Corporate finance covers a wide range of topics and functions within an organisation. The three main areas we will look at in this course relate to answers to the following questions:
1. Which investments should the firm undertake?
2. How, where, when and how much finance should be raised?
3. How should the firm's profits be used or distributed?
These questions are more commonly referred to as:
(a) The investment decision
(b) The financing decision
(c) The dividend decision.
In making such decisions, the firm must ensure that it achieves its objectives. Central to this first unit, then, is the issue of what the objectives of companies are. This is our first main area of study.
The prime objective is often stated as the maximisation of shareholder wealth. This would imply that companies must be run in the interests of shareholders. However, there are a range of interests involved in the way in which companies are managed. We shall examine these in the second main section of the unit and consider, in particular, the importance of the stakeholder concept and the tensions that arise from the different interests involved. Finally, we turn to the scope of corporate financial management. We shall develop the issues of financial decision-making referred to above and consider their implications for the range of financial functions carried out in modern organisations and the roles required of the finance manager.
The modern financial manager also needs to consider two different issues:
1. Risk. Some of the financial decisions made will incur little risk, for example, investing in Government backed bonds, but other areas of investment, such as investing in derivatives, will incur a lot of risk. There is a balance to be struck between the return that can be expected and the risk involved with the particular investment concerned.
2. The strategic role of the modern financial manager. There is an ever increasing need in the modern business world for key staff, including the financial manager, to play a key role in the strategic vision and environment within which the business is operating. There needs to be input at all three levels of strategic involvement – ie at a strategic level for broad issues, at a business or competitor level in respect of how strategic vision can be turned into reality, and at an operational level for how the broader plans can be turned into operational success.
We shall start by reviewing two fundamental concepts relating to companies which underpin much of our studies.
Types of Company
When a company is formed, the person or people forming it decide whether its members' liability will be limited by shares. The memorandum of association (one of the documents by which the company is formed) will state:
1. the amount of share capital the company will have; and
2. the division of the share capital into shares of a fixed amount.
The members must agree to take some, or all, of the shares when the company is registered. The memorandum of association must show the names of the people who have agreed to take shares and the number of shares each will take. These people are called the subscribers.
A company is a separate legal entity, which means that it may take legal action against its shareholders or vice versa. Limited liability companies have capital divided into shares. If a shareholder has paid in full for his or her shares, then liability is limited to those shares. This is the concept of limited liability. The two main classes of limited company are public and private companies:
Public companies
Company legislation defines a public company as one which:
1 Has an authorised share capital of at least £50,000;
2. Is trading a minimum of £50,000 issued share capital
3. Has a minimum membership of two (there is no maximum);
4. Has a name ending with "public limited company" or plc.
Not all public companies have shares which are traded on the Stock Exchange. Those traded on the Stock Exchange are known as quoted or listed companies.
Private companies
A private company can be formed by two or more persons. They are often smaller or family owned businesses. A private company:
1. Can have an authorised share capital of less than £50,000, although there is no maximum to any company's authorised share capital and no minimum share capital for private limited companies.
2. Cannot offer its shares for sale to the general public. You may know of private companies which have become public companies and have started to trade on the Stock Exchange. An example was the clothing retailer Laura Ashley which started life as a family owned private company. The amount of share capital stated in the memorandum of association is the company's
"authorized" capital
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