UNIT 1 - INTRODUCTION TO CORPORATE
FINANCE
1.1 INTRODUCTION
When we think of Corporate Finance, the first thing that comes to our mind is
managing money in a business, from raising funds to investing them wisely.
Corporate finance is the area of finance that deals with the sources of funding,
and the capital structure of corporations, the actions that managers take to
increase the value of the firm to the shareholders, and the tools and analysis used
to allocate financial resources. The primary goal of corporate finance is to
maximise or increase shareholder value. Correspondingly, corporate finance
comprises two main sub disciplines. Capital budgeting is concerned with the
setting of criteria about which value-adding projects should receive investment
funding, and whether to finance that investment with equity or debt capital.
Working capital management is the management of the company's monetary
funds that deal with the short-term operating balance of current assets and current
liabilities; the focus here is on managing cash, inventories, and short-term
borrowing and lending (such as the terms of credit extended to customers).
1.2 MEANING OF CORPORATE FINANCE
Corporate finance refers to planning, developing and controlling the capital
structure of a business. It aims to increase organizational value and profit through
optimal decisions on investments, finances as well as dividends. It focusses on
1
,capital investments aimed at meeting the funding requirements of a business to
attain a favourable capital structure.
Corporate Finance Services are referred to as the activity of raising and
adrninistering of funds used in business by companies. Corporate finance aims at
studying the funding of assets from market sources either from the general public,
or from various institutions.
The importance of corporate finance is underlined by economic and social
significance in terms of:
a) Increase in public responsibility as the organisation grows,
b) Wide distribution of the corporate ownership
c) Identity of ownership distinct from management.
The decision, as to whether the finance is to be raised from a particular source or
for a particular period, is based on the fundamental analysis of the aims and
targets of the corporate, the analysis of its performance as depicted through the
analysis of the financial statements, the funds flow and cash flows, the ratio
analysis, the leverage, break-even analysis and profitability analysis. The
financial requirement is assessed for the purpose for which the funds are needed.
The main functional areas are capital budgeting, capital structure, working capital
management and dividend decisions. For example, judging whether to invest in
debt or equity as a medium to raise funds for the business. The concept focusses
on investment, financing and dividend principle.
2
, 1.3 PRINCIPLES OF CORPORATE FINANCE
1. The Investment Principle:
According to investment principle, funds raised by the firm should be invested to
obtain maximum ROI (return on investment). Also it is important to invest at
minimum and acceptable hurdle rate. Hurdle rate reflects equity and debt of the
project. As a matter of fact the hurdle rate is higher for riskier projects. The market
today is very competitive investment decisions are expected to yield more than
revenues and profits. Those decisions should save money and channelize an
effective distributive system. During the assessment of any project prior to
investment, the financial team should also consider the side costs and side
benefits respectively.
2. The Financing Principle:
The financing principle states that the ratio of debts and equity should be chosen
to maximize the value of investment and to match the financing nature of the
assets. Almost every economic activity is run by financing mix i.e. money
borrowed from someone (debt) and owner’s funds (equity). It’s often noticed that
optimal financing mix or the required financing mix is different from the current
one. When this happens, the first thing finance manager does is the analyses of
how to reach to the optimum level. The process involves determining short-term
or long-term and fixed or variable investments to maximize the revenue cost ratio.
3
FINANCE
1.1 INTRODUCTION
When we think of Corporate Finance, the first thing that comes to our mind is
managing money in a business, from raising funds to investing them wisely.
Corporate finance is the area of finance that deals with the sources of funding,
and the capital structure of corporations, the actions that managers take to
increase the value of the firm to the shareholders, and the tools and analysis used
to allocate financial resources. The primary goal of corporate finance is to
maximise or increase shareholder value. Correspondingly, corporate finance
comprises two main sub disciplines. Capital budgeting is concerned with the
setting of criteria about which value-adding projects should receive investment
funding, and whether to finance that investment with equity or debt capital.
Working capital management is the management of the company's monetary
funds that deal with the short-term operating balance of current assets and current
liabilities; the focus here is on managing cash, inventories, and short-term
borrowing and lending (such as the terms of credit extended to customers).
1.2 MEANING OF CORPORATE FINANCE
Corporate finance refers to planning, developing and controlling the capital
structure of a business. It aims to increase organizational value and profit through
optimal decisions on investments, finances as well as dividends. It focusses on
1
,capital investments aimed at meeting the funding requirements of a business to
attain a favourable capital structure.
Corporate Finance Services are referred to as the activity of raising and
adrninistering of funds used in business by companies. Corporate finance aims at
studying the funding of assets from market sources either from the general public,
or from various institutions.
The importance of corporate finance is underlined by economic and social
significance in terms of:
a) Increase in public responsibility as the organisation grows,
b) Wide distribution of the corporate ownership
c) Identity of ownership distinct from management.
The decision, as to whether the finance is to be raised from a particular source or
for a particular period, is based on the fundamental analysis of the aims and
targets of the corporate, the analysis of its performance as depicted through the
analysis of the financial statements, the funds flow and cash flows, the ratio
analysis, the leverage, break-even analysis and profitability analysis. The
financial requirement is assessed for the purpose for which the funds are needed.
The main functional areas are capital budgeting, capital structure, working capital
management and dividend decisions. For example, judging whether to invest in
debt or equity as a medium to raise funds for the business. The concept focusses
on investment, financing and dividend principle.
2
, 1.3 PRINCIPLES OF CORPORATE FINANCE
1. The Investment Principle:
According to investment principle, funds raised by the firm should be invested to
obtain maximum ROI (return on investment). Also it is important to invest at
minimum and acceptable hurdle rate. Hurdle rate reflects equity and debt of the
project. As a matter of fact the hurdle rate is higher for riskier projects. The market
today is very competitive investment decisions are expected to yield more than
revenues and profits. Those decisions should save money and channelize an
effective distributive system. During the assessment of any project prior to
investment, the financial team should also consider the side costs and side
benefits respectively.
2. The Financing Principle:
The financing principle states that the ratio of debts and equity should be chosen
to maximize the value of investment and to match the financing nature of the
assets. Almost every economic activity is run by financing mix i.e. money
borrowed from someone (debt) and owner’s funds (equity). It’s often noticed that
optimal financing mix or the required financing mix is different from the current
one. When this happens, the first thing finance manager does is the analyses of
how to reach to the optimum level. The process involves determining short-term
or long-term and fixed or variable investments to maximize the revenue cost ratio.
3
