Kiran Kumar has a PhD in finance from the Indian Institute of Science. He has over 20 research papers and has received five best research paper awards. He is currently an associate professor at IIM Indore and has previously held positions at the National Institute of Securities Markets and ISB. His research focuses on high frequency data analysis, market microstructure, and derivatives.
Finance involves making investment and funding decisions to allocate resources and generate returns. The three major corporate finance decisions are investments, financing, and dividends. Investments should earn returns above the hurdle rate, financing should minimize costs, and excess cash should be returned to shareholders if no high-return investments exist. The traditional goal of corporate finance is to maximize
This chapter introduces derivative markets and securities such as forwards, futures, and options. It discusses how these contracts are distinguished from fundamental securities like stocks and bonds. Key characteristics of forwards, futures, and options are described, including how they can be interpreted as types of insurance policies. The chapter also covers how derivative markets are organized, common terminology, pricing of derivatives, and similarities/differences between contract types. It explains how derivatives can be combined to create synthetic securities and discusses various uses of derivatives in portfolio management like hedging and restructuring cash flows.
The document discusses the scope of financial management based on three approaches: traditional, transitional, and modern. It focuses on three major areas that constitute the scope: investment decisions, financial decisions, and dividend decisions. Investment decisions involve selecting long-term and short-term assets, including capital budgeting and working capital management. Financial decisions relate to choosing an optimal capital structure and sources of financing. Dividend decisions balance distributing profits to shareholders versus retaining profits for future business needs.
This document discusses the finance function. It identifies the primary goals of business as earning a profit, increasing its own value, and improving community quality of life. It describes the functions of finance as allocating, procuring, and utilizing financial resources efficiently and effectively. It discusses investment portfolios and the primary activities of a financial manager as financial planning and analysis, managing a firm's assets and liabilities, and owners' equity.
1) The document discusses the concept of cost of capital, which refers to the minimum rate of return a firm must earn on its investments.
2) Cost of capital includes the cost of debt, preference shares, and equity. It is classified as historical or future, specific or composite, explicit or implicit, and average or marginal.
3) The costs are calculated using different formulas based on whether the securities are perpetual or redeemable, and issued at par, premium or discount.
4) Cost of capital is a key concept in financial management as it is used to evaluate investment projects and make capital structure decisions.
This document discusses various cash, inventory, and accounts receivable management techniques. It begins by outlining cash management, inventory management, and accounts receivable management. It then provides details on managing cash and marketable securities, determining optimal cash balances using the Baumol and Miller-Orr models, inventory management techniques like ABC analysis, EOQ, and JIT, and elements of an effective credit policy for accounts receivable management.
The finance function involves acquiring and utilizing funds for a business. It is classified into long-term and short-term financial decisions. Long-term decisions include financing, investment, and dividend policy decisions. Financing decisions deal with acquiring and deploying funds. Investment decisions relate to selecting fixed and current assets. Dividend policy decisions determine how much profit to distribute versus retain. Short-term decisions include liquidity management to ensure sufficient current assets and avoid illiquidity. The finance function aims to provide funds favorably, manage all cash-related activities, and effectively procure and utilize funds for the business.
This presentation provides the complete Role and responsibilities of a person acting as a Finance Manager in any XYZ organization.
One can very well use this as a reference to see the basic Job Description for the post of a Finance Manager and can gain meaningful insights from it.
The document discusses various methods for valuing companies, including cost-based methods like book value and replacement cost, income-based methods like earnings capitalization and discounted cash flow, and market-based methods. It notes that valuation depends on factors like management, performance, projections, industry, and the transaction context. The valuation process involves considering financial and non-financial factors, using multiple models, and arriving at a valuation range. Special situations like multi-business companies, M&A, and cyclic businesses require tailored applications of valuation models.
This document discusses concepts and issues related to working capital management. It covers determining the optimal level of current assets by analyzing tradeoffs between liquidity, profitability and risk. The document also discusses classifying current assets as permanent or temporary. It analyzes approaches to financing current assets, including hedging short-term assets with short-term financing and considering conservative versus aggressive mixes of short and long-term financing. The level of current assets and financing decisions are interdependent factors in working capital management.
