: Corporate Finance

Syllabus
Course Aim/s:
• To give an overview of the problems facing a financial manager in the commercial
world.
• It will introduce the concepts and theories of corporate finance that underlie the
techniques that are offered as aids for the understanding, evaluation and
resolution of financial manager’s problems.
Learning Outcome/s:
• Provides support for decision making.
• It enables to monitor their decisions for any potential financial implications and for
• Lessons to be learned from experience and to adapt or react as needed.
• To ensure the availability of timely, relevant and reliable financial and nonfinancial
Information.
• FM helps in understanding the use of resources efficiently, effectively and
Economically.
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Unit-I: The Finance Function
• Introduction to Finance: Nature and Scope - Finance Function - It’s
Role in the Contemporary Scenario - Goals of Finance Function -
Maximizing vs. Satisfying - Profit vs. Wealth vs. Welfare - The Agency
Relationship and Costs - Risk-Return Trade Off.
• Time Value of Money: Concept - Future Value and Present Value and
the Basic Valuation Model.

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Unit-II: The Investment Decision
• Investment Decision Process: Project Generation - Project Evaluation -
Project Selection and Project Implementation - Developing Cash Flows
- Data for New Projects.
• Capital Budgeting Techniques: Traditional and DCF methods - The NPV
vs. IRR Debate. (Theory & Problems)
• Cost of Capital: Concept and Measurement of Cost of Capital - Debt
vs. Equity - Cost of Equity - Preference Shares - Equity Capital and
Retained Earnings - Weighted Average Cost of Capital and Marginal
Cost of Capital (Theory & Problems) - Importance of Cost of Capital in
Capital Budgeting Decisions.

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Unit-III: Capital Structure Decisions
• Capital Structure vs. Financial Structure: Capitalization - Financial
Leverage - Operating Leverage and Composite Leverage. (Theory &
Problems)
• EBIT-EPS Analysis: Indifference Point/Break-Even Analysis of Financial
Leverage.
• Capital Structure Theories: The Modigliani Miller Theory - Net Income
- Net Operating Income Theory and Traditional Theory (Theory &
Problems) - A Critical Appraisal.

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Unit-IV: Dividend Decisions
• Major Forms of Dividends: Cash and Bonus Shares.
• Dividends and Value of the Firm: Relevance of Dividends - The MM
Hypothesis - Factors Determining Dividend Policy - Dividends and
Valuation of the Firm - The Basic Models.
• Dividend Theories: Major Theories centred on the works of GORDON,
WALTER and LITNER. (Theory & Problems)

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Unit-V: Management of Current
Assets
• Working Capital Management: Components of Working Capital -
Gross vs. Net Working Capital - Determinants of Working Capital
Needs - The Operating Cycle Approach - Planning of Working Capital -
Financing of Working Capital through Bank Finance and Trade Credit;
• Management of Cash: Basic Strategies for Cash Management - Cash
Budget (Problems) - Cash Management Techniques/Processes;
Management of Receivables & Inventory.

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What is finance?
• Imagine that you were to start your own business. No matter what
type you started, you would have to answer the following three
questions in some form or another:
• 1. What long-term investments should you take on? That is, what
lines of business will you be in and what sorts of buildings, machinery,
and equipment will you need?
• 2. Where will you get the long-term financing to pay for your
investment? Will you bring in other owners or will you borrow the
money?
• 3. How will you manage your everyday financial activities such as
collecting from customers and paying suppliers?

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Concept of Finance
• Finance is the art and science of managing money.
• Finance is simply how an individual or an organization manages its
financial resources. It can include borrowing, investing, lending,
budgeting, saving, spending, and forecasting.
• While people tend to think of finance in terms of money, finance is
about more than cash. While money is a legal tender used for many
financial transactions, finance refers to asset allocation and
management of monetary resources.
• Finance is mainly focussed on the study of prices, interest rates, money
flows, and the financial markets. In a broader sense, the concept of
finance also focuses on the time value of money, rates of return,
capital cost, optimal financial structures and the quantification of risk.
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 Types of Finance :

