CORPORATE FINANCE-

INTRODUCTION
OCTOBER 25 , 2023
TH

Scope
Functions
Profit Vs. Wealth creation
CORPORATE FINANCE:
DEFINED AS…..
 Corporate finance deals with the capital structure of a corporation, including its funding and
the actions that management takes to increase the value of the company.
 Management of flow of funds and deals with the financial decision making.
 It encompasses the procurement of funds in the most economic and prudent manner and
employment of these funds in the optimal way to maximize the return for the owner.
 All business decisions have financial implications and therefore, financial management is
inevitably present in all business operations. The scope of financial management includes
optimum utilization of funds through analytical decision making.
 These days, Corporate finance or financial management has a strong connection with
technology.
CORPORATE FINANCE:
ACTIVITIES
 SCOPE OF FINANCIAL
MANAGEMENT
 Procurement of funds
 Finance function is linked with purchase/procurement, production, HR, marketing, capital expenditure.
It involves the decision on
a) Procuring the required quantum of funds when required, at the lowest cost
b) Investing the funds in various assets in most profitable ways
c) Distribution of returns to the shareholders
Thus the functions of a finance manager are as follows
i) Overall financial planning and control
ii) Raising funds for different sources
iii) Selection of long term assets
iv) Management of working capital
v) Any other financial event
INVESTMENTS AND CAPITAL BUDGETING
 Investing and capital budgeting includes planning where to place the company’s long-term
capital assets in order to generate the highest risk-adjusted returns. This mainly consists of
deciding whether or not to pursue an investment opportunity, and is accomplished through
extensive financial analysis.
 By using financial accounting tools, a company identifies capital expenditures, estimates cash
flows from proposed capital projects, compares planned investments with projected income,
and decides which projects to include in the capital budget.
 Financial modeling is used to estimate the economic impact of an investment opportunity and
compare alternative projects. An analyst will often use the internal rate of return (IRR) in
conjunction with net present value (NPV) to compare projects and pick the optimal one
MAJOR FINANCIAL DECISIONS: INVESTMENT
DECISION
:What kinds of capital investments should you make?
 Proper investments that generate profits and reduce cost
 Capital Budgeting: Long term asset composition that generate returns
over the time
 Which asset should be purchased out of the different alternative
options?
 To buy or to get it on lease?
 To buy or outsource
 To buy a running concern
 Evaluate proposal of merger
CAPITAL FINANCING
 Decisions on how to optimally finance the capital investment through the
business’ equity, debt, or a mix of both.
 Long-term funding for major capital expenditures or investments may be
obtained from selling company stocks or issuing debt securities in the market
through investment banks.
 Balancing the two sources of funding (equity and debt) should be closely
managed because having too much debt may increase the risk of default in
repayment, while depending too heavily on equity may dilute earnings and
value for original investors.
 Ultimately, it’s the job of corporate finance professionals to optimize the
company’s capital structure by lowering its cost of capital as much as
possible.
DIVIDENDS AND RETURN OF CAPITAL
 Decision on whether to retain a business’s excess earnings for future investments and
operational requirements or to distribute the earnings to shareholders in the form of dividends
or share buybacks.
 Retained earnings that are not distributed back to shareholders may be used to fund a business’
expansion. This can often be the best source of funds, as it does not incur additional debts nor
dilute the value of equity by issuing more shares.
 At the end of the day, if corporate managers believe they can earn a rate of return on a capital
investment that’s greater than the company’s cost of capital, they should pursue it. Otherwise,
they should return excess capital to shareholders via dividends or share buybacks.
MAJOR FINANCIAL DECISIONS:
INVESTMENT DECISION AND FINANCING
DECISION
“The industry saw a robust growth of 5.6 times. The growing sensitivity to climate impact and the
improved Total Cost to Operation proposition considering rising fuel prices saw accelerated
consumer interest in the category of EV two wheeler. (TVS Motors)” AR 2022
Investment decision: Working capital management
Danger of having excessive current assets or shortage of working capital
A trade off between liquidity and profitability
Financing decision: relates to the choice of the proportion of debt and equity sources of financing
 The term capital structure refers to the proportion of debt (fixed-interest sources of financing)
and equity capital
 The borrowed funds are cheaper but has a risk of insolvency or the financial risk which arises
due to non payment of interest or the capital amount.
 DIVIDEND POLICY DECISION
 Two alternatives are available in dealing with the profits of a firm:
 they can be distributed to the shareholders in the form of dividends
 they can be retained in the business itself

 The decision as to which course should be followed is referred to as dividend policy decision.
 Retention of profit is related to
 Reinvestment opportunities available to the firm
 The opportunity rate of return of the shareholders
 BUYBACK OF SHARES AND ISSUE OF BONUS SHARES
On the record date, the company makes a note of eligible dividend recipients on
their books. The ex-dividend date is normally set ONE business day before the
record date. Only shareholders who own the shares before the ex-dividend date
are entitled to receive the dividend
Company Bonus Record Date BuyBack Current Market Pri
Name price (Per Share) ce
Bonus or
Buyback
13-10-2023
MRP Agro (Announceme
2:1
(Bonus) nt sate: 28th
August)
Wipro June 16, 2023 445 383.20
Limited
(Buyback)
OBJECTIVES OF FINANCIAL
MANAGEMENT
 There are two widely-discussed approaches:
 Profit (total)/ Earning Per Share (EPS) maximization approach
 Wealth maximization approach
 In a large Public sector company (say Adani), shareholders cannot participate in day to day operation
 They delegate authority to BOD.
 Shareholders have different appetite of risk, return, time horizon so the natural objective is to maximize the
wealth of the shareholders, which is maximizing the value of the firm.
 VF= VE+VD
PROFIT / EPS
MAXIMIZATION DECISION
CRITERION
 According to this approach, actions that increase profits (total)/ EPS should be undertaken and
those that decreases profits/ EPS are to be avoided.

 The main technical flaws of this criterion are

 ambiguity,
 timing of benefits, and
 quality of benefits.
WEALTH MAXIMISATION
DECISION CRITERION
 This is also known as value maximization or net present worth maximization.
 Its operational features satisfy all the three requirements of a suitable operational objective of financial course of
action, namely,
 exactness,
 quality of benefits and
 the time value of money
 Two important issues are related to the value/ share price-maximization, namely
 economic value added and
 focus on stakeholders
 Economic value added is equal to after-tax operating profits of a firm less the cost of funds used to finance
investments.
 Stakeholders include groups such as employees, customers, suppliers, creditors, owners and others who have a
direct link to the firm.
WHY DO COMPANIES CARE
ABOUT THEIR SHARE PRICES?
 A company's stock price reflects investor perception of its ability to earn and grow its profits in the future.

 If shareholders are happy and the company is doing well, as reflected by its share price, the management would likely
remain and receive increases in compensation.
 The prevention of a takeover is another reason that a corporation might be concerned with its stock price.

 If a company's stock price is performing well along with the company, the company is likely to receive more favorable
press from analysts and the media.
 Convenient Financing Options

 A company's stock price reflects investor perception of its ability to earn and grow its profits in the future.

 If shareholders are happy and the company is doing well, as reflected by its share price, the management would likely
remain and receive increases in compensation.
 The prevention of a takeover is another reason that a corporation might be concerned with its stock price.

 If a company's stock price is performing well along with the company, the company is likely to receive more favorable
press from analysts and the media.
 Convenient Financing Options