The document outlines the course details for a Financial Management course, including:
1) The course objectives are to acquaint students with finance functions, establish relationships between functions, and help students design financial programs for organizations.
2) Students are required to have business news reading habits and industry knowledge.
3) Teaching will be through lectures, discussions, group work, assignments, and student presentations.
4) By the end of the course, students will be able to make major financial decisions and improve their skills in areas like analysis, costing and budgeting.
This document discusses profit maximization vs wealth maximization as objectives for a firm. It outlines arguments in favor of each, such as profit maximization ensuring survival but not being socially desirable, while wealth maximization serves owners and stakeholders but is difficult to achieve when ownership and management differ. The document concludes that wealth maximization is a more appropriate objective, as it implies long-term growth and maximizing shareholder utility. It also defines economic value added and market value added as ways to measure shareholders' value creation.
This document discusses business finance, including the meaning, scope, traditional and modern approaches to financial management. It covers the major financial decisions around investment, financing, and dividends. Key aspects of financial management are discussed such as capital budgeting, working capital management, and capital structure. The objectives, importance and types of both fixed and working capital are also summarized. Finally, the document outlines various instruments that can be used to raise funds for business such as shares, retained profits, debentures, institutional finance, public deposits and bank finance.
Financial management refers to the efficient and effective management of money to achieve business objectives. It involves making decisions about raising capital, allocating funds, budgeting, and managing current assets. Financial management is important for establishing and operating a business successfully as it provides the necessary financing. The objectives of financial management are to maximize the firm's value, earnings, profitability, and cash flows. Key financial decisions include investment decisions, financing decisions, and dividend decisions.
This presentation is designed to answer some of the questions regarding structuring hedge fund due diligence, mapping out the due diligence process and establishing all necessary procedures.
This document discusses key concepts for making investment decisions, including investment appraisal techniques like payback period, average rate of return, and net present value. It explains how to calculate and interpret each technique, along with their advantages and disadvantages. The document also covers investment criteria, risks and uncertainties, and qualitative influences that should be considered alongside quantitative factors when evaluating investments.
Financial management concerns acquiring, financing, and managing assets to achieve overall goals. It involves investment, financing, and asset management decisions. The goal is typically to maximize profits or shareholder wealth. However, there are conflicts of interest between shareholders and managers, and between shareholders and creditors. Mechanisms like executive compensation and creditor protections aim to resolve these agency problems. Effective corporate governance, with shareholders overseeing boards and management, helps ensure the goal of shareholder wealth maximization.
Mba iii-advanced financial management [10 mbafm321]-notesAnita Nadagouda
The document discusses the topics of working capital management over 8 modules. Module 1 defines working capital and discusses determining optimal levels of current assets and sources of working capital financing. It describes the need for adequate working capital management and concepts like gross and net working capital. Module 2 covers cash management strategies like cash forecasting. Module 3 discusses receivables management through credit policies and evaluation. Module 4 covers inventory management techniques. Later modules discuss capital structure, dividend policy, hybrid financing, corporate financial modeling, and financial management of sick companies.
This document summarizes the key aspects of financial management discussed in the passage. It lists the names and student IDs of 8 students representing the Financial Management Unit -1. It then provides 3 sentences on the key topics covered:
The passage discusses the objectives, scope and evolution of financial management. It covers the basic objectives of profit maximization and wealth maximization, and describes the scope of financial management across five areas: anticipation, acquisition, allocation, appropriation and assessment of funds. The evolution of financial management is described across the traditional, transitional and modern phases.
This document discusses financial management and capital budgeting. It defines financial management as planning, directing, monitoring, organizing, and controlling an organization's monetary resources. The roles of a finance manager include estimating financial needs, identifying funding sources, allocating funds, and ensuring optimal fund usage. Capital budgeting evaluates large investments to obtain the best returns, and techniques for project selection include payback period, accounting rate of return, profitability index, and internal rate of return. Capital budgeting decisions are significant as they commit an organization to long-term assets and impact future sales based on asset availability and capacities.
In simple language working capital can be described as the funds required by an enterprise to finance its day-to-day operations. The working capital of a business is calculated by deducting current liabilities from current assets. Hence, an enterprise has a working capital surplus if its current assets are more than current liabilities. On the other hand, if the current assets are less than current liabilities, the business has a working capital deficiency.
