UNIT-1

Corporate Finance & its scope : Corporate finance is the study of financial activities,
dealing with the utilization and distribution of wealth to maintain a company’s capital and
economic structure. This area of finance manages investment, funding aspects to proceed
towards stable wealth generation that can help the company experience relentless growth.
The corporate finance motto includes making sound financial decisions to enhance the
monetary impact by implementing sustainable goals, profiting both the shareholder and
organization. It uses proven tools and analysis to aim towards sustainable growth rather than
a momentary profit. 
The core are of study about corporate finance are as:
1. Investment Principle – opting for the befitting space to allocate resources.
2. Financing Principle – seeking the right mix of capital to fund your business
3. Dividend Principle- allocating the generated revenue
 
Types of Corporate Finance:
Types of corporate finance include the various methods of raising funds for the business.
Short-term corporate finance
Short-term is the type of corporate financing that extends its services to a company for a short
period of time. The tenure for short-term corporate finance is limited to a few months or a
whole year at maximum. Short-term corporate includes various other sub-activities.
 Financial lease:  Financial lease refers to the type of corporate finance where the
financial entity is the owner of the asset till the lease is repaid. (Arrangement of Fixed
assets by getting on lease in spite-of Purchasing that)
 Trade Credit: Trade credit is an agreement where clients can purchase any offered
goods while paying the supplier at a scheduled date later on. Prominently part of the
B2B structure.(Purchase of raw Material and stock on Credit)
  Accrual accounts: This method of corporate finance refers to following the accrual
method of accounting, which enters the sale at the time of invoice generation rather
than when cash is actually received. (Credit Sales)

Long-term corporate finance

As the same suggests, Long-term corporate finance refers to corporate financial aids spread
over a year or more. The time span tends to get longer with minimum interest rates that can
be returned as monthly interest payments. Long-term corporate finance includes various types
of activities, such as:
 Debentures: A debenture, also known as a type of bond, is the debt instrument used
by big corporations and governments that agree to borrow finance following a fixed
interest rate.
 Bank Loan: Bank loan is the most common financing option that almost every other
company relies upon to structure its expansion. Entities can choose from medium to
long-term financing options.  
 Floatation(Issue of Shares): Conversion of a private entity into public by issuing
shares for the general public. This type of corporate financing ensures obtaining funds
from external means rather than depending upon earnings and fresh projects for
maximizing the corporation.
Scope of Corporate Finance:
Scope of corporate finances refers to the various objectives and responsibilities that are dealt
with under the corporate financing sector. These objectives focus on maximizing the
sustainable expansion of the company along with generating wealth. Some of them are as
follows:
 Capital budgeting to keep expenditures in check while allocating only the most
profitable projects.
 Market analysis to keep up with the rapidly changing trends by accumulating the
same in practices.
 Decision-making after in-depth market research around raising capital through
reliable and most effective sources.
 Taking up the advisory roles under mergers, acquisitions, and takeovers.
 Analyzing different investment options using fundamentals of corporate finance to
redeem an optimal mix of the most efficient financing instruments.
 Decisions to diversify and expand as per the growth of the company.

Corporate Governance and Agency Problem:

 The term ‘Principal-agent relationship’ or just simply, ‘Agency relationship’ is used
to describe an arrangement where one entity, the principal, legally appoints another
entity, the agent, to act on its behalf by providing a service or performing a particular
task.
The agent is expected to act in the best interest of the principal. It is however not
unusual for principal-agent relationships to lead to conflicts. The most common
example of this occurs when managers, acting as agents, do not act in the best interest
of the shareholders of the company (the principals).

Shareholder and Manager or Director Relationships:

Directors and managers (agents) are expected to act in the best interests of the
shareholders (principal) by maximizing the company’s equity value. These two
groups, however, tend to have conflicting interests on issues related to the risks that a
company should undertake

Controlling and Minority Shareholder Relationships:

Minority shareholders usually have limited or no control over the management.
Similarly, they have limited or no voice in director appointments or in major
transactions that could directly impact shareholder value. As a result, conflicts
between minority and controlling shareholders usually occur.

Manager and Board Relationships:

Whereas managers are involved in the day-to-day operations of a company, the board
of directors, especially the non-executive board members, are not. This leads to
information asymmetry and makes it difficult for the board to effectively carry out its
functions.

Creditor Versus Shareholder Interests:

Creditors’ interest is to have a company undertake activities that promote stable
financial performance and maintain default risk at an acceptable level. This essentially
guarantees a safe return of their principal and payment of interest by the company.
 Shareholders, on the other hand, prefer to have the company venture into riskier
activities that have high return potential and are as such more likely to enhance equity
value. There is, therefore, a divergence of interest in risk tolerance between these two
groups.

Other Stakeholder Conflicts:

Examples of other conflicts between stakeholders include conflicts between
customers and shareholders, customers and suppliers, and shareholders and
governments or regulators.

Introduction to start-up finance:

The term start-up refers to a company in the first stages of operations. Start-ups are founded
by one or more entrepreneurs who want to develop a product or service for which they
believe there is demand.

Sources of Financing for small business or start-up can be divided into two parts: Equity
Financing and Debt Financing.
Best Common Sources of Financing Your Business or Start-up are:

1. Personal Investment or Personal Savings

2. Venture Capital
3. Business Angels:
4. Assistant of Government
5. Commercial Bank Loans and Overdraft
6. Financial Bootstrapping
7. Buyouts
1.Personal Investment or Personal Savings.

