SOURCES OF FUNDS:

1 -retained earnings used from the company to the shareholders as dividends or for reinvestment

2 -Borrowing , this tool has tax advantages.

bank borrowing is the largest single source of external financing

SHORT-TERM DEBT

The corporate make to finance their working capital investments with short-term bank loans for up to one year

LONG-TERM DEBTLong-term debt may take the form of bonds sold publicly in the financial market or placed privately with large financial institutions.

-Publicly issued debt and equity securities entail higher transaction costs.

EQUITY VERSUS DEBT -As dividend payments are not tax-deductible, -new issues of equity involve high transaction

costs, -equity issues are a less significant source of

external financing than debt.

debt holders have a prior claim on the company’s assets, and shareholders can claim only what is left after lenders’ claims have been satisfied.

-This makes borrowing more risky than equity from the company’s standpoint.

INITIAL PUBLIC OFFERINGWhen a private company becomes a public corporation, it makes an initial public offering (IPO) of some of its shares with the help of investment bankers.

-the investment bankers buy the entire issue and resell the shares

A rights issue is an offer of additional shares at a discounted price to existing shareholders.

-The offer allows shareholders several weeks to exercise their rights to the new shares.

-the treasurer can raise further equity capital from existing shareholders or from the public, depending in part on what is permitted in the company’s Articles of Association.

-financial institutions acting as underwriters guarantee the rights issue. That is, they buy any shares that remain unsold to the existing shareholders.

MARKET CAPITALIZATION

The net worth is the value of all the assets minus the value of the company’s liabilities.

-The stock market makes its own assessment of the values of the assets and liabilities determines what the net value of the equity is really worth .market capitalization.

-CAPITAL STRUCTURE

Lenders wish to be relatively certain of getting their money back,

-debt typically represents a smaller proportion of the total financing employed by the firm than does equity.

CORPORATE FINANCIAL OBJECTIVES

-CONFLICTS OF INTEREST WITH DEBT HOLDERS

-Conflicts of interest can arise between shareholders and debt holders.

RISK AND REQUIRED RATES OF RETURNThe expected cash flows generated by an assettogether with its cost determine the expected rate of return from investing in the asset. In the financial market, different securities have different risks, and investors demand higher rates of return on securities with higher risk.

PRESENT VALUEThe cost of such a portfolio indicates the presentvalue (PV) of the asset to the shareholders. If the cost of the asset is less than its PV, the

investment is favorable for the shareholders..In practice, a financial analyst estimates the PV of the asset by estimating the PV of each of its expected future cash flows separately

EFFICIENCY OF THE FINANCIAL MARKET-In developed economies, financial markets are very

competitive.-Competition makes financial markets efficient.

-The meaning of an efficient financial market is that the prices of securities reflect all price-sensitive information as it becomes available to market participants.

VALUE MAXIMIZATIONThe way that management increases the value of the corporation is to raise funds at competitive rates in an efficient financial market and then reinvest the funds in products and services that sell inmarkets that are less competitive and where higher rates of return are obtainable.

-Managers must seek profitable ventures in product markets where they can expect to enjoy some advantage over competitors.

Competitive advantage can derive from patents and technologies, superior research,

THE COST OF CAPITALThe costs of capital include 1- after-tax interest payments on debt 2- and the level of dividends 3-and capital gains that are required to satisfy the shareholders.

• -The cost of capital is a variable that depends on the risk of the investment.

Before the management determine the rate of return, must to determine the risk of different investments

CORPORATE GOVERNANCE

Corporate governance concerns management at board level and the agency relationship between managers and owners.2 In public companies managers are hired to act as agents for the owners, who are the

shareholders in the company .

The problem is the potential for conflicts of interest between managers and shareholders.

CONTROL-ORIENTED FINANCE

there are two systems affecting the behavior of corporate governance that operate in different countries1-control-oriented finance and arm’s length finance.

control-oriented finance,

investors such as large shareholders and bank lenders protect their own interests by having representatives on the board influencing strategic decisions.

ARM’S LENGTH FINANCE

With arm’s length finance, investors and lenders do not intervene in the decision-making process as long as,

The most important legal right shareholders have is to vote onparticular corporate matters such as mergers, liquidations, and elections of directors. Votingrights,