K. If all of the world's cultural heritage (sports, music, fashion, architecture, literature, painting, etc..) was contained in a time capsule, what would you include to demonstrate the legacy of your country?
Young Sun is a volunteer organization focused on educational programs that designs customized programs for each school based on their needs. Their activities include workshops, school renovations, training, ecological activities, and collecting educational materials from businesses. The organization began with the goal of using education to help build a better future for children and young people in their country by addressing educational needs and opportunities.
This document provides exercises and instructions for a patient who has undergone a total hip arthroplasty (hip replacement surgery). It outlines a home exercise program for recovery following surgery. The first few days involve exercises like ankle pumps, glute sets, quad sets while in the hospital. Before being discharged, the patient is taught how to go up and down stairs safely and how to get in and out of a car. The program then provides instructions for several leg strengthening exercises to perform at home during recovery.
El documento habla sobre la importancia de los sistemas de gestión para organizar y gestionar los recursos técnicos y alinearlos con los servicios prestados al negocio. Explica que los sistemas de gestión como ISO 20000 y ISO 27001 ayudan con la eficiencia, calidad, cumplimiento y alineación entre TI y el negocio. También provee ejemplos de cómo estos sistemas abordan aspectos como la seguridad de la información, gestión de incidentes, seguridad física y cambios.
El documento describe los diferentes tipos de costos de mantenimiento, incluyendo costos directos, indirectos, de tiempo perdido y costo integral. Explica que el costo integral considera los costos directos, indirectos, de falla y financieros para dar una visión más completa del costo total de mantenimiento.
Digital Transformation: Faster, Better, HybridIDC Italy
Abstract della presentazione di Sergio Patano, Research & Consulting Manager di IDC Italia, tenuta nel corso del roadshow Digital Transformation che ha toccato quattro città italiane nel corso del mese di giugno 2015
financial management - long term (strategic) decisionZenn Vanrim Lopez
This document discusses strategic decisions, characteristics of strategic decisions, and compares strategic decisions to administrative and operational decisions. Some key points:
- Strategic decisions are long-term decisions that deal with an organization's entire resources, environment, and future planning. They involve major changes and risks.
- Strategic decisions harmonize organizational capabilities with opportunities and threats. They determine the organization's overall activities and range.
- Strategic decisions differ from administrative decisions, which are routine and facilitate strategic decisions, and operational decisions, which are technical and help execute strategic decisions.
- The document provides an overview of strategic decisions, administrative decisions, and operational decisions to highlight their differences.
The document provides an overview of the NISM Research Analyst Certification Examination. It discusses the exam preparation, what topics will be covered, and how to study for and pass the exam. Some key points:
- The exam covers topics like economic analysis, industry analysis, company analysis both qualitatively and quantitatively, and valuation.
- Studying the NISM material, textbooks, and using online resources like mock tests on the NISM portal are recommended for preparation.
- The exam should not be seen as a test but as an opportunity to learn lifelong skills in financial analysis that can help one's career. Understanding of concepts is more important than rote memorization.
- Various valuation approaches
Finance involves managing money and making decisions about assets and investments. It includes financial management, capital markets, and investments. Financial management involves acquiring funds, investment decisions about long-term projects, capital structure decisions about debt vs equity, dividend payout policies, and working capital management. Capital markets determine interest rates and prices of stocks and bonds. Investments analyze individual securities, construct portfolios, and evaluate market conditions. The finance function involves procuring funds and allocating them optimally through investment, financing, dividend, and working capital decisions. These decisions balance the interests of stakeholders under uncertainty.
This document discusses the three major financial decisions that financial managers must make: investment decisions, financing decisions, and dividend decisions. It provides details on the types of assets and projects considered under investment decisions. Financing decisions involve determining the appropriate capital structure and balancing the costs and risks of debt vs. equity. Dividend decisions relate to determining the optimal dividend payout policy that maximizes shareholder wealth. The document also outlines several factors that affect each type of financial decision.
The document discusses fundamental analysis, which examines financial and non-financial factors to determine a security's intrinsic value. It covers quantitative factors like financial metrics and qualitative factors like management quality. Analysts use public data on the economy, industry, and company to estimate a stock's fair value and identify undervalued or overvalued stocks. Key financial statements like the balance sheet, income statement, and statement of cash flows provide quantitative data for fundamental analysis.
