'm working on completing the course. Also on my channel you can find other courses other accounting courses. Please take a look and you have a wide variety of courses. If you are studying with the for the CPA exam or CFA exam you want to check out studypal.co. It's where you can connect with other study bodies in your area. They have users in 85 countries from LA to New York. It's an artificial intelligence study body platform. I suggest you check them out. So what I'm going to do I'm going to go ahead and use the textbook and basically this is think of this as chapter one or the one on corporate finance course. What do you what do you would need to know? Well think about it. The first thing is you want to know what are you studying? What is corporate finance? What is this concept? What's this you are taking a course in finance specifically corporate finance? What is a corporate finance? Well think about businesses. We're talking about for profit businesses. What do for profit businesses like to do? Well they like to make a profit. Well to make a profit you have to properly plan your financing. So imagine you want to start your own business and it doesn't matter what type of business you'll have to answer the following questions. Question one what long-term investment should you take on? Okay that is what line of business will you be in and what sort of building machinery and equipment will you need? Simply put depending on the need of your business you might have to buy machinery, land, building, software, computer, servers depending what your business you have. So you have a need to plan. Where will you get the long-term financing to pay for your investments? Now if you have money up front that's not an issue whatsoever but the point is companies don't have all the money that they need up front therefore they have to rely on stockholders they have to rely on creditors they have to rely on suppliers. Okay will you bring in in other owners or would you borrow money? So that's another way how you finance yourself, how you structure your business and how will you manage your day-to-day financial activities such as collecting from customers and paying for suppliers. Now those three topics they have technical words which we're gonna see in a moment but I'm just planting the seed for that concept. So simply put we have a financial manager. Now why the financial manager is a little bit different in the real world? Well it's different because we're dealing with large corporation. So the feature of large corporation especially a multinational or even large corporation doesn't have to be multinational is the owners are not usually directly involved in making day-to-day business operation. For example Bill Gates. Bill Gates don't run Microsoft. Bill Gates make decision on a high basis. They don't you know they used to run the company on a day-to-day basis but that's no longer the case. They can't do that. They have thousands and thousands of employees and hundreds if not thousands of different project. So what happened? The corporation employs managers to represent the owner's interests. Now we're gonna learn later on in this chapter there might be a conflict between the owners and the managers but that's we'll talk about this topic separately. So they will hire managers to make a decision on their behalf. So in large corporation the financial manager would be in charge of answering the three questions that we raised earlier and we're gonna put some words on them. So the financial management function is usually associated with top officers of the firm such as the VP of finance or some other chief financial officer. Now we're gonna look at a figure that kind of shows us the simplified version of the corporate organ organization. Okay so let's take a look actually at the picture. So this way we'll get an idea what we are looking at. So this way we kind of point out who's responsible for what in a corporate setting. So this is what a typical simplified organization chart would look like. So let's take a look at it. So on the top of the organization on the top of the organizations is the board of directors. The board of directors you have to understand they're not really on the top really who's on the top on the top are the stockholders but the stockholders what they do because the stockholders they cannot run the company they have other jobs they have other responsibilities all what they do is they have money and they invest in this company. So they vote this group this group is voted voted and this group is supposedly represent not supposedly that's what they're supposed to do is represent the yes supposedly represent the stockholders or the shareholders or the owners. Now the board of directors will select the CEO or the chairman of the board and the chief executive officer. The CEO would select the president and chief operation officer. Now it doesn't have to be this way you just may need a CEO then this individual would select the VP of marketing the VP of finance the P of production. Now then you have to understand something here once we get to this point at some point we have to have separate separate structure we have to have the treasurer and the controller under the president vice VP of finance which is under the CFO those two positions should be separate. Let me explain to you why from an internal control perspective. Treasurers think of them as the individuals that handles change this handles the cash handles the dollar amount so under the treasurer you have the cash manager person that touches the cash deposit the cash receives the cash handles the cash you have the credit manager who approves the sales. Now notice the cash manager and the credit managers are different notice they are kind of separated notice this and reason is this now I'm gonna tell