Corporate Finance → Definition → Corporation → Sole Proprietorship to a Corporation Suppose you decide to start a business from your personal savings of $1 million to produce some goods. You hired some work force for this purpose and start the business. In other words, you have created a sole proprietorship. You soon realize that the business […]
Risk and Return
Risk in investments means future returns are unpredictable. There is risk in all investments, and even all transactions. In general, the greater the risk involved, the greater the expected return, and similarly, the smaller the risk involved the smaller is the expected return. Consider the following three types of investments: 1. Treasury Bills These are […]
Investment Decisions
Investment opportunity and business decisions making based on net present value and rate of return. Net Present Value Net present value can be calculated by subtracting the required investment from the present value. NPV = PV – Investment Example 1. The price of a flat is $100,000. But it could be sold out for $130,000 after […]
Bond Valuation
Corporate Finance → Corporation → Financing Decision → Bond → More on Bonds In financing decision we learned that bonds are issued to raise cash. Governments and corporations borrow money by issuing bonds. The bond issuer pays the bond holder regular interest payments and repay the original amount at the expiry date of the bond. For […]
Bond
Corporate Finance → Corporation → Financing Decision → Bond A bond is an asset that pays the regular interest payments and repay the original investment at the expiry date of the bond. Regular interest payments are called coupon. The original investment is called the face value and the date of expiry is called maturity or […]
Payout Policy
Corporations pay back their shareholders in two ways: By paying dividend By repurchasing stocks Paying Dividends A company’s dividend is usually set by the board of directors. They decide how to pay dividends to their shareholders. Dividends can be paid in two ways: Dividends can be paid in cash. For example, a company announced that […]
Capital Structure
A firm is mainly financed by its stocks which it sells to its shareholders and receives cash inflows. When a firm also takes loans to finance it or issue debt securities, for example bonds, it also has to pay regular interest payments to the debt holders. The firm’s mix of debt and equity financing is […]
Business Structures
Corporate Finance → Business Structures Business can take many forms. But, the three basic forms are: The Sole Proprietorship The Partnership, and The Corporation The Sole Proprietorship A sole proprietorship is a business owned by one person. The person, owner, is liable for all business debts and obligations. And, the profits of the business are taxed […]
Goals of a Corporation
Corporate Finance → Corporation → Agency Problem → Goals of a Corporation All shareholders agree on one point and that is to maximize the current profit and overall value of the firm. But, for management there are two questions and decisions to take: A corporation may be able to increase current profit by cutting some investment which could […]
Agency Problem
Corporate Finance → Corporation → Agency Problem Shareholders who owns the company are called principals and management who runs the company on behalf of the shareholders are called shareholder’s agents. Conflicts between shareholders and management’s objectives create agency problem. Because, shareholders’ main priority involves seeking new investments to raise share value, while management may pursue job security, […]