Amity School of Business

Amity School of Business

BBA, Semester 6TH
ADVANCE CORPORATE FINANCE Ms. GEETIKA

Course Outline
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Module I: Module II: Module III: Module IV: Module V: Module VI:

Introduction. Valuation Concepts. Corporate Restructuring. Corporate Governance and Business Ethics. Behavioural Finance. Strategic Cost Management.

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Module 1 INTRODUCTION

Outline:
Concept of Corporate Finance. Principles of Corporate Finance. Objectives of Corporate Finance. Shareholder wealth Maximization. Agency Problems. Management Compensation. Measurement of Performance.

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Meaning

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Every decision that a business makes has financial implications, and any decision which affects the finances of a business is a corporate finance decision.

Everything that a business does fits under the rubric of corporate finance.

Decisions under Corporate Finance

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Investment Decision. Financing Decision. Dividend Decision.

Investment Decisions

Key Decision Areas

Financing Decisions

Dividend Decisions

Capital Budgeting

Working Capital

What is a good objective?

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A good corporate objective is one which is:

Clear. Unambiguous. Timely measure. Consistent with long term objectives. Does not increase costs for other entities or groups.

The Classical Objective Function

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SHAREHOLDERS

Hire & fire managers - Board - Annual Meeting Lend Money BONDHOLDERS Protect bondholder Interests

Maximize shareholder wealth No Social Costs Costs can be traced to firm

Managers

SOCIETY

Reveal information honestly and on time

Markets are efficient and assess effect on value

FINANCIAL MARKETS

What Can Go Wrong?

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SHAREHOLDERS
Have little control over managers Managers put their interests above shareholders

Lend Money BONDHOLDERS Bondholders can get ripped off

Significant Social Costs

Managers
Some costs cannot be traced to firm

SOCIETY

Delay bad news or provide misleading information

Markets make mistakes and can over react

FINANCIAL MARKETS

The Only Self Correcting Objective

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SHAREHOLDERS
1. More activist investors 2. Hostile takeovers Protect themselves BONDHOLDERS Managers of poorly run firms are put on notice.

Good Corporate Citizen Constraints

Managers
1. Covenants 2. New Types of bond issue

SOCIETY 1. More laws 2. Investor/Customer Backlash

Firms are punished for misleading markets

Investors and analysts become more skeptical

FINANCIAL MARKETS

The Modern Corporation

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Modern Corporation

Shareholders

Management

There exists a SEPARATION between owners and managers.

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Given these agency problems, is stock maximization really the best objective? Alternate objectives: Maximize earnings. Maximize market share. Maximize firm size.

price

Do these serve us as a better objective?

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Response to Agency Problems

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Bondholder Protection Restrictive covenants. New type of bond issue. More hybrid bonds. Financial Market response Regulatory changes. Increased importance of ethical behavior. Increased availability of information and ease of trade. Societal response Catering more socially conscious clientele. Growth of social responsible funds.

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Management compensation and Measurement of Performance

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Executive Compensation
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Key elements: Salary. Benefits. Incentive Compensation.

Generated lot of debates among legislators, corporate observers, economists, journalists and management experts.

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Failure to promote value creation

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Linkage between size and pay. Emphasis on short term performance. Reliance on accounting measures.

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Objectives for Executive compensation Amity School of Business policy

Stephen OBryne identified 4 objectives:
Alignment Managers. Strategies, action, investments, actions that maximise shareholder value.
Leverage Work harder, take risk, do unpleasant things. Retention. Incentive sufficient to retain them.

Shareholder cost. Level where shareholder wealth is maximised.

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Designing an Incentive Compensation Amity School of Business Plan

A well conceived incentive compensation plan goes a long way in aligning the interests of managers and shareholders.
Integrate the Incentive plan into the total compensation Architecture. Choose the Appropriate Level of Risk Posture and Time Focus.

Designing an Incentive Compensation Plan

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Use Objective criteria Select the right set of performance measures. Reward relative measures. Discourage parochial behavior. Abandon attempts to measure what executives control. Lengthen the Decision making Horizon of the Executives. Employ Stock Options Judiciously. Ensure tax Efficiency = Post tax benefit to manager Post tax cost to the company

ESOP
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SEBI Guidelines for ESOP Eligibility Not a promoter, not a director who holds more than 10% of the outstanding Equity Shares. Compensation committee consisting of a majority of independent directors, for advice and supervision of the ESO scheme. No ESOP unless shareholders pass a special resolution. Pricing Lock in period and rights of the option holder.

Performance Measurement
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Robert W Hall:
Performance measurement is the basis of every system in a company: Cost systems. Planning systems. Capital budgeting systems. Personnel assignments. Promotions. Reorganisations. Budget allocations. - the mechanisms built up over years by which everything runs.
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Facets of business performance measurement

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Rationale on current focus on performance measurement. Comprehensive value metrics framework. Non financial measures. Balance scorecard. Parta system. Performance measurement awards. Strategic performance measurement. Memorandum of understanding.

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Rationale for business performance measurement Amity School of Business

Heightened competition. Growing empowerment. Quality awards. Expanding organisational roles. Greater external demands. Power of information technology.

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Comprehensive value risk framework

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Comprehensive value risk framework

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Non Financial Measures

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Strengths and weaknesses- Non Financial Measures

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Strengths Directly traceable to key success factors: Customer satisfaction, market leadership, manufacturing excellence, Quality etc. Actionable. Predict better picture of cashflows.
Weaknesses Difficult to assign rupee value to improvements in non financial measures. Conflict with each other. Managers may resort to gaming.
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The End

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