Valuation of Private vs. Public Companies. Private company valuations are discounted based on several risk factors associated with private sector investing, which results in a marked difference between the valuation of a privately held company, subsidiary or a division and a publicly traded corporation.
Overview of Corporate Finance in India a presentationfootydigarse
Slide 1: Introduction
Welcome to the presentation on Corporate Finance in India.
Overview of the financial landscape and key aspects of corporate finance.
Slide 2: Importance of Corporate Finance
Explanation of why corporate finance is vital for businesses.
Role in maximizing shareholder value, strategic decision-making, and capital allocation.
Slide 3: Financial Markets in India
Overview of India's financial markets: stock exchanges, bond markets, money markets.
Regulatory bodies such as SEBI (Securities and Exchange Board of India).
Slide 4: Sources of Corporate Finance
Equity financing: IPOs, rights issues, private placements.
Debt financing: bank loans, corporate bonds, debentures.
Hybrid instruments: convertible bonds, preference shares.
Slide 5: Capital Structure Decisions
Explanation of capital structure and its importance.
Factors influencing capital structure decisions.
Trade-off between debt and equity financing.
Slide 6: Valuation Methods
Common valuation methods in India: Discounted Cash Flow (DCF), Comparable Company Analysis (CCA), Precedent Transactions Analysis.
Importance of accurate valuation for investment decisions.
Slide 7: Corporate Governance
Overview of corporate governance principles in India.
Role of the board of directors, transparency, and accountability.
Slide 8: Risk Management
Types of financial risks faced by Indian corporations: market risk, credit risk, operational risk.
Risk management strategies: hedging, diversification, insurance.
Slide 9: Mergers and Acquisitions (M&A)
Trends in M&A activity in India.
Motivations behind M&A transactions.
Regulatory framework and approval process.
Slide 10: Case Studies
Analysis of notable corporate finance transactions in India.
Learnings from successful and unsuccessful deals.
Slide 11: Future Outlook
Emerging trends and opportunities in Indian corporate finance.
Potential challenges and how to address them.
Slide 12: Conclusion
Recap of key points covered in the presentation.
Importance of effective corporate finance management for sustainable growth.
Slide 13: Questions and Discussion
Open the floor for questions and discussion.
Working capital management involves determining the appropriate level and financing of current assets, such as cash, inventory, and accounts receivable. It aims to balance holding costs of current assets with costs of shortages. Key aspects include calculating net working capital as current assets minus current liabilities, understanding operating cycles involving days of inventory and receivables outstanding, and choosing financing strategies like matching asset and liability maturities or relying more on long-term or short-term funds. The optimal working capital strategy minimizes total relevant costs subject to meeting business needs.
The document provides an overview of key considerations for entrepreneurs and investors in establishing a realistic valuation for a startup company. It discusses the capital life cycle stages from concept to growth, and how valuation requires a holistic view of the interests of the company, founders, and investors. Key aspects of valuation covered include quantitative and qualitative advantages, dilution, down rounds, sources of capital, arrival at a value using market forces and financial models, deal structure, and common terms in investment agreements.
Introduction to Financial Management.docxrobelynverano
This document provides an overview of financial management roles and responsibilities within a corporation. It discusses shareholders who elect the board of directors, whose primary responsibility is ensuring the corporation operates in the shareholders' best interests. The president oversees company operations and strategy implementation with assistance from vice presidents of different functional areas like marketing, production, and administration. Financial management decisions include funding long-term investments and working capital, considering factors like risk, return, and financing costs.
Equity Research primarily means analyzing company's financials, perform ratio analysis, forecast the financial in excel (financial modeling) and explore scenarios with an objective of making BUY/SELL stock investment recommendation.
This document discusses key concepts in business finance and financial management. It defines business finance as money and credit used in business operations. There are two types of capital: fixed capital for long-term assets, and working capital for day-to-day operations. Financial management involves optimal procurement and use of funds. Its objectives include ensuring adequate funding, minimizing costs and risks, and maximizing returns. Financial decisions encompass investment, financing, and dividends. Factors like costs, risks, and cash flows influence these decisions. Financial planning and maintaining an appropriate capital structure are also discussed.
