Jeevendeep Shaishanik Sanstha Poi, Sanchalit

ARTS, COMMERCE, SCIENCE JUNIOR &

SENIOR COLLEGE, KHARDI

Name: Ajay Arun Sabale.

Roll No: 15147
Subject: Corporate Finance
Topic Name: Cost Of Capital
Teacher Name: Deepswini Madam

SR. PARTICULAR PAGE REMARKS

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NO. NO.
1 Concept of Business Ethics 03

2 Definition of Business Ethics 04

3 Sources of Business Ethics 04

4 Need of Business Ethics 07

INDEX

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 INTRODUCTION

• The project’s cost of capital is the minimum

required rate of return on funds committed to

the project, which depends on the riskiness of

its cash flows.

• The firm’s cost of capital will be the overall,

or average, required rate of return on the

aggregate of investment projects

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 SIGNIFICANCE OF THE COST OF
CAPITAL

• Evaluating investment decisions

• Designing a firm’s debt policy

• Appraising the financial performance of top

management

Shareholders’ Opportunities and

Values

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• The required rate of return (or the opportunity cost of

capital) is shareholders is market-determined.

• In an all-equity financed firm, the equity capital of

ordinary
shareholders is the only source to finance investment
projects, the firm’s cost of capital is equal to the
opportunity
cost of equity capital, which will depend only on the
business

risk of the firm.

Creditors’ Claims and

Opportunities

• Creditors have a priority claim over the firm’s assets and

cash flows.

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• The firm is under a legal obligation to pay interest and

repay principal.

• There is a probability that it may default on its obligation

to pay interest and principal.

• Corporate bonds are riskier than government bonds

since it is very unlikely that the government will default

in its obligation to pay interest and principal.

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Definitions of Business Ethics

Business ethics is the study of appropriate business policies and practices

regarding potentially controversial subjects including corporate governance,
insider trading, bribery, discrimination, corporate social responsibility, and
fiduciary responsibilities. The law often guides business ethics, but at other
times business ethics provide a basic guideline that businesses can choose to
follow to gain public approval.

Sources of Business Ethics:

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In every society there are three sources of business Ethics-Religion, Culture
and Law. The HR manager in every organisation, thus, has to be well versed
with the unique system of values developed by these three sources.

These sources are discussed as follows:

1. Religion:
Religion is the oldest source of Religion is the oldest source of ethical
inspiration. There are more than ethical inspirations. 1,00,000 religions which
exist across the whole world, but all of them are in agreement on the
fundamental principles. Every religion gives an expression of what is wrong and
right in business and other walks of life. The Principle of reciprocity towards
one's fellow beings is found in all the religions. Great

religions preach the necessity for an orderly social system and emphasize upon
social responsibility with an objective to contribute to the general welfare.
With these fundamentals, every religion creates its own code of conduct.

2. Culture:
Culture is the set of important understandings that members of a community
share in common. It consists of a basic set of values, ideas, perceptions,
preferences, concept of morality, code of conduct etc. which creates
distinctiveness among human groups. When we talk about culture we typically
refer to the pattern of development reflected in a society's pattern of
knowledge, ideology, values, laws, social norms and day to day rituals.
Depending upon the pattern and stage of development, culture differs from
society to society. More over culture is passed from generation to generation.

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Culture facilitates the generation of commitment to something larger than
one's individual self-interest.

Culture encourages the members of the organisation to give priority to

organizational goals over and above their personal interests. Culture also
serves as a sense making and control mechanism that guides and shapes the
attitudes and behaviour of people. Managers have to run an industrial
enterprise on the cutting edge of cultural experience. The tension that their
actions create makes sense making and control

mechanism that guides and shapes the attitudes and behaviour of people.
Managers have to run an industrial enterprise on the cutting edge of cultural
experience. The tension that their actions create makes

The business ethically more complex.

3. Law:
The legal system of any country, guide the human behaviour in the society.
Whatever, ethics the law defines are binding on the society. The society
expects the business to abide by the law. Although it is expected that every
business should be law abiding, seldom do the businesses adhere to the rules
and regulations. Law breaking in business is common egg. Tax evasion,
hoarding, adulteration, poor quality & high priced products, environment
pollution etc.

