INTRODUCTİON TO BUSİNESS - Deneme Sınavı - 3

Companies usually utilize the self-liquidating principle to maintain a proper level of working capital. According to this principle, temporary investments are financed with temporary sources while permanent asset investments are financed with permanent sources.

Pro forma income statement exhibits forecasted revenues and expenses for a future period. Pro forma balance sheet displays forecasted assets and total financing provided by debt and equity financing at a future date.

Banks usually assess the credit worthiness of companies to establish a credit relationship with companies by in view of 5 C’s of credit. These are: character, capacity, capital, collateral and conditions.

Firms may issue shares of stock to raise capital as a form of equity financing. Stocks represent ownership interest in the business and its assets. Companies raise capital by issuing shares of stock. Financing decisions involve debt or equity financing. Bond issuances provide debt financing whereas issuing shares of stock provides equity financing.

Another widely used technique closely related to NPV is the Internal Rate of Return (IRR). IRR is the discount rate that equates the present value of future cash flows with the initial outlay of the project. If the IRR is above the shareholders’ required rate of return, then the project should be accepted. However, if the IRR of the project is below the required rate of return, it should be rejected.

Although there are many types of risk classes, basic types of risk for a business can be classified as: credit risk (default risk),  market risk, political risk and operational risk.  Various risks that can arise from a company’s ordinary business are called operational risks.

The following formula is used to calculate EVA:
EVA= NOPAT / (Capital Base, net of depreciation * WACC)
NOPAT: Net Operating Profit After Tax
WACC : Weighted Average Cost of Capital
If EVA is positive, then it means the company is adding value.

Capital Markets Board of Turkey’s Corporate Governance Principles consist of four main sections, namely shareholders, disclosure and transparency, stakeholders and board of directors.

Business finance decisions are related to the resources of a business and they can be grouped as investment decisions, financing decisions and operating decisions.
• Investment decisions: Making sound investment choices in line with
business strategies and economic analysis.
• Financing decisions: Selecting the optimum mix of internal and
external funds to finance the investments of the business.
• Operating decisions: Employing the resources of the business to
efficiently generate profits.

The best mix of debt financing and equity financing depends on the type of the industry in which the company operates and general economic conditions as well. Moreover, it depends on the following factors:
• Level of risk that management can be assumed in case of unpredicted events.
• Level of earnings to cover the interest payments associated with debt financing and dividend payments associated with equity financing.

• Level of control that management seeks to maintain as issuing new shares of stock brings new shareholders to the company who have voting rights as owners of the company.
• Costs of debt financing and equity financing at the time of capital structure decisions.
• Conditions in the financial markets.

Financial markets serve many roles among which are:
• Efficient allocation of capital: Financial markets help channel funds into profitable investments and boost economic growth
• Price discovery:Prices of financial assets are formed in the market by the interaction of demand and supply for these securities.
• Liquidity: Investors can sell their investments and turn them into cash in financial markets.
• Risk Sharing: Financial institutions such as commercial banks, mutual funds, and pension funds create and sell assets with different risk characteristics for different type of investors

Working capital includes current asset investments of the firm, which comprises assets that can be converted into cash within one year. Current assets include cash, marketable securities, accounts receivables, inventory, and other short-term investments of the firm. Companies need to sustain a sufficient level of working capital to ensure that short-term obligations are met on time. Net Working Capital on the other hand refers to the current assets of the firm less the current liabilities.

Companies usually finance their long-term assets with long-term resources such as long-term trade credit extended by their suppliers, long-term leasing, long-term bank loans, or by issuing bonds or stocks

Stocks grant the holders:
• Limited liability in case of bankruptcy (limited with the amount of investment).
• Claim on income in the form of dividends.
• Claim on assets if the business goes bankrupt.
• Voting rights in the election of the Board of Directors.
• Preemptive rights.
Preemptive rights gives the preferred stockholders the right to purchase new shares of stock proportionate with their existing share of ownership.

Efficient markets are markets where all valid information is available to all participants at the same time, and where prices respond immediately to available information.

Although there are many types of risk classes, basic types of risk for a business can be classified as:
• Credit risk (Default risk)
The risk that a company or individual will not be able to pay the contractual interest or principal on its debt obligations.
• Market risk
The risk that the value of an investment to fluctuate due to general market conditions.

• Political risk
The risk that a country’s government will suddenly change its policies.
• Operational risk
Various risks that can arise from a company’s ordinary business

Enterprise Risk Management (ERM) is an integrated risk management approach, which considers risks in the context of business strategy and manages them with a portfolio perspective through well-defined risk responsibilities and strong risk monitoring processes. In ERM, there is a senior level position usually called Chief Risk Officer (CRO) who has the highest responsibility for overseeing the centralized risk management function.

To fight against fraud and corruption, companies can establish internal control systems. Typically, implementation of internal controls involve the following steps:22
• Identification of possible internal and external threats,
• Identification of internal processes,
• Identification of process gaps using control assessment tools,
• Implementing internal controls to fill gaps with strong control processes,
• Testing the controls with an early warning system.

Financing decisions involve decisions about how much profit to distribute as well as how to finance the resources of the company. As businesses invest in assets to carry on their operations, they must make decisions regarding how to finance these resources.

The combination of internal funds and external funds creates the financing structure, in other words the capital structure of the company.