This document provides an outline for a presentation on capital budgeting. It discusses capital budgeting theory, evaluation methods like net present value (NPV), internal rate of return (IRR), and profitability index (PI). It covers the importance of capital budgeting, types of capital budgeting projects, and the eight step capital budgeting process. Evaluation methods are examined in depth including their strengths and weaknesses. The presentation aims to help the audience understand capital budgeting and how to select projects that maximize shareholder wealth.
This document provides an introduction to Islamic investment. It defines key terms like investing, finance, and investors. It also classifies investments as real or financial, marketable or non-marketable, and transferable or non-transferable. The nature of investment management is discussed, including balancing risk and return. The investment management process is outlined in five steps - setting an investment policy, analyzing securities, valuing assets, constructing a portfolio, and evaluating performance. Finally, the objectives of investment are explained as earning income, achieving capital appreciation, ensuring safety and liquidity of funds.
Financial management deals with how a firm obtains funds and how it use them.
Financial management is the area of business management that is devoted to the judicious use of capital and a careful selection of sources of capital in order to geared toward attainment of goals
The document provides an overview of the field of finance. It discusses how finance fits within organizations, with the chief financial officer overseeing accounting, treasury, and other financial departments. The three main questions of corporate finance are then outlined as investment, financing, and liquidity. Key financial management decisions involve capital budgeting, capital structure, and working capital management. The goals of financial management are also presented as maximizing shareholder wealth, share price, and firm value. Determinants of stock prices and intrinsic value are further explained.
This document provides an overview of financial management. It discusses the scope of financial management including long-term decisions like investment, financing, and dividend decisions as well as short-term decisions like working capital management. It describes the roles and responsibilities of finance managers. It also covers topics like financial goals and objectives, the need for a valuation approach given the risk-return tradeoff, agency problems that can arise between managers and shareholders, and how companies typically organize their finance functions.
The PowerPoint presentation covers key concepts in financial management including:
- Definitions of finance and financial management from various authors.
- The nature and scope of financial management, including the functions of investment, financing, and dividend decisions.
- The objectives of financial management including maximization of profits, returns, and shareholder wealth.
- Key concepts in investment decisions like risk-return tradeoff, discounting and present value calculations.
- Other important financial concepts covered include cost of capital, capital budgeting techniques, and valuation of annuities, perpetuities and growing cash flows.
This document provides class notes on Lecture 7 which covers interest rates, bond valuation, and stock valuation. The key topics discussed include:
- Types of bonds including treasury, corporate, and municipal bonds as well as their characteristics like par value, coupon rate, and maturity.
- How bond values change with interest rates, with bonds trading at a premium, discount, or par value depending on if rates are lower, higher, or equal to the coupon rate.
- Bond valuation which discounts future cash flows from coupons and principal.
- Common stock valuation using the dividend discount and constant growth models.
- Capital budgeting techniques like net present value for evaluating investment projects.
Public Expenditure & its Classifications, Canons, Causes, Effects & Theories....Dr T AASIF AHMED
The meaning, classifications, canons, theories, effects, and trends in public spending are all included in this ppt. This has been prepared to aid students in understanding and help them achieve the best grade possible. Kindly provide your insightful opinions and recommendations. For additional details, get in touch with Dr. T. Aasif Ahmed.
Building Trust Through Transparency Kissht's Commitment during Regulatory Cr...Kissht Reviews
Kissht, a leading India fintech company, has shown an unwavering commitment to these principles, particularly during periods of regulatory crackdowns. By prioritizing transparency and robust compliance measures, Kissht has not only built trust among its users but also established itself as a reliable and ethical player in the fintech industry.
The JD Euroway and Fritzgerald Zephir (Fritz) Financial Debacle.pptxsonalisaini008
In an astonishing series of events, Finance JD Euroway Inc. and its CEO Fritzgerald Zephir (Fritz) find themselves embroiled in a high-stakes legal battle, accused of orchestrating a fraudulent investment scheme.
