Introduction To Corporate Finance

Finance and Corporate finance
.
What Is Finance?
• Virtually all individuals and organizations earn
or raise money and spend or invest money.
Finance is the processes by which money is
transferred (financing and investing) among
businesses, individuals, and governments.
FINANCE-MEANING
• Finance is a field that deals with the study
of investments. It includes the dynamics of
assets and liabilities over time under
conditions of different degrees of uncertainty
and risk. Finance can also be defined as the
science of money management.
Contd....
• A key point in finance is the time value of
money, which states that purchasing power of
one unit of currency can vary over time.
• Finance aims to price assets based on their
risk level and their expected rate of return.
Finance can be broken into three different
sub-categories: public finance, corporate
finance and personal finance.
BREAKING DOWN 'Finance
• The study of finance can also take many forms,
depending on the field or area of finance which
one wishes to study.
• For instance, economics is considered a pillar of
financial science, where both macro and
microeconomic factors affect virtually levels of
financial decisions and outcomes at all levels.
Forms of Business Organisation
• Sole Proprietorship
• Partnership
• Private Limited Company
• Public Limited Company
• Public Enterprises
Sole Proprietorship
• One man Control
• Top secrecy
• Limited Capital
• Limited sources
• Unlimited liabilities
• Small in size
Partnership
• Partners (2 to 20 and in case of banking 2 to
10)
• Partnership Deed
• Unlimited Liabilities
• Top Secrecy
• Active partners and sleeping partners
Private Limited Company
• Members 2 to 50
• Limited Liabilities
• Special privileges
• No offer to public (NO IPO)
• Commencement of business
• Documents for incorporation
Public Limited Company
• Members 7 to unlimited
• Limited Liabilities
• No Special privileges
• Offer to public
• Commencement of business
• Documents for incorporation
• Large in size
• Huge resources
Financial Market
Introduction
• ‘FM’ may be defined as the art & science of managing money.

FM is concerned with the duties of the financial managers in
the business firm.
• Relationship of financial management and other supportive
disciplines is:Decision Areas
Financial
Primary Disciplines
Support1. Accounting
1. Investment analysis 2. Macroeconomics
2. Working Capital Management 3. Microeconomics
3. Sources and cost of funds
4. Determination of capital structure
5. Dividend Policy
6. Analysis of risk and returns
Support
Other Related Disciplines
1. Marketing
2. Production
Resulting in 3. Quantitative methods
Shareholder wealth maximization

Functions of Finance under
Modern Approach
Financial Management in the modern sense
of the firm can be broken down into three
major decisions as functions of finance. These
are :
The investment decision
The financing decision
The dividend decision
Organisation of Finance Function
Board of Directors
Managing Director /Chairman
Vice President /Director (Finance)/ Chief finance Officer

(CFO)
Treasurer Controller
Financial Cash Credit Foreign Tax

planning and Exchange Manager Cost
Manager Manager Accounting
fund-raising Manager
manager Manager
Financial
Capital
Pension Corporate Accounting
Expenditure Fund Accounting Manager
Manager Manager Manager
The Investment Decision
The investment decision relates to the selection of

assets in which funds will be invested by a firm. The
assets which can be acquired fall into two broad
categories
Long term assets (which yield return over a period over
a time in future.) –Capital Budgeting.
Short term or current assets (convertible into cash
usually within one year.) –Working Capital
Management.
•Capital Budgeting
Capital budgeting is the most crucial financial decision of the

firm. It refers to selection of an asset or investment proposal or
course of action whose benefits are likely to be available in future
over the lifetime of the project. The main elements of capital
budgeting are:
 Choice of the new assets out of the alternatives available or
relocation of the capital when an existing asset fails to justify
the funds committed.
 Capital budgeting decision is the analysis of risk and uncertainty.
 The concept and measurement of cost of capital.
•Working Capital Management (wcm)
WCM is concerned with the management of current assets.

The key strategies and considerations in ensuring a tradeoff
between profitability and liquidity is one of the major
dimensions of WCM. The management of working capital has
two basic ingredients:
An overview of working capital management as a
whole
Efficient management of the individual current
assets such as cash, receivables and inventory.
The Financing Decision
The investment decision is broadly concerned

with the assets–mix or the composition of the assets
of the firm. A capital structure with a reasonable
proportion of debt and equity capital is called the
Optimal Capital Structure. The two aspects of
financing decision are :
The capital structure theory
The capital structure decision
The Dividend Decision
The dividend should be analysed in relation to the

financing decision of the firm. Two alternatives are available
in dealing with the profits of a firm:
 They can be distributed to the shareholders in the
form of the dividends
They can be retained in the business itself.
The decision as to which course should be followed
depends largely on the significant dividend decision, the
dividend –pay –out ratio, i.e. what proportion of net profits
should be paid out to the shareholders.
OBJECTIVES OF FINANCIAL
MANAGEMENT
The objective provide a framework for
optimum financial decision making. They are
concerned with designing a method of
operating the internal investment and
financing of a firm. There are two widely
discussed approaches under this, these are:
Profit Maximisation
Wealth Maximisation
Profit Maximisation
Profit /EPS maximization should be undertaken and those

that decrease profits or EPS are to be avoided. Profit is the
test of economic efficiency. It leads to efficient allocation of
resources, as resources tend to be directed to uses which in
terms of profitability are the most desirable. Financial
management is mainly concerned with the efficient economic
resources namely capital. The main technical flaws of this
criteria are :
 Ambiguity
 Timing of benefits
 Uncertainty
Wealth Maximisation
Wealth maximisation is also known as Value or Net

present worth maximisation. Its operational features satisfy
all the three requirements of the operational of the financial
course of action namely, exactness, quality of benefits, and
the time value of money. Two important issues related to the
value/share price maximisation are:
Focus on stakeholders -stakeholders include groups
such as employees, customers, suppliers, creditors,
owners and others who have a direct link to the firm.
 EVA (Economic Value Added) –EVA is equal to the
after-tax operating profits of a firm less the cost of the
firm to finance investments.

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Finance and Corporate finance

• ‘FM’ may be defined as the art & science of managing money.

Shareholder wealth maximization

Managing Director /Chairman

Vice President /Director (Finance)/ Chief finance Officer

Financial Cash Credit Foreign Tax

The investment decision relates to the selection of

Capital budgeting is the most crucial financial decision of the

WCM is concerned with the management of current assets.

The investment decision is broadly concerned

The dividend should be analysed in relation to the

Profit /EPS maximization should be undertaken and those

Wealth maximisation is also known as Value or Net

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