you why those two separated in a moment but why is the cash manager separated from the credit manager the credit manager have every incentive to grant credit for everyone okay why because they would increase sales. The cash manager handles the cash so granting credit and handling cash collecting cash should be different. Also under the treasurer you have a capital expenditure and the financial planning basic capital expenditure is long-term planning and financial planning is how are you planning to finance those expenditure. Now you have to understand the reason we have kind of a separate wall between this group let's call them the group A treasurers and group B group B controller think of these are the accounting people they handle the books they handle the accounting record such as the tax manager the cost accounting manager the financial accounting manager and the data processing manager think of them as they handle the data and the data would include notice data processing manager and financial accounting manager data include accounting okay and the people with access to the data the access to programming they should not have access to this side of things which is the cash why because if you can't change the books here's the books here if you can't change the record if you can't change the record then you can manipulate the books and cover your tracks now remember we are dealing with large corporations with people with a lot of responsibilities so if you could hide your rack hide your tracks and you'll be able to steal money from the company so that's why those they separate them once we get to that level many hot then we hire employees and employees work for the corporation now let's talk about the three the three tasks that managers would need to do remember what we talked about they said that managers will need to will need to do three tasks one of them is called capital budgeting and what is capital budgeting capital budgeting is the process of planning and managing a firm long-term investments remember you have to buy vehicles land equipment that's part of starting a business this process is called capital budgeting in capital budgeting the financial manager try to identify investment opportunities that are worth more to the firm than they cost to acquire now you have to understand we have a full chapter it's called capital budgeting so we would learn in details I don't know what chapter is this maybe a chapter 12 in this book I'm not sure but I already covered that chapter so capital budgeting is one of the one of the one of the main main tasks of corporate finance okay loosely speaking this means that the value of the cash generated must exceed generated by the asset exceed the cost and that's obviously simply put cash flow must be greater than the cost now this is a simplified formula what we do with the cash flow we discount the cash and we'll talk we talked about this in another chapter okay the type of investment opportunities that would be typically be considered dependent and part on the nature of the firm so what type of capital budgeting the decisions we're going to be making depending on what business you are in for example if you look at Walmart okay they decide whether to open another store would be an important capital budgeting decision it's so capital budgeting is when you are investing a large amount of money for a project for example opening a new Walmart is a lot is a capital budgeting maybe buying a fleet of trucks for Walmart that's capital budgeting buying a warehouse that's capital budgeting okay because those decision affect the company for many years and they require a substantial amount of money okay some decisions such as what type of computer system to purchase might not depending on a particular line of business so if you're buying one or two computers doesn't really it's not a capital budgeting process but if you are buying if you're updating all the computers at the company and you're trying to update the computers for several years that's a capital budgeting decision so that's one of the thing that managers will have to tackle is capital budgeting and this is what we made by capital budgeting is basically answering one what long-term investment should we take on the second thing that corporate finance are responsible for is where will you get the long-term financing and this is where we come up to the second is what's called capital structure so what is capital structure so the second question for the financial manager concern is how do we finance deferred long-term financing how do we finance deferred so hopefully you understand that assets equal to liabilities plus just write this liabilities plus equity now now my channel is all about accounting so I live and die by this by this equation so all your assets are coming from either debt or equity which is stock think about stocks and bonds think about stock and bonds so the financial manager will have to determine the capital structure basically if we have 100 of assets and we have $30 in liabilities and $70 in equity we say our capital structure is 70% equity and 30% debt okay so we are financed by 70% equity 30% debt now generally speaking not generally speaking if any for any given company they always prefer not to have that they prefer to have equity generally speaking unless interest rate is low and the company have enough cash flow to cover the the interest cost then they might prefer that but how do we how do we do this capital structuring depending on many factor depending on many factor okay is the specific mixture of long-term debt and equity of the firm uses for its operation so how do they bring their assets they borrow money or do they raise money through stocks first how much should the firm borrow that is what's the mixture of debt and equity is