1. ADM658 – CHAPTER 1: CORPORATE FINANCE
Definition
Practical Reason
Goal of the firm
Legal Reason
Corporate Finance
Other Possible
Capital budgetting
Financial
Management Decision
Capital Structuring
Importance of Finance
Manager
Working Capital
Management
Definition
Corporate Finance.
Occurance
Problem
Agency Problem
Costs.
Principal-Agent
Relationship
Agency Relationship
Management goal and
agency cost
Solutions
sole proprietorshp
General Partnership
Form of Business
Partnership
Limited Liability
Partnership
Company
Role
Primary
Secondary
Financial Market
Money Market
Capital Market
Derivative Maret
Systematic Risk
Risk and return
Unsystematic Risk.
NurAisyahBintiMahbob (2010312861)
Faculty of Administration Science and Policies Studies.
Page 1

2. ADM658 – CHAPTER 1: CORPORATE FINANCE
DEFINITION OF FINANCE MANAGEMENT.
A process involved in an attempt to obtain and allocate financial resources effectively and
efficiently to achieve the firm’s goal that is to maximize the shareholder’s wealth by maximizing the
share price.
Sole Proprietorship
Partnership
Company
Description
Owned by a single person
Coming
together
Given its legal status by
(association) of 2 or
CA 1965
Owner has title to the
more individuals for a
business’ assets & all
Need to be incorporated
common purpose to
business liabilities.
with the Registrar of
operate
a
business
Companies ,under CCM
No limitation – as to the
together for profit.
amount of gains and
Must have MOA and AOA
2
subcategories
of
losses that the owner
Separation of ownership
partnership:
shall be entitled or liable
and control
o General P.
to
o Limited Liability P
Advantages
No legal requirements
Cheap
Ownership
can
be
other than the need to
transferred by way of
Easy to form
register the business
transfer of shares.
Management
control
with the Registrar of
Unlimited life
resides with the general
Business
partner.
Shareholder’s
liability
Cheap
limited to the amount
Two or more owners
Easy to start
invested in the company
More capital to start
Business
incurs
no
Easy to raise additional
Income taxed once as
corporation or income
funding from external
personal income
tax – tax liability borne
providers of finance
by the individual.
(bank)
Life of business depends
Limited liability
on the life of the owner.
Disadvantages
Funds in business limited
Unlimited liability
Annual accounts need to
to amount that the sole
be prepared
Partnership
dissolves
proprietor has personally
when one partner dies or
Accounts of the company
SP has unlimited liability
withdraws from the
need to be audited by
for debts and liabilities
partnership agreement.
external auditors
No distinction/separation
Difficult
to
transfer
Filing
of
financial
made between business
ownership
statements and annual
and personal assets
returns must be made
Difficult
to
raise
with
Registrar
of
Creditors may claim the
additional funding.
Companies every year.
SP’s personal assets
when
the
business’
Annual & extraordinary
assets cannot pay the
meeting
must
be
creditor.
conducted.
Difficult to sell ownership
Min director: 2
interest
Double
taxation.
(Corporate/personal rate
NurAisyahBintiMahbob (2010312861)
Faculty of Administration Science and Policies Studies.
Page 2

3. ADM658 – CHAPTER 1: CORPORATE FINANCE
To maximize the wealth of shareholders.
GOAL OF THE FIRM
Practical reason
When making investment and financing decision for the firm,
decisions can be made much more simply and quickly. If the
interest of other stakeholders were also be considered,decisions
may be not be madequickly and efficiently.
Shareholder are the owner of the firm. Firms become into being
due to contribution made by the shareholder
Legal reason
Shareholders are protected
under the CA1965
Finance manager owe some kind of allegiance to the 'owners' of
the firm. (Principal-agent relationship)
Maximize sales/market
share
Minimize cost
Maximize profits
Other prossible goal
Achieve adequate profits
Ensure continued earning
growth
Catch up and overtake
competitiors
Avoid financial distress
and bankruptcy.
NurAisyahBintiMahbob (2010312861)
Faculty of Administration Science and Policies Studies.
Page 3

4. ADM658 – CHAPTER 1: CORPORATE FINANCE
Financial Market
•an organization that responsible for the distribution of fund to the end user as they collect from the
general public & channel it to the user.
•Function: to help allocate the financial resources within economy
•Types:
•Primary/Secondary/Money/Capital Market.
Roles Of Financial Markets
•facilitation of savings by individual by allowing them to consume less today (saving) to be able to
consume more in future.
•platform to raise financing by the users (firms) of finance
•channel whereby demand for and supply of fund can interact and arrived at a suitable market price
for funds.
•provision of financial services that allow participants to work out and balance their risk tolenrance
and expected return
primary market.
•Used when firms first issue securities for funds
•involves 2 types of activities: public offering/private placements
•PO: issue debt/equity to the public
•publish prospectuses - advertise in newspaper
•Private placement: Firms may issue debt or equity to certain parties - after discussion
Secondary market
•already issued securities to raise the fund in order to finance new investment in fixed asset
•investor buy & sell shares/bonds/loan stocks
Money Market
•for debt securities that will be repaid in the short-term (<1 year)
•related to a group loosely connected markets.
•main player: Dealer-Bank. Active in market (as lenders/borrowers)
•large firm lend when they have surplus cash/borrow when they are short of money.a
Capital Market
•markets for long-term debt and equity
•ex: bonds/debentures/term loan/leasing/industrial hire purchase
•Equity:
•shares are equity in firm
•represents ownership
•resdual interest in firm: shareholders can only clain on he share of earnings and assets has be made
to other claimants.
•shareholder have dividend right, voting rights, liquidation, pre-emptive rights.
•Debt vs. Equity Securities.
NurAisyahBintiMahbob (2010312861)
Faculty of Administration Science and Policies Studies.
Page 4