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Fundamental principles of corporate finance and financial markets

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Principles of corporate finance are the part of finance that deals with the financial decisions of companies and the instruments and analysis used to make these decisions. The main objective of corporate finance is to maximize corporate value while managing the financial risks of the company.

Although in principle it is different from the business financing that studies the financial decisions of all companies, the main concepts in the study of corporate finance are applicable to the financial problems of all types of companies.

Transcript of Principles of Corporate Finance

principles of corporate finance

The interest rate on very short-term bank loans is generally fixed during the term of the loan, but in other cases, it floats along with the general level of short-term interest rates.

Short-term securities pay interest, cash does not, so; Why do corporations and individuals keep billions of dollars in cash and demand deposits?

Why, for example, do not you take all your money and invest it in securities that pay interest? Of course, the answer is that cash provides more liquidity than securities. You can use it to pay for things. It is quite difficult for a New York taxi driver to change a 20 dollar bill, now imagine asking him to accept a Treasury certificate and, in addition, to return the change.

Financial Statements

principles of corporate finance

Financial reasons rarely give answers, but they do help to ask the right questions.

There are no international standards for financial reasons. A little reflection and common sense are worth much more than a blind application of the formulas.

A comparison standard is needed to determine the principles of corporate finance position of a company.

Administration of Credit

principles of corporate finance

When a company sells products to another, in general, it does not expect to be paid immediately. These unpaid accounts, or commercial credit, make up the bulk of accounts receivable. The rest is integrated by consumer credit, that is, accounts that are expected to be paid by the final consumer.

Negotiable Securities

principles of corporate finance

The problem for financial planning

A company that issues large amounts of long-term debt or common stock, or that retains a large portion of its profits, may have cash surpluses. In these cases, there are never problems paying bills, and short-term principles of corporate financial planning are to manage the portfolio of negotiable securities of the company.

Market value

Most companies need to maintain inventories of raw materials, work in process or finished items that await their sale and shipment. Maintaining an adequate level of inventories is mainly the task of the production manager, but when sales sink unexpectedly, production does not always react immediately and the increase in inventories may require some very drastic actions.

If you have more cash than necessary at any given time, you can invest it in the money market. There is a wide variety of investments in the principles of corporate finance market, with different degrees of liquidity and risk. Remember that the interest rate on these investments is often quoted as a discount. Compound yield is always greater than the discount rate.

Purchased Purchases

A PAC is an acquisition or purchase of a company or division that is financed mainly by debt. CAP is privately owned, usually by an investment consortium. Financing via debt is not the goal of most CAPs; it is a means to an end.

CAPs are almost by definition transactions that involve thinning of the acquired company, but there were other reasons

Alternate Bankruptcy Procedures

principles of corporate finance

Its main focus is to rescue struggling companies, but this carries a cost since there are many cases in which the assets of the company would be better used elsewhere.

Michael Jensen has argued that “the bankruptcy code of the United States has fundamental flaws. It is expensive, it exacerbates the conflict of interest between the different classes of creditors, and it often takes years to solve individual cases. ”

It is directly related to the management of assets and liabilities of short-term or circulating, of a company.

However principles of corporate financer, banks also grant loans in installments, which sometimes extend for five years or more. Longer-term loans that are sold on a regular basis are known as medium-term notes or payrolls

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