best and there is something called the maximizing capital structure and that's a separate topic we'll discuss in later stages the mixture choosing will affect both the risk and the value of the firm now the more that you have if you have more that relative to equity you are riskier okay and also we have to manage risk also we have to manage in the cost of the cost of financing sometime equity is very expensive because the stockholders would require you to have a lot of return sometime that for example for the past I would say 10 years in the US interest rate is low so companies corporations has been heavily borrowing money financing themselves through that is because it's cheap it's simply cheap but if something happened and the economy turns south and will have a corporate debt explosion because they cannot pay their interest okay because the interest rate will go up and they have more they have to pay more okay so if we picture the firm as a pie if you didn't get a pie like this you know for example we could have this much equity and the rest debt so okay in other words what percentage of the firm cash flow goes to the creditor and what percentage goes to the shareholders creditor get the interest the shareholder get part of the profit firm have a great deal of flexibility and choose on the financial structure sometime they do sometime they don't sometime simply no one wants to lend you money because you're doing you're not doing a good job and sometime nobody wants to even give you money because you're a your stock is not doing well therefore no one wants to buy your stock so it's I would I would not say they have a lot of flexibility but if they're doing good they have some flexibility okay in addition to deciding the financing mix the financial manager has to decide exactly how and where to raise money the expenses associated with raising long-term financing can be considerable so different possibilities should be evaluated carefully and this is part of the finance manager so that's the second thing that the finance finance manager will have to tackle is the capital structure how do we structure financially how do we financially how do we financially finance the company is it through that or is it through equity and the third job for the corporate finance manager is something called working capital what is working capital well working capital is think of it short-term okay the firm working capital referring to the firm short-term assets such as inventory and its short-term liabilities such as money older suppliers if you really want to think about it you can say let me just tell you capital budgeting that we talked about earlier not long ago think of this process as long-term working capital think of it as shorter okay managing the firm working capital is the day-to-day activity that ensure that the firm has sufficient resources sufficient cash to operate and avoid costly interruption okay this involved a number of activities that they have to do related to the firm receipts and firm disbursement so they have to decide you know when should they receive the money how much they should they should spend on bills and you know timing of paying bills okay some questions about working capital must be answers you know how much cash and inventory should we keep on hand should we sell on credit if so what term would we offer 30 days 60 days should we offer discount not discount how will we obtain any short-term financing needed do we have some type of a line of credit with the local bank in case we need money will we purchase will we purchase on credit or will we borrow money on the short-term and pay cash so those are the decisions that we have to make that are considered working capital capital is capital is money it's a fancy word for money and working is how do we work the money how do we work our capital how do we pay our bills how do we how do we collect our money what is our collection policy okay this is the working capital decision these are small sample by the way simply put simply put the three areas of corporate financial management is capital budgeting capital structure and working capital management obviously those are very broad categories and you're gonna see there's a chapter or two for every one of them so this is chapter one is given you in overview one more thing I want to cover for the financial manager just basically just because it's a small section I just would like to go over and just to make sure I cover it so this way in case you read it somewhere in case you read it in your textbook and that's the goal of financial management what's the goal of financial management well you want the company to survive you want the company to avoid financial distress beat the competition maximize sales minimize costs maximize profit maintain study earning and growth so those are all obvious you can think of them but also the goal of financial management now in today's world you can agree this agree you should have some social responsibility again that's a political hot political topic you know is financial management part of the social responsibility also obviously they have to follow rules and regulation they cannot be unethical they cannot break the law again those are obvious goals of financial of financial management so in case you want to read this section go ahead and read it but just know that the goal is to maximize the profit so the answer is maximize the profit or maximize the shareholders wealth by maximizing the profit you maximize the shareholder wealth now bear in mind I do have additional lectures about corporate finance maybe I have another 12 chapters and I'm adding to them so check out my website and make sure you subscribe so you have access not only to corporate finance to all my courses good luck study hard and stay motivated