1. Personal Finance
• Personal finance refers to managing an individual’s monetary resources across 5 key areas: Income,
savings, investments, spending decisions, and asset protection. The goal is to make intelligent
investment decisions and build a safety net and meet their goals without taking on too many debt
obligations.
• Personal finance involves managing an individual’s or a family’s financial affairs. It includes budgeting,
savings, investing, retirement planning, and debt management.
• A personal financial system can also involve generational wealth transfer, taking advantage of tax
planning opportunities, filing tax returns, using credit cards, and buying, selling, and managing assets.
Personal finance is always tailored to one’s specific needs in the short, medium, or long term.
• This means that two people may not make the same financial decisions because of their different goals,
earning potential, incomes, and timeframes. When it comes to managing your finances, it’s important to
set both short-term and long-term goals. For instance, you may want to prioritize paying off a loan in the
short-term, while also considering long-term investments in real estate or the stock market. Personal
finance software can be a helpful tool to assist you with modern financial management.
How Personal Finance Can Impact Your Business
• Business owners must develop a strategic personal finance plan to protect them from unforeseen
circumstances. For example, having personal savings may help you raise startup capital for your
business, and saving for retirement helps the business owner avoid running out of money and being
forced to sell the business.
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2. Public Finance
• Like individuals, governments must allocate their resources to different
sectors of the economy. Public finance is how federal, state, and local
institutions track revenue and manage expenses for all the services they
provide to the public.
• Some of a government’s most essential functions include collecting money
from the public sector via taxes, raising capital through bonds, and
channeling money into a broad range of services that benefit the public.
When the public sector distributes tax revenues across multiple functions,
including debt servicing, infrastructural development, and recurring
expenditures. By overseeing income generation and government spending,
government agencies help ensure a stable economy and prevent market
failure.
• Other aspects of public finance include tax management, debt issuance,
budgeting, international trade, and inflation regulation. These factors have
a direct and lasting effect on business
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and personal finance.
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3. Business Finance (Corporate Finance)
• Business finance, or corporate finance, covers all the financial activities
related to running a business. You can think of this in terms of acquisitions
and investments, funding, capital budgeting, risk management, and tax
management needed for business growth in financial markets.
• Companies must balance cash flow, risks, and investment opportunities to
increase their value and strengthen their capital structure.
• A great example of corporate finance is when a business chooses
between equity financing and debt financing to raise capital. Equity
financing is the act of securing funding through stock exchanges and issues,
while debt finance is a loan that must be repaid with interest on an agreed
date.
• Businesses have to develop a revenue-generation plan which determines
business profitability in the medium- and long term.

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Contd… Types of Finance

• 4. Investment Finance: Investment finance pertains to the

management of investments in various asset classes, such as stocks,
bonds, real estate, and commodities. It involves portfolio
management, asset allocation, and risk assessment.
• 5. International Finance: International finance deals with financial
transactions between countries and multinational corporations. It
covers exchange rates, international trade finance, and foreign
investments.
• 6. Behavioral Finance: Behavioral finance explores the psychological
factors that influence financial decision-making, shedding light on
human biases and emotions that impact investment choices.

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7. Social Finance
• Social finance typically refers to investments made in social enterprises
including charitable organizations and some cooperatives. These
investments take the form of equity or debt financing in which the investor
seeks both a financial reward and a social gain.
• Forms of social finance also include some segments of microfinance,
specifically loans to small business owners and entrepreneurs in less-
developed countries to enable their enterprises to grow. Lenders earn a
return on their loans while simultaneously helping to improve individuals’
standards of living and to benefit the local society and economy.
• Social impact bonds, also known as Pay for Success Bonds or social benefit
bonds, are a specific type of instrument that acts as a contract with the
public sector or local government. Repayment and return on investment are
contingent upon the achievement of certain social outcomes and
achievements.
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The Importance of Finance
• Finance is crucial in several aspects of our lives and the global economy:
• Economic Growth: Finance plays a pivotal role in facilitating economic growth by
providing the necessary capital for businesses to expand, invest in innovation, and
create jobs.
• Risk Management: It helps individuals and organizations manage financial risks through
insurance, hedging, and diversification strategies.
• Wealth Accumulation: Finance enables individuals to accumulate wealth over time
through prudent savings and investment decisions, contributing to financial security
and retirement readiness.
• Resource Allocation: Effective finance ensures efficient allocation of resources,
directing funds to projects and initiatives with the highest potential returns.
• Government Operations: Public finance sustains essential government functions,
including infrastructure development, healthcare, education, and defense.
• Global Trade: International finance supports global trade by facilitating currency
exchange, trade financing, and investment across borders.
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Is Finance an Art or a Science?
• Finance As a Science
• As a field of study and an area of business, finance has strong roots in related
scientific areas such as statistics and mathematics. Many modern financial theories
resemble scientific or mathematical formulas.
• There's no denying, however, that the financial industry also includes nonscientific
elements that liken it to an art. It's been discovered that human emotions and
decisions made because of them play a large role in many aspects of the financial
world.