Neither of excess is good for the society, it has to be balanced to achieve maximum social benefit. Dalton called this principle as "Maximum Social Advantage" and Pigou termed it as "Maximum Aggregate Welfare". It was introduced by Swedish Economist "Erik Lindahl in 1919". See my ppt for additional details.
What is an E-commerce- digital marketingpdfPurna Rai
What is an E-commerce?
E-commerce refers to the buying and selling of goods and services over the Internet. In an e-commerce transaction, the exchange of products or services takes place electronically, often through online platforms or websites. E-commerce has become a major aspect of the modern economy, enabling businesses and consumers to conduct transactions without the need for physical presence. It has gained immense popularity over recent years, with more people turning to online shopping for its convenience and accessibility.
E-commerce platforms provide a virtual marketplace where sellers can showcase their products, and buyers can browse and purchase items with just a few clicks. This has opened up new opportunities for entrepreneurs and businesses of all sizes, allowing them to reach a larger customer base and operate globally. However, e-commerce also presents its own set of challenges, such as competition, security concerns, and effectively managing logistics and customer experience. It is important for e-commerce businesses to stay up-to-date with evolving technologies, consumer trends, and effective marketing strategies to remain successful in this ever-growing industry.
What are the Key Components and Features of E-commerce?
E-commerce has various forms, including business-to-consumer (B2C), business-to-business (B2B), consumer-to-consumer (C2C), and more. The growth of e-commerce has transformed the way businesses operate and how consumers shop, providing convenience, accessibility, and a global marketplace. Key components and features of e-commerce include:
Online Stores: Businesses set up digital storefronts or online stores where customers can browse, select, and purchase products or services. These stores can take various forms, including dedicated websites, marketplaces, or social media platforms.
Electronic Payments: E-commerce transactions involve electronic payment methods. Customers can use credit cards, digital wallets, online banking, or other electronic payment systems for making payments.
Digital Marketing: E-commerce relies heavily on digital marketing strategies to attract customers. This includes search engine optimization (SEO), social media marketing, email marketing, and other online advertising methods.
Product Catalogs: Online stores have digital catalogs that showcase their products or services. These catalogs provide detailed information, images, and specifications to help customers make informed purchasing decisions.
Shopping Carts: E-commerce platforms typically incorporate shopping carts that allow customers to add products to their virtual cart, review their selections, and proceed to checkout for payment.
Secure Transactions: Security is a critical aspect of e-commerce. Secure socket layer (SSL) encryption is commonly used to ensure the confidentiality and integrity of sensitive information, such as payment details.
1. Finance – 1
PGP – 1 : Term 2
Overview – Goals n Functions
K Kiran Kumar
IIM- Indore
2. Who am I?
Kiran Kumar, K
Education n Research profile
PhD Finance from Indian Institute of Science, Bangalore (2006)
Have about twenty+ research papers and five best research paper awards
Work Experience
Associate Professor, IIM Indore, June 2014 onwards
Assistant Professor, National Institute of Securities Markets, Mumbai
Was at ISB in various positions (Researcher, Senior Researcher and Faculty ) between
April 2005 to April 2009
Prior to that, with ICICI Research Centre (2004-05)
Exposure - High Frequency data analysis / Market Microstructure / Derivatives
Extensively dealt with high frequency data in my research
One of very few academics holding proprietary NSE order book data n research
Contact co-ordinates:
kirankumar@iimidr.ac.in / Extn: 514
Academic Associate : Ms Surbhi Jain
surbhijain@iimidr.ac.in
3. What is Finance?
• Finance is the study of how people and businesses
evaluate investments and raise capital to fund them.
• Finance is the art and science of managing wealth.
– It is about making decisions regarding what assets
to buy/sell and when to buy/sell these assets.
– Its main objective is to make individuals and their
businesses better off.
Why is it important for you??
4. What is corporate finance?
• 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.
5. Traditional Accounting Balance Sheet
Assets Liabilities
Fixed Assets
Debt
Equity
Short-term liabilities of the firm
Intangible Assets
Long Lived Real Assets
Assets which are not physical,
like patents & trademarks
Current Assets
Financial InvestmentsInvestments in securities &
assets of other firms
Short-lived Assets
Equity investment in firm
Debt obligations of firm
Current
Liabilties
Other
Liabilities Other long-term obligations
The Balance Sheet
By now…you are very familiar with these….
