Corporate Finance
By: Dr. Veerma Puri
• https://tradebrains.in/biggest-bankruptcies-in-india/
• Bhushan Steel (US$6.2 billion) – Biggest Bankruptcies in India
• Alok Industries – US$4.1 billion
• Jet Airways – US$2 billion
What is Financial Management?
• Every decision that a business makes has financial implications, and any
decision which affects the finances of a business is a corporate finance
decision
• Defined broadly, everything that a business does fits under the rubric of
corporate finance
• Financial Management is the study of techniques & markets for managing
& understanding the creation of value for owners in a risky environments.
What is Financial Management
Shareholders’
Financial
Capital
Wealth Management
Rs. Rs.
Decisions
Major Financial Management Functions
(2) Financial (1) Financial
Firm's manager
operations markets
(Raising capital in
(Evaluating
investments in (4) multiple currencies
from multiple
multiple countries )
markets via
multiple avenues)
(3) (5)
(1) Cash raised from investors
(2) Cash invested in firm’ s real assets
(3) Running operations
(4) Cash from operations is reinvested
(5) Cash returned to investors
Major Financial Management Functions
(2) (1)
Firm's Financial Financial
(4)
operations manager markets
(Evaluating (Raising capital in
investments in multiple currencies
multiple countries ) from multiple
(3) (5) markets via
multiple avenues)
(1) Cash raised from investors
(2) Cash invested in firm’ s real assets
(3) Running operations
(4) Cash from operations & reinvested
(5) Cash returned to investors
Major Financial Management Functions
(2) (1)
Minimize the
cost of capital
Firm's Financial Financial
(4)
operations manager markets
(Evaluating (Raising capital in
investments in multiple currencies
multiple countries ) from multiple
(3) (5) markets via
multiple avenues)
(1) Financing decision
(2) Cash invested in firm’ s real assets
(3) Running operations
(4) Cash from operations & reinvested
(5) Cash returned to investors
Major Financial Management Functions
(2) (1)
Minimize the
cost of capital
Firm's Financial Financial
(4)
operations manager markets
(Evaluating (Raising capital
investments in in multiple
currencies from
multiple (3) (5) multiple markets
countries )
via multiple
avenues)
(1) Financing decision
(2) Cash invested in firm’ s real assets
(3) Running operations
(4) Cash from operations & reinvested
(5) Cash returned to investors
Major Financial Management Functions
Invest in Value
(2) (1) Minimize the
maximizing cost of capital
projects
Financial Financial
Firm's (5) markets
manager
operations (Raising capital
in multiple
(Evaluating currencies from
investments in multiple markets
multiple via multiple
countries ) (3) (5) avenues)
(1) Financing decision
(2) Investing decision
(3) Running operations
(4) Cash from operations & reinvested
(5) Cash returned to investors
Major Financial Management Functions
Invest in Value (2) (1) Minimize the
maximizing cost of capital
projects
Financial
Firm's Financial markets
(4)
operations manager (Raising capital
in multiple
(Evaluating currencies from
investments in multiple markets
multiple countries ) via multiple
(3) (5) avenues)
(1) Financing decision
(2) Investing decision
(3) Running operations
(4) Cash from operations & reinvested
(5) Cash returned to investors
Major Financial Management Functions
Invest in Value (2) (1)
maximizing Minimize the
projects cost of capital
Firm's Financial Financial
operations manager (4) markets
(Evaluating (Raising capital
investments in in multiple
multiple countries ) currencies from
(3) (5) multiple markets
Striking balance via multiple
avenues)
between liquidity
& profitability
(1) Financing decision
(2) Investing decision
(3) Working Capital Management
(4) Cash from operations & reinvested
(5) Cash returned to investors
Major Financial Management Functions
Invest in Value (2) (1)
maximizing Minimize the
projects cost of capital
Firm's Financial Financial
operations manager (4) markets
(Evaluating (Raising capital
investments in in multiple
multiple countries ) currencies from
(3) (5) multiple markets
Striking balance via multiple
avenues)
between liquidity
& profitability
(1) Financing decision
(2) Investing decision
(3) Working Capital Management
(4) Cash from operations is reinvested
(5) Cash returned to investors
Major Financial Management Functions
Minimize the
Invest in Value (2) (1) cost of capital
maximizing
projects Financial
Firm's Financial markets
operations manager (4)
(Raising capital
in multiple
(Evaluating currencies from
investments in multiple markets
multiple countries ) via multiple
(3) (5) avenues)
Striking balance
Do not retain for
between liquidity
& profitability
(1) Financing decision value destroying
(2) Investing decision prepositions
(3) Working Capital Management
(4) Dividend Decision
The finance function manages the cash flow
Major Corporate Finance Functions- Balance Sheet
Perspective
The Balance Sheet
Assets Liabilities
Equity Equity investment in firm
Long Lived Real Assets Fixed Assets
Assets which are not physical, Debt Debt obligations of firm
Intangible Assets
like patents & trademarks
Other
Investments in securities & Liabilities Other long-term obligations
assets of other firms Financial Investments
Short-lived Assets Current Assets Current Short-term liabilities of the firm
Liabilities
Major Corporate Finance Functions- Balance Sheet
Perspective
• Asset side decisions • Liabilities side decisions
• In which fixed assets should we invest? • How much equity should we have in our
(Capital Budgeting (CAPEX); Mergers & capital structure, and what forms should it
Acquisitions; Tangible & Intangible assets) take (common stock, preferred stock, or
• How many fixed assets (Property, Plant, & retained earnings)? (Financial Leverage;
Equipment) do we need? (Operating Cost of Capital; Stock Valuation; Financial
Leverage) Markets)
• How much cash, marketable securities, • How should we design our dividend policy?
accounts receivable, and inventory do we (Dividend Policy)
need? What should be the relative • How much long-term debt should we have
composition of those items? (Working in our capital structure, and what forms
Capital Management) should that debt take? (Financial
Leverage; Cost of Capital; Bond Valuation;
Leases; Financial Markets)
• What strategies should we employ with our
accounts payable and short-term financing?