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Need and Importance of Business Ethics
The need for business ethics is more felt in recent years than ever before.

The following points outline the significance of business ethics:

1.Survival of Business:
Business needs to follow ethical values for its own good and survival. A firm
can have short-term and quick gains by resorting to unethical means and
disregarding social welfare.
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However, such firms grow fast and are out of business faster. On the other
hand, organisations doing business ethically have continued to survive and
prosper for a long time.

2. Protection of Consumer Rights:

The application of business ethics will help to confer and implement consumer
rights. This will enhance the strength of individual consumer against the
powerful business community. Business ethics can be used to
check malpractices like adulteration, unfair trade practices and to make the
working of business consumer oriented.
3. Consideration of Society's Interest:
Those firms, which follow business ethics in the society, would make every
possible effort to produce goods and services not only in the interest of the
consumers, but also in the interest of the society. These firms
would look into not only the customers' well-being, but also welfare of the
society. Therefore, they would make every possible effort to produce eco-
friendly products.
4. Interest of Small-scale Industry:
Business ethics is necessary to safe-guard the interest of small-scale business
firms. The tendency of big business units is always to dominate the market and
drive away the small and medium scale units from the
market small-scale units can establish their position and fight for their rights in
the industry follows a code of ethics.
5.Better Relations with Members of the Society:
Business ethic is needed to develop good relations between business and
society. The relationship of business with society has various dimensions such
as its relations with shareholders, employee consumers, distributors,
competitors and government. Ethic is needed to maintain good relations
among the firms on onside and between the firm and social groups on other.
Business ethics will help to promote and protect the interest of various groups,
associated with business activities.

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6. Mutual Benefit:
Business ethics benefits the business firm as well as the society. The business
firm that adopts business ethic get good name in the society. It may be able to
increase confidence in the minds of the buyers who in turn would help to
improve the sales of the firm. The society can also gain due to ethical practices
on the part of the business. For instance, the consumers can benefit by way of
quality goods at right prices the employees can get fair treatment, and so on.
7.Facilitates Growth and Expansion:
Business ethics facilitates growth and expansion of the business. Ethical
practices enable the business firm to gain trust and confidence of the
customer’s employees, shareholders, and society. Therefore, there would be
greater support to the firm from various stakeholders, which in turn facilitate
growth and expansion of the firm.
8. Benefits to Shareholders:
Business ethics helps a company to expand and grow. Therefore, the
performance of the firm will improve in terms of market share, profits, etc. As
a result, the shareholders stand to gain in terms of higher returns in form on
dividend, bonus shares, and high share price on the stock markets.
9.Decision Making:
Firms that adopt ethical practices make better decisions in the interest of the
organisation and that of the stakeholders such as customers, dealers,
employees, etc. Respect for ethics will enable a firm to consider economic,
social and ethical aspects while taking decisions. Therefore, a business firm
would be in a better position to take sound business decision firm in the short
term as well as in the long term.
10.Market Share and Profits:
When a business firm adopts ethical practices relating to production,
marketing, etc., customers develop trust and confidence in such companies.
Therefore, the sales of such business firms and market share will

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Also, being ethical does not mean working in the interest of the society only.
Every organisation has a responsibility towards itself i.e., to earn profits. Ethical
companies are bound to be
successful and more profitable in the long run though in the short run they
may make losses.
11. Attracts and Retains Competent Employees:
People aspire to join companies that adopt ethical values. Business ethics helps
to attract and retain competent employees. An ethical company that is
dedicated in taking care of the employees will be rewarded with employees
being equally dedicated in taking care of the company. Employees provide
their skills, efforts and time in return for higher salary, bonus, and career
advancement opportunities. Thus, business ethics motivates employees to
work with commitment and dedication.
12. Corporate Image:
Ethical practices enable a firm to improve its performance. Therefore, the
image of the firm improves in the minds of various stakeholders such as
employees, customers, dealers, financial institutions, government agencies,
suppliers, shareholders, media and other sections of the society. For instance,
in India, the firms under Tata Group enjoy a good corporate image in the minds
of stakeholders due to the ethical practices followed by the firms under Tata
Grow

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Thank You

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