6. Reasoning behind Accounting B/Sheet
• An Abiding Belief in Book Value as the Best Estimate of Value:
Unless a substantial reason is given to do otherwise, accountants
view the historical cost as the best estimate of the value of an
asset.
• A Distrust of Market or Estimated Value: The market price of an
asset is often viewed as both much too volatile and too easily
manipulated to be used as an estimate of value for an asset.
• A Preference for under estimating value rather than over
estimating it: When there is more than one approach to valuing an
asset, accounting convention takes the view that the more
conservative (lower) estimate of value should be used rather than
the less conservative (higher) estimate of value.
– Exceptions: Current assets are valued close to market value; Banks are
also marked to market; Trend for Fair value accounting
7. The Financial View of the Firm
Assets Liabilities
Assets in Place Debt
Equity
Fixed Claim on cash flows
Little or No role in management
Fixed Maturity
Tax Deductible
Residual Claim on cash flows
Significant Role in management
Perpetual Lives
Growth Assets
Existing Investments
Generate cashflows today
Includes long lived (fixed) and
short-lived(working
capital) assets
Expected Value that will be
created by future investments
Growth Assets
Firm vs Equity ?
8. Big Picture : The Three Major Decisions
• The Allocation / Investment decision
– Where do you invest the scarce resources of your business?
– What makes for a good investment?
• The Financing decision
– Where do you raise the funds for these investments?
– Generically, what mix of owner’s money (equity) or borrowed money(debt) do
you use?
• The Dividend Decision
– How much of a firm’s funds should be reinvested in the business and how
much should be returned to the owners?
9. What are Investment Decisions / Principle?
• Scarce resources Optimal allocation is reqd
• Not just those create revenues and profits
– Eg: New product line or expanding to new market
• But also that save money
– Eg: Building a new and more efficient system / machinery
– Even working capital decisions are invt decisions
• How much and What Inventory to maintain
• Whether and how much credit to grant to customers
• How to measure viability of these invts?
• Invest in projects that yield a return greater than the
minimum acceptable hurdle rate.
– The hurdle rate should be higher for riskier projects and reflect the financing mix used - owners’ funds
(equity) or borrowed money (debt)
– Returns on projects should be measured based on cash flows generated and the timing of these cash
flows; they should also consider both positive and negative side effects of these projects.
10. Financing Decisions : The Choices
• Equity can take different forms:
– For very small businesses: it can be owners investing
their savings
– For slightly larger businesses: it can be venture capital
– For publicly traded firms: it is common stock
• Debt can also take different forms
– For private businesses: it is usually bank loans
– For publicly traded firms: it can take the form of bonds
• Choose a financing mix that minimizes the hurdle
rate and matches the assets being financed.
11. Fixed Claim
High Priority on cash flows
Tax Deductible
Fixed Maturity
No Management Control
Residual Claim
Lowest Priority on cash flows
Not Tax Deductible
Infinite life
Management Control
Debt EquityHybrids (Combinations
of debt and equity)
Debt versus Equity
What are Financing Decisions / Principle?
• Different claim on cash flows of firm
• Degree of control each exercises on firm?
12. A Life Cycle View of Financing Choices
Stage 2
Rapid Expansion
Stage 1
Start-up
Stage 4
Mature Growth
Stage 5
Decline
Ex ternal
Financing
Revenues
Earnings
Owner’s Equity
Bank Debt
Venture Capital
Common Stock
Debt Retire debt
Repurchase stock
Ex ternal f unding
needs
High, but
constrained by
infrastructure
High, relative
to firm value.
Moderate, relative
to firm value.
Declining, as a
percent of firm
value
Int ernal financing
Low, as projects dry
up.
Common stock
Warrants
Convertibles
Stage 3
High Growth
Negative or
low
Negative or
low
Low, relative to
funding needs
High, relative to
funding needs
More than funding needs
Accessing private equity Inital Public offering Seasoned equity issue Bond issues
Financing
Transitions
Growth stage
$ Revenues/
Earnings
Time
13. The Financing Mix Question
• In deciding to raise financing for a business, is
there an optimal mix of debt and equity?
– If yes, what is the trade off that lets us determine
this optimal mix?
