Corporate Finance: educational manual

286 Pages·2020·1.332 MB·English

by  Дарибаева М.Ж.

AL-FARABI KAZAKH NATIONAL UNIVERSITY
M.Zh. Daribayeva
CORPORATE FINANCE
Educational manual
Almaty
«Qazaq University»
2020
UDC 658(075)
LBC 65.290.93я73
D 20
Recommended for publication by the decision of the Academic Council
of the High School of Economics and Business
and Editorial and Publishing Council of al-Farabi KazNU
(Protocol No.5 dated 27.06.2019)
Reviewers:
PhD, Acting Associate Professor R.D. Doszhan
PhD, Acting Associate Professor Sh.A. Boluspayev
c.e.s., Professor S. Yessengaziyeva
Daribayeva M.Zh.
D 20 Corporate Finance: educational manual / M.Zh. Dariba ye va.
– Almaty: Qazaq University, 2020. – 285 p.
ISBN 978-601-04-4498-0
The content of the educational manual «Corporate Finance» includes
the issues of formation of own fi nancial resources, fundraising from external
sources, distribution and use of borrowed resources. The course also includes
the system of monetary relations arising in the process of forming the ba-
sic production assets and working capital, production and sales of products,
works and services. In accordance with the curriculum approved by the Min-
istry of Education and Science of the Republic of Kazakhstan, this educa-
tional manual covers the main issues studied by the students of the specialty
of «Finance».
UDC 658(075)
LBC 65.290.93я73
ISBN 978-601-04-4498-0 © Daribayeva M.Zh., 2020
© Al-Farabi KazNU, 2020
CONTENT
ABBREVIATIONS .......................................................................................6
INTRODUCTION .........................................................................................7
1. FINANCE OF CORPORATIONS:
CONTENT AND ORGANIZATION OF ACTIVITY ...............................9
1.1. Essence and functions of corporate fi nance ............................................9
1.2. Principles of organization of corporate fi nance .....................................14
1.3. Financial mechanism of corporations ....................................................19
Tasks ..............................................................................................................23
Test questions ................................................................................................24
2. FUNDAMENTALS OF FINANCIAL ANALYTICS
OF CORPORATION ..................................................................................29
2.1. Purpose and objectives of the fi nancial analysis of a corporation ........29
2.2. Financial analysis and management decisions .......................................35
2.3. Methods of fi nancial analysis ................................................................40
Tasks ..............................................................................................................45
Test questions ................................................................................................46
3. FIXED CAPITAL OF CORPORATIONS ............................................51
3.1. Essence of fi xed capital: composition and structure .............................51
3.2. Indicators of the movement of fi xed assets ............................................57
3.3. Depreciation and amortization of fi xed assets .......................................62
3.4. Indicators of the effi ciency of fi xed assets use .......................................67
Tasks ..............................................................................................................71
Test questions ................................................................................................72
4. CONTENT AND STRUCTURE OF THE WORKING CAPITAL
OF CORPORATION ..................................................................................76
4.1. Content and structure of working capital ...............................................76
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4 Corporate Finance
4.2. Sources of fi nancing working capital .....................................................81
4.3. Effi ciency of working capital use ...........................................................86
Tasks ..............................................................................................................91
Test questions ................................................................................................91
5. CLASSIFICATION OF CORPORATE COSTS .................................96
5.1. General Characteristics of Corporate Costs ...........................................96
5.2. Cost Planning Methods ........................................................................107
5.3. The effect of operating leverage ...........................................................110
Tasks ............................................................................................................113
Test questions ..............................................................................................114
6. EARNINGS OF THE CORPORATION
AND THEIR CLASSIFICATION ...........................................................118
6.1. General characteristics of corporate earnings ......................................118
6.2. Profi t and profi tability ..........................................................................128
Tasks ............................................................................................................131
Test questions ..............................................................................................132
7. EQUITY CAPITAL OF CORPORATIONS: COMPOSITION
AND STRUCTURE ..................................................................................136
7.1. Equity capital of corporations: structure ..............................................136
7.2. Management of own (equity) capital ...................................................143
Tasks ............................................................................................................152
Test questions ..............................................................................................153
8. DEBT SOURCES OF FINANCING THE CORPORATION ...........157
8.1. The role of borrowed sources of fi nancing in the activities