(Working Capital Management)
Major Corporate Finance Functions
1. Investment (Capital Budgeting) Decision Traditional
2. Financing (Capital Structure & Dividend) Decision corporate
3. Working Capital Management Finance
Functions
4. Growing engagement in the top management decisions (Analysis of
Mergers, Acquisitions, Divestments, Business Alliances)
5. Accounting and Control
6. Emerging Finance Functions
The borders between these areas
are gray, because they are all
interrelated and connected—
through the issue of valuation!
Other corporate
Finance Functions
Major Corporate Finance Functions
Major Corporate Finance Functions
Traditional
1. Investment (Capital Budgeting) Decision corporate
2. Financing (Capital Structure & Dividend) Decision Finance
3. Working Capital Management Functions
4. Growing engagement in the top management decisions
(Analysis of Mergers, Acquisitions, Divestments, Business Alliance)
5. Accounting and Control
6. Emerging Finance Functions
The borders between these areas
are gray, because they are all
interrelated and connected—
through the issue of valuation!
Other corporate
Finance Functions
Other Corporate Finance Functions
4. Growing engagement in the top management decisions
Timely supply of key information and analysis for management decisions
Improving processes & systems: planning, budgeting and forecasting
Analysis of M&As, Divestments, Business Alliances
• Should we acquire this company? At what price?
• At what price we should hive off our business unit?
• What takeover defenses should the company apply?
• Should it expand in overseas market?
Implication:
Be good in
number
crunching
but also
become a
visionary
Other Corporate Finance Functions
5. Accounting and Control
• Establishment of accounting policies
• Development & reporting of accounting data
• Internal auditing
• Accounting systems and procedures
• Reporting & interpreting operations results
• Government reporting
• Budgeting
• Sales forecasting
• Pricing policies
• Cost standards
• Comparing performance with operating plans and standards
Other Corporate Finance Functions
6. Emerging Finance Functions in India
• Surviving through economic recession
• Corporate Governance
• Risk Management: Forex Risk Management
• Buy Back Decision
• Designing innovating financial instruments
• Understanding the implications of changes in the tax regimes
Who are the corporate finance specialists?
Who are the corporate finance specialists?
• Corporate finance specialists (Financial executive) -- a person with
authority in any one of the following positions:
(Banking & investor
relationships)
Fundamental Financial Objective
• The choice of objective is important. There are many plausible alternative
objectives, and managers would often make very different decisions
depending on the objective.
• For profit making business “Shareholders’ Wealth Maximization (SWM)”
• To Measure Shareholders’ Wealth
• Value of Equity (Ve) =Number of issued Equity/Ordinary Shares X Current
Market Price (Po)
Fundamental Financial Objective
• Maximize PAT
• Maximize Sales
• Maximize Assets
• Maximize ROA
• Maximize EVA
• Maximize Shareholders’ Wealth
Fundamental Financial Objective
• Firms may pursue varied objectives. However, the most suitable objective
for profit making businesses is to “Shareholders’ Wealth Maximization
(SWM)” in long-run.
• To Measure Shareholders’ Wealth
• Value of Equity (Ve) =Number of issued Equity/Ordinary Shares X Current
Market Price (Po)
Fundamental Financial Objective
• Indicators:
• Financial indicators pointing towards maximising S/H wealth:
• Earning per share(EPS)
• Dividend per share(DPS)
• Return on Capital Employed(ROCE)
• Return on Shareholder Capital(ROSC)
• Profit after tax
• Revenue
Fundamental Financial Objective
• Indicators:
• Non-Financial indicators pointing towards maximising S/H wealth:
• Market Share
• Customer Satisfaction
• Quality Measures
• The above are all Key Performance Indicators (KPI’s) that need to be
measured and reviewed on a regular basis by the board of directors.
(Board)
Fundamental Financial Objective
• Firms may pursue varied objectives. However, the most suitable objective
for profit making businesses is to “Shareholders’ Wealth Maximization
(SWM)” in long-run.
• To Measure Shareholders’ Wealth
• Value of Equity (Ve) =Number of issued Equity/Ordinary Shares X Current
Market Price (Po)
Fundamental Financial Objective
• Indicators:
• Financial indicators pointing towards maximising S/H wealth:
• Earning per share(EPS)
• Dividend per share(DPS)
• Return on Capital Employed(ROCE)
• Return on Shareholder Capital(ROSC)
• Profit after tax
• Revenue
Fundamental Financial Objective
• Indicators:
• Non-Financial indicators pointing towards maximising S/H wealth:
• Market Share
• Customer Satisfaction
• Quality Measures
• The above are all Key Performance Indicators (KPI’s) that need to be
measured and reviewed on a regular basis by the board of directors.
(Board)
What ought not to be done in the name of SWM?
• Short-term pursuance of SWM via earnings management and
misreporting.
• Maximizing returns without any consideration to risk: Financial
managers should attempt to either maximize the return per unit
of risk or minimize the risk per unit of return, disclose
information about risk to the stakeholders.
• Ignoring the interest of other stakeholders
• Focusing on ‘accounting profit’ rather than on ‘cash flows’:
Frequently used valuation models use cash flows and not the
accounting profits