2. Venture Capital: Under this form of corporate financing, the financial investor
participates in the fresh business in exchange for strategic advice and cash. eg:

Venture Capitalists Startups Funded

Accel Partners BabyOye, Flipkart, Book My Show, Myntra

Helion Venture Partners MakeMyTrip, Yepme, TAXI For Sure

Sequoia Capital India iYogi, JustDial, bankbazaar.com

Blume Ventures Printo, Carbon Clean Solutions, Exotel

IDG Ventures Yatra.com, Ozone Media, FirstCry

Canaan Partners Bharat Matrimony, Naaptol, CarTrade

3. Business Angels: These are the professional investors who invest either just a part or their
entire wealth as well as time in the growth of innovative companies(eg: The Shark Tank of
India)

4. Assistant of Government.

5. Commercial Bank Loans and Overdraft: Bank loans serve as a long-term mode of
financing entrepreneurial business. Overdraft facility is for a short-term span. Under a bank
loan, the financial institution shall specify the loan tenure.

6. Financial Bootstrapping: Here the goal remains to build a sustainable business comprising
of committed employees as well as a growing customer community without having to seek out
the assistance of a bank loan. Various examples of financial bootstrapping are sweat equity,
owner financing, joint utilization, minimization of accounts payable, delaying payment,
minimization of inventory, subsidy finance etc.

7. Buyouts: This form of corporate finance can alter the form of a company’s ownership.
After the company attains a private status by being freed from the regulatory burdens of
operating as a public firm, the ultimate goal of buyout remains to build its value.
Selling off non-core assets, refocusing on the mission of the company, streamlining processes,
freshening product lines and replacing existing management might thus serve as essential
parts of the buyout drive.

Financial Decisions:

There are three major decisions in financial decisions of financial management –

1.Investment decisions,

2.Financial decisions

3.Dividend decisions.

Investing decisions:

The investment decision is broadly classified into two categories and they are:

a. Long-term investment decision: long term investment decision is also

called ‘capital budgeting decision’. Capital budgeting decision involves
capital expenditure. Some examples of capital budgeting decisions are:
investment in new machinery, opening a new branch of the firm or
buying a new fixed asset, etc.
b. Short-term investment decision: short term investment decision is
working capital decisions. These decisions are for a short period of
time, for daily activities. These decisions affect the working of the
business, its liquidity, and profitability.

Factors affecting capital budgeting decisions

a. Cash flow of the project: despite the availability of cash with the firm, it is important
to consider the cash flow of the project.
b. The rate of return: businesses run for profit. They look for some return from every
activity they do. Thus, every investment is made so that some good amount of return is
gained with the lowest risk and lowest cost possible.

Financing decisions:

The financing decision is regarding the quantum/amount of finance that is to be raised from
various sources for a long period of time. The financial decision does not involve the decision
regarding funds for a short period of time; it is considered under working capital management.
Identification of various sources, careful analysis, and then selection of the source which is
considered best for the firm are the main steps under financial decision.

Financial risk is the main element in this decision. It means the risk of default on payment.
There can be various reasons for the default including lower or no profit, increased cost, etc.
To avoid this, it becomes important to properly analyse the sources of finance.
Funds can be raised from shareholders or debt (borrowed funds). Both have different kinds of
benefits and limitations. Borrowed funds involve a fixed rate of interest and are to be repaid
on time. Shareholders, on the other hand, involve committed to the payment and they can even
take part in the management and thus the control is diluted.

Another important financial management decision is the flotation cost, it is the cost involved
in raising funds from a certain source of finance. It must be considered while the evaluation of
the various sources available. Different sources involve different kinds of costs. Debt is
considered the cheapest in terms of cost because of the tax deductibility.

Still, there are other factors also which are to be considered while taking a financial decision.

Factors affecting the financial decision:

1. Cost
2. Risk
3. Cash flow position of the business
4. Control considerations
5. State of capital markets

Dividend decisions:

The third important financial management decision is the dividend decision. It is a decision
regarding the distribution of the profit. A financial manager decides how much amount is to be
distributed to the shareholders and how much is to be retained back in the business. Retained
earnings are very important for a businesses’ financial position. It affects financial decisions
because a firm raises a fund from the available funds in the business.

On the other hand, maximizing the shareholder’s wealth is equally important as it is the main
aim of financial management.

There are various factors that affect the dividend decision of the firm.

Factors affecting the dividend decisions

1. Earnings
2. Stability of earnings
3. amount of dividend
4. Stability of dividends
5. Growth opportunities
6. Shareholder preference
7. Cash flow position
8. Taxation policy
9. Stock market reaction
10. Legal constraints
11. Access to capital market
12. Contractual constraints
Time Value of Money:
Time value of money (TVM), is the idea that money that is available at the present time is
worth more than the same amount in the future, due to its potential earning capacity. This
core principle of finance holds that provided money can earn interest, any amount of money
is worth more the sooner it is received. One of the most fundamental concepts in finance is
that money has a time value attached to it. In simpler terms, Rs/- 100 was worth more
yesterday than today and a Rs/-100 today is worth more than a Rs/-100 tomorrow. (Because
of Decreasing Purchasing power of Currency ).
There are five (5) variables that you need to know:

1. Present value (PV) - This is your current starting amount.  It is the money you
have in your hand at the present time, your initial investment for your future. 
2. Future value (FV) - This is your ending amount at a point in time in the future. It
should be worth more than the present value, provided it is earning interest and
growing over time.
3. The number of periods (N) - This is the timeline for your investment (or debts).
It is usually measured in years, but it could be any scale of time such as quarterly,
monthly, or even daily.
4. Interest rate (I) - This is the growth rate of your money over the lifetime of the
investment. It is stated in a percentage value, such as 8% or .08.
5. Payment amount (PMT) - These are a series of equal, evenly-spaced cash flows.