of the corporation ........................................................................................157
8.2. Sources and methods of fi nancing loans ..............................................163
8.3. The Effect of Financial Leverage .........................................................169
Tasks ............................................................................................................174
Test questions ..............................................................................................175
9. COST AND STRUCTURE OF CORPORATE CAPITAL ...............179
9.1. The economic nature of capital ............................................................179
9.2. Methodology of capital formation .......................................................184
9.3. Methods for calculating the capital structure .......................................190
Tasks ............................................................................................................195
Test questions ..............................................................................................196
10. FINANCIAL PLANNING AND FORECASTING
OF CORPORATIONS ..............................................................................201
Content 5
10.1. The concept of fi nancial planning: objectives and principles ............201
10.2. Types of fi nancial planning ................................................................206
10.3. Current and operational fi nancial planning ........................................213
Tasks ............................................................................................................219
Test questions ..............................................................................................220
11. EVALUATION OF FINANCIAL CONDITION
OF THE CORPORATION: CONCEPT OF FINANCIAL
STABILITY ..............................................................................................224
11.1. The concept of the fi nancial condition of the company .....................224
11.2. Analysis of solvency and liquidity of the enterprise ..........................232
11.3. Indicators of fi nancial stability of the enterprise, the method
of their calculation.......................................................................................243
Tasks ............................................................................................................248
Test questions ..............................................................................................249
12. DETERMINATION OF FINANCIAL INSOLVENCY
OF CORPORATION ................................................................................252
12.1. Financial relations of the enterprise in terms of economic
insolvency and bankruptcy ..........................................................................252
12.2. Diagnostic system of fi nancial crisis of an enterprise ........................257
12.3. Financial management of the processes of stabilization,
reorganization and liquidation of an enterprise ...........................................267
Tasks ............................................................................................................275
Test questions ..............................................................................................275
TASKS FOR INDEPENDENT SOLUTION ..........................................279
REFERENCES ..........................................................................................283
ABBREVIATIONS
ACH – Automated Clearing House
CF – fl ow
CD – coeffi cient of disposal
COGS – costs of goods sold
CPA – Certifi ed Public Accountant
CFO – Chief Financial Offi cer
DSO – Days Sales Outstanding
– cash
FASB – Financial Accounting Standards Board
FA – Fixed asset
– generally accounting
GRFA – growth rate of fi xed assets
IAS – International Accounting Standards
IRR – Internal Rate
IRS – Internal Revenue Service
JSC – Joint Stock Company
– marginal of
MW – minimum wage
NPV – value
PP&E – plant
RIAs – Registered Investment Advisers
ROE – Return on Equity
ROA – Return on assets
ROI – Return on investment
RP – Reported period
SIT – systematic investment plan
VAT – Value Added Tax
WC – Working capital
– cost capital
WCC – working capital cycle
WCM – Working Capital Management
WIP – work in progress
6
INTRODUCTION
Corporate fi nance is a set of economic relations arising in the pro-
cess of formation, distribution and use of funds generated in the pro-
cess of production and sale of goods and services.
Corporate fi nance is a part of the fi nancial system that creates
part of the national wealth and gross national product. It formulates
the main source of state budget revenues – tax payments of legal enti-
ties. Corporate fi nance is the basis for the development of technol-
ogy, scientifi c and technical progress, therefore forms the basis for
the development of the industrial, economic and fi nancial relations
of the society. The vast majority of jobs serving as the main source of
income for another part of the fi nancial system, household fi nances,
are created with the help of corporate fi nance.
The peculiarity of corporate fi nance is the availability of produc-
tion assets, functioning of which determines the signifi cance of fi nan-
cial relations.
The content of Corporate Finance educational manual covers the
formation of internal fi nancial resources, attraction of external sources
of funding, their distribution and use. The course also includes a sys-
tem of monetary relations arising in the process of forming the basic
production assets and working capital, production and sale of goods
and services.
Economic monetary relations associated with the creation, distri-
bution and use of funds and savings in the sphere of material produc-
tion is the subject of Corporate Finance course.
The fi nancial activity of an enterprise is formed under the infl u-
ence of two multidirectional factors: intra-company relations and rela-
7
8 Corporate Finance
tions with the external business environment. Therefore, a necessary
tool for managing a system of fi nancial relations at the level of a cor-
poration in a market environment is a clear understanding of the inter-
relation of all factors affecting the overall level of fi nancial condition.