• Modern financial theories such as the Black-Scholes model draw heavily on the laws
of statistics and mathematics found in science. Their very creation would have been
impossible if science hadn’t laid the initial groundwork. Theoretical constructs such
as the capital asset pricing model (CAPM) and the efficient market hypothesis (EMH)
attempt to explain the behavior of the stock market in an emotionless, completely
rational manner, ignoring elements such as market and investor sentiment.
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Finance As an Art
• Academic advancements have greatly improved the day-to-day operations of
the financial markets but history is rife with examples that seem to contradict
the notion that finance behaves according to rational scientific laws.
• Stock market disasters such as the October 1987 crash (Black Monday) that
saw the Dow Jones Industrial Average (DJIA) fall 22% and the great 1929 stock
market crash beginning on Black Thursday (Oct. 24, 1929) aren't suitably
explained by scientific theories. The human element of fear also played a part.
A dramatic fall in the stock market is often called a “panic."
• The track records of investors have shown that markets aren't entirely efficient
and they're therefore not entirely scientific, either. Studies have shown that
investor sentiment appears to be mildly influenced by weather with the overall
market generally becoming more bullish when it's predominantly sunny. Other
phenomena include the January effect when stock prices fall near the end of
one calendar year and rise at the beginning of the next.
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Traditional approach to financial
management
• Traditionally, financial management was considered as a branch of
knowledge with focus on the procurement of funds. Instruments of
financing, formation, merger and restructuring of firms, legal and
institutional frame work involved therein occupied the prime place in
this approach.

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Financial Management
• It is concerned with the acquisition, financing, and management of
assets with some overall goal in mind. Thus the decision function of
financial management can be broken down into three major areas:
the investment, financing, and asset management decisions.
• The financial management framework is an analytical way of viewing
the financial problems of a firm.

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Modern approach to financial
management
• Modern phase has shown the commendable development with
combination of ideas from economic and statistics that led the
financial management more analytical and quantitative. The key work
area of this approach is rational matching of funds to their uses,
which leads to the maximisation of
Meaning :
• Financial Management means planning, organizing, directing and
controlling the financial activities such as procurement and utilization
of funds of the enterprise. It means applying general management
principles to financial resources enterprise shareholders' wealth.

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DEFINITION OF FINANCIAL MANAGEMENT
• Financial management is an integral part of overall management. It is
concerned with the duties of the financial managers in the business
firm.
• The term financial management has been defined by Solomon, “It is
concerned with the efficient use of an important economic resource
namely, capital funds.
• The most popular and acceptable definition of financial management
as given by S.C. Kuchal that “Financial Management deals with
procurement of funds and their effective utilization in the business”.

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• Howard and Upton : Financial management “as an application of
general managerial principles to the area of financial decision-making.
Weston and Brigham : Financial management “is an harmonizing
individual motives and enterprise goals.
• Joshep and Massie : Financial management “is the operational activity
of a business that is responsible for obtaining and effectively utilizing
the funds necessary for efficient operations. Thus, Financial
Management is mainly concerned with the effective funds
management in the business. In simple words, Financial Management
as practiced by business firms can be called as Corporation Finance or
Business Finance.
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NATURE
• Financial management is management principles and practices applied to
finance. General management functions include planning, execution and
control. Financial decision making includes decisions as to size of investment,
sources of capital, extent of use of different sources of capital and extent of
retention of profit or dividend payout ratio.
• Financial management, is therefore, planning, execution and control of
investment of money resources, raising of such resources and retention of
profit/payment of dividend.
• Howard and Upton define financial management as "that administrative area
or set of administrative functions in an organisation which have to do with the
management of the flow of cash so that the organisation will have the means
to carry out its objectives as satisfactorily as possible and at the same time
meets its obligations as they become due.
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Contd…

• Bonneville and Dewey interpret that financing consists in the raising,

providing and managing all the money, capital or funds of any kind to
be used in connection with the business. Osbon defines financial
management as the "process of acquiring and utilizing funds by a
business”.
• Considering all these views, financial management may be defined as
that part of management which is concerned mainly with raising
funds in the most economic and suitable manner, using these funds as
profitably as possible.

