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Corporate Finance: Understanding Debt and Equity Financing, Schemes and Mind Maps of Finance

A basic overview of corporate finance, focusing on the key concepts of debt and equity financing. It explains how companies raise funds through debt and equity, explores the balance sheet and income statement, and discusses the importance of financial leverage. The document also touches upon the main duties of a cfo and the goal of shareholder wealth maximization.

Typology: Schemes and Mind Maps

2023/2024

Uploaded on 01/03/2025

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How do companies raise funds?
Debt Debt Financing
Equity Equity Financing
Total Assets
Uses of Fund = Sources of Fund
Total Assets = Total Debt + Equity
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How do companies raise funds?

Debt Debt Financing

Equity Equity Financing

Total Assets

Uses of Fund = Sources of Fund

Total Assets = Total Debt + Equity

Sources Of

Capital for

a

Company

Debt

Equity

Preferred Stock - Common Stock

Balanc e Sheet Current Assets Cash Near Cash Marketable Securities Accounts Receivables Inventory Fixed Assets Tangible Fixed Assets (plant, machinary, property.....) Intangible Fixed Assets Short Term Liabilities (Current Liabilities) Trade Payables Financial Debt (Notes Payables) Long Term Liabilities Trade Payables Financial Debt Equity Common Stock Preferred Stock Retained Earnings

Income Statement- Simplified

  • (^) Sales
  • (^) COGS (-)
  • (^) Gross Profit
  • (^) Operating Expenses (-)
  • (^) Operating Income – EBIT
  • (^) Interest Expense (-)
  • (^) Profit Before Tax
  • (^) Tax (-)
  • (^) Net Profit

FINANCIA L LEVERAG E

  • (^) Ideal Ratio for Financial Leverage
  • (^) 1-unit debt for 1-unit equity (1: rule)
  • (^) Total Debt/ Total Assets = 0, ( it depends on the sector)

How much financial leverage should a company have?

  • (^) The ideal ratio for leverage is 0.5. It can

change in different sectors.

  • (^) However when this leverage ratio is

higher than 0.7, that is 7 units debt for

3 units equity, the firm becomes riskier

and it indicates that the firm may face

a liquidity crisis and may have difficulty

to pay its debt. This is also a negative

indicator for rating agencies.

CORPORATE FINANCE DEALS WITH 3 MAIN QUESTIONS

(Main duties of CFO) **1) What long term Investmets should the company take on What kind of business will the company be in, what sort of machines will you need: Investing in Feasible Projects: CAPITAL BUDGETING

  1. How to Finance? Debt or equity : CAPITAL STRUCTURE
  2. How to manage daily operations Short term operations**
  • (^) NET WORKING CAPITAL: Current Assets- Current Liabilities

The main goal of a corporation (or CFO) SHAREHOLDER WEALTH MAXIMIZATION

  • (^) Increasing (maximizing) market price of each share
  • (^) Increasing (maximizing) the market value of the company