It is necessary to properly use the fi nancial levers and incentives in
order to achieve the highest economic effi ciency. Moreover, it is im-
portant to take into account the nature and prospects of relations with
partners (not only with corporations associated with the purchase and
sale of goods, supplies of inventory, but also with shareholders, credi-
tors, stock markets, tax and insurance agencies). The development of
ownership forms led to the emergence of new types of enterprises:
private, cooperative, joint-stock, mixed, joint with economic entities
of foreign countries. The fi nances of each branch of the economy have
signifi cant differences arising from the technical and economical fea-
tures of these business entities.
The purpose of studying corporate fi nance is to study the essence
of corporate fi nance, its principles and management.
In order to achieve this goal it is necessary to solve the following tasks:
– to study the theory of corporate fi nance;
– to study the nature and principles of corporate fi nance management;
– to study the features of corporate fi nance management;
– to reveal the analysis of the corporate fi nance management system.
The results of studying Corporate Finance for students:
1. To become a master of the theory and practice of fi nancial re-
lations of corporations in a market economy, to know the features
of corporate fi nance organization in various forms of ownership and
management.
2. To be able to assess the fi nancial position of the corporation,
make fi nancial plans and forecasts.
3. To acquire the skills to make the right fi nancial decisions in an
unstable economy in various areas of corporate operations.
In accordance with the curriculum approved by the Ministry of
Education and Science of the Republic of Kazakhstan, this education-
al manual covers the main course of issues studied by the students of
Finance specialty.
1. FINANCE OF CORPORATIONS:
CONTENT AND ORGANIZATION OF ACTIVITY
1.1. Essence and functions of corporate fi nance
1.2. Principles of organization of corporate fi nance
1.3. Financial mechanism of corporations
1.1. Essence and functions of corporate fi nance
The main concepts of corporate fi nance. Corporate fi nance es-
sentials can be divided into two main categories: investment analysis
or capital budgeting, and working capital management. What are these
concepts?
Investment analysis or capital budgeting. Investment analysis
or capital budgeting has at its core the aim of adding value to the long-
term corporate fi nance projects. These are projects, which relate to the
investments that are funded through capital structure.
In other words, corporate fi nance fi rst studies how the company de-
ploys its long-term capital, i.e. where it is spending or investing its money.
So, how do corporations get their hands on capital and then how
do they invest it? First, let us examine the different capital structures
of the company and the basis of corporate fi nance.
Capital structure. Corporate fi nance is interested in increasing
the shareholder value and in order to do so, it generally has to invest in
order to expand and to grow. In order to be able to invest, the organiza-
tion must fi nd ways to fi nance this growth and investment. There are
generally two different ways of fi nancing corporate activity:
9
10 Corporate Finance
‒ Self-generating the capital (i.e. selling products and services)
‒ Issuing new debt and equity.
Furthermore, the capital structure usually consists of a combina-
tion of the following sources of capital:
‒ Debt capital – which is often borrowed funding, either as debt
capital or credit.
‒ Equity capital – which refers to the money companies raise by
selling shares to investors.
‒ Preferred stock – which is a hybrid version, including both an
equity and a debt instrument.
The organization’s role is to fi nd a balance between these different
options for sourcing capital and creating a sustainable capital structure.
Generally, this means using different capital sources to ensure there is
no an over-reliance on a single source or capital model. You can fi nd out
more about capital structure from the introductory video below:
Investment and project valuation. After a business has dealt
with the capital structure, the focus of corporate fi nance moves to cap-
ital investment and budgeting. The process of capital investments, i.e.
the process of deciding where the money should go in order to attract
long-term value, is determined by capital budgeting. For this, the or-
ganization must consider investment and project valuation.
The valuation process essentially determines how to maximize the
benefi ts, i.e. profi ts, and to minimize risks and costs. The most common
calculation related to investment and project valuation is the discount-
ed cash fl ow (DCF) valuation. This determines the cash fl ow expected
from the investment and therefore, shows whether it is worth it.
To calculate DCF, the organization needs to implement concepts
such as time value of money to determine the present value of future
cash fl ows. The sum of the different present values will provide the net
present value (NPV), which shows whether the investment is worth
the costs. Other key ways to measure the investment value as part of
corporate fi nance include:
‒ Discounted payback period.
‒ Equivalent annuity.
‒ Rate of return.