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Nature or Features or Characteristics of Financial
Management
• Nature of financial management is concerned with its functions, its
goals, trade-off with conflicting goals, its indispensability, its systems,
its relation with other subsystems in the firm, its environment, its
relationship with other disciplines, the procedural aspects and its
equation with other divisions within the organisation.
• 1. Financial Management is an integral part of overall management.
Financial considerations are involved in all business decisions. So
financial management is pervasive throughout the organisation.
• 2. The central focus of financial management is valuation of the firm.
That is financial decisions are directed at increasing/maximization/
optimizing the value of the firm.

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Contd….

• 3. Financial management essentially involves risk-return trade-off Decisions on

investment involve choosing of types of assets which generate returns accompanied
by risks. Generally higher the risk, returns might be higher and vice versa. So, the
financial manager has to decide the level of risk the firm can assume and satisfy with
the accompanying return.
• 4. Financial management affects the survival, growth and vitality of the firm. Finance
is said to be the life blood of business. It is to business, what blood is to us. The
amount, type, sources, conditions and cost of finance squarely influence the
functioning of the unit.
• 5. Finance functions, i.e., investment, rising of capital, distribution of profit, are
performed in all firms - business or non-business, big or small, proprietary or
corporate undertakings. Yes, financial management is a concern of every concern.
• 6. Financial management is a sub-system of the business system which has other
subsystems like production, marketing, etc. In systems arrangement financial sub-
system is to be well-coordinated with others and other sub-systems well matched
with the financial subsystem.
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Related Areas of FINANCIAL MANAGEMENT

• . Finance and Economics

• Macroeconomics is concerned with the overall institutional
environment in which the firm operates. It looks at the economy as a
whole. Macroeconomics is concerned with the institutional structure
of the banking system, money and capital markets, financial
intermediaries, monetary, credit and fiscal policies and economic
policies dealing with, and controlling level of, activity within an
economy. Since business firms operate in the macroeconomic
environment, it is important for financial man agers to understand the
broad economic environment.

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Macroeconomic environment
• (1) recognise and understand how monetary policy affects the cost
and the availability of funds;
• (2) be versed in fiscal policy and its effects on the economy;
• (3) be ware of the various financial institutions/financing outlets;
• (4) understand the consequences of various levels of economic
activity and changes in economic policy for their decision
environment and so on.

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Microeconomics
• (1) supply and demand relationships and profit maximisation
strategies,
• (2) issues related to the mix of productive factors, ‘optimal’ sales level
and product pricing strategies,
• (3) measurement of utility preference, risk and the determination of
value, and
• (4) the rationale of depreciating assets. In addition, the primary
principle that applies in financial management is marginal analysis;
• Marginal analysis suggests that financial decisions should be made on
the basis of comparison of marginal revenues and marginal costs/
added benefits exceed added costs.
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Finance and Accounting
• (i) they are closely related to the extent that accounting is an important input in
financial decision making; and
• (ii) there are key differences in viewpoints between them.
• Accounting function is a necessary input into the finance function. That is,
accounting is a sub function of finance.
• Accounting generates information/data relating to operations/activities of the
firm. The end-product of accounting constitutes financial statements such as
the balance sheet, the income statement (profit and loss account) and the
statement of changes in financial position/sources and uses of funds
statement/cash flow statement.
• The information contained in these statements and reports assists financial
managers in assessing the past performance and future directions of the firm
and in meeting legal obligations, such as payment of taxes and so on. Thus,
accounting and finance are functionally closely related.
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SCOPE OF FINANCIAL MANAGEMENT

• What is the total volume of funds an enterprise should commit?

• What specific assets should an enterprise acquire?
• How should the funds required be financed?
• Alternatively, the principal contents of the modern approach to financial
management can be said to be:
• (i) How large should an enterprise be, and how fast should it grow?
• (ii) In what form should it hold assets? and
• (iii) What should be the composition of its liabilities?
• Three major decisions as functions of finance:
• (i) The investment decision,
• (ii) The financing decision, and
• (iii) The dividend policy decision.
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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 groups:
• (i) long term assets which yield a return over a period of time in future,
• (ii) short-term or current assets, defined as those assets which in the
normal course of business are convertible into cash without diminution
in value, usually within a year.
• The first of these involving the first category of assets is popularly
known in financial literature as capital budgeting.
• The aspect of financial decision making with reference to current
assets or short-term assets is popularly termed as working capital
management.
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Capital budgeting relates to the selection of an asset
whose benefi ts would be available over the project's life..
• the evaluation of the worth of a long-term project implies a certain norm
or standard against which the benefits are to be judged.
• The requisite norm is known by different names such as cut-off rate,
hurdle rate, required rate, minimum rate of return and so on.
• This standard is broadly expressed in terms of the cost of capital.
• The concept and measurement of the cost of capital is, thus, another
major aspect of capital budgeting decision.
• In brief, the main elements of capital budgeting decisions are:
• (i) the long-term assets and their composition,
• (ii) the business risk complexion of the firm, and
• (iii) the concept and measurement of the cost of capital.
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Working Capital Management

• Working capital management is concerned with the management of current assets.

• It is an important and integral part of financial management as short-term survival is a
prerequisite for long-term success.
• One aspect of working capital management is the trade-off between profitability and
risk (liquidity).
• There is a conflict between profitability and liquidity. If a firm does not have adequate
working capital, that is, it does not invest sufficient funds in current assets, it may
become illiquid and consequently may not have the ability to meet its current
obligations and, thus, invite the risk of bankruptcy.
• If the current assets are too large, profitability is adversely affected. The key strategies
and considerations in ensuring a trade-off between profitability and liquidity is one
major dimension of working capital management.
• In addition, the individual current assets should be efficiently managed so that neither
inadequate nor unnecessary funds are locked up.
• Thus, the management of working capital has two basic ingredients: (1) an overview of
working capital management as a whole, and (2) efficient management of the individual
current assets such as cash, receivables
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Financing Decision

• relates to the choice of the proportion of debt and equity sources of

financing
• financing decision is with the financing-mix or capital structure or leverage.
• The term capital structure refers to the proportion of debt (fixed-interest
sources of financing) and equity capital (variable-dividend securities/source
of funds).
• The financing decision of a firm relates to the choice of the proportion of
these sources to finance the investment requirements.
• There are two aspects of the financing decision.
• First, the theory of capital structure which shows the theoretical relationship
between the employment of debt and the return to the shareholders.
• The use of debt implies a higher return to the shareholders as also the
financial risk.
A proper balance between debt [email protected]
•04/23/2025 and equity to ensure a trade-off between 35
risk and return to the shareholders is necessary.
optimum capital structure

• A capital structure with a reasonable proportion of debt and equity

capital is called the optimum capital structure.
• Thus, one dimension of the financing decision whether there is an
optimum capital structure and in what proportion should funds be
raised to maximise the return to the shareholders?
• The second aspect of the financing decision is the determination of an
appropriate capital structure, given the facts of a particular case.
• Thus, the financing decision covers two interrelated aspects:
• (1) the capital structure theory, and
• (2) the capital structure decision

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Dividend Policy Decision

• Two alternatives are available in dealing with the profits of a firm:

• (i) they can be distributed to the shareholders in the form of
dividends or
• (ii) they can be retained in the business itself.
• The decision as to which course should be followed depends largely
on a significant element in the dividend decision, the dividend-pay
out ratio, that is, what proportion of net profits should be paid out to
the shareholders.
• The final decision will depend upon the preference of the
shareholders and investment opportunities available within the firm.
• The second major aspect of the dividend decision is the factors
determining dividend policy of a firm in practice.
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Contd…

• The traditional approach to the functions of financial management

had a very narrow perception and was devoid of an integrated
conceptual and analytical framework. It had rightly been discarded in
the academic literature.
• The modern approach to the scope of financial management has
broadened its scope which involves the solution of three major
decisions, namely, investment, financing and dividend.
• These are interrelated and should be jointly taken so that financial
decision making is optimal.
• The conceptual framework for optimum financial decisions is the
objective of financial management. In other words, to ensure an
optimum decision in respect of these three areas, they should be
related to the objectives of financial management.
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 Thank you

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