– If not, why not?
Tax benefit; adds discipline to Mgmt / business
Agency costs
14. What are Dividend Decisions / Principle?
• At some stage or other, all businesses grow
mature
• If there are not enough investments that earn
the hurdle rate, return the cash to
stockholders.
– The form of returns – dividends ,stock buybacks and spin offs - will depend
upon the stockholders’ characteristics.
15. First Principles / Big Picture
Corporate Finance
• Invest in projects that yield a return greater than the minimum
acceptable hurdle rate.
– The hurdle rate should be higher for riskier projects and reflect the financing mix used
- owners’ funds (equity) or borrowed money (debt)
– Returns on projects should be measured based on cash flows generated and the
timing of these cash flows; they should also consider both positive and negative side
effects of these projects.
• Choose a financing mix that minimizes the hurdle rate and
matches the assets being financed.
• If there are not enough investments that earn the hurdle rate,
return the cash to stockholders.
– The form of returns - dividends and stock buybacks - will depend upon the
stockholders’ characteristics.
• Who will take these decisions and what is their objective?
16. What n Why do we need an objective?
• An objective specifies what a decision maker is
trying to accomplish and by so doing, provides
measures that can be used to choose between
alternatives.
• Why do we need an objective?
– If an objective is not chosen, there is no systematic way to make the decisions that every
business will be confronted with at some point in time.
– A theory developed around multiple objectives of equal weight will create quandaries
when it comes to making decisions.
– The costs of choosing the wrong objective can be significant.
17. Characteristics of a Good Objective Function
• It is clear and unambiguous
• It comes with a clear and timely measure that
can be used to evaluate the success or failure of
decisions.
• It does not create costs for other entities or
groups that erase firm-specific benefits and leave
society worse off overall. As an example, assume
that a tobacco company defines its objective to
be revenue growth.
18. Goal of a Corporation?
• Is it
– Profit Max / Cost Min
– Sales Max
– Cash flow Max , NPV Max
– Sustainability? / Long term profitability max ?
– Stock price Max / Shareholders wealth max
– Employee / Customer satisfaction ?
– Society welfare max ?
19. The Objective in Decision Making
• In traditional corporate finance, the objective in decision making is to
maximize the value of the firm.
• A narrower objective is to maximize stockholder wealth. When the
stock is traded and markets are viewed to be efficient, the objective
is to maximize the stock price.
• All other goals of the firm are intermediate ones leading to firm value
maximization, or operate as constraints on firm value maximization.
20. Why traditional corporate financial theory often focuses
on maximizing stock prices as opposed to firm value?
• Stock price is easily observable and constantly
updated (unlike other measures of performance,
which may not be as easily observable, and
certainly not updated as frequently).
• If investors are rational (are they?), stock prices
reflect the wisdom of decisions, short term and
long term, instantaneously.
• The stock price is a real measure of stockholder
wealth, since stockholders can sell their stock and
receive the price now.
21. Is stock price maximization the same as profit
maximization?
• No, despite a generally high correlation
amongst stock price, EPS, and cash flow.
• Current stock price relies upon current
earnings, as well as future earnings and cash
flow.
• Some actions may cause an increase in
earnings, yet cause the stock price to
decrease (and vice versa).
22. Maximize stock prices as the only objective function
• For stock price maximization to be the only
objective in decision making, we have to assume
that
– The decision makers (managers) are responsive to the owners (stockholders) of the
firm
– Stockholder wealth is not being increased at the expense of bondholders and
lenders to the firm; only then is stockholder wealth maximization consistent with
firm value maximization.
– Markets are efficient; only then will stock prices reflect stockholder wealth.
– There are no significant social costs; only then will firms maximizing value be
consistent with the welfare of all of society.
23. The Classical Objective Function
STOCKHOLDERS
Maximize
stockholder
wealth
Hire & fire
managers
- Board
- Annual Meeting
BONDHOLDERS
Lend Money
Protect
bondholder
Interests
FINANCIAL MARKETS
SOCIETYManagers
Reveal
information
honestly and
on time
Markets are
efficient and
assess effect on
value
No Social Costs
Costs can be
traced to firm
24. How managers can max shareholders’ wealth?
• Max Stock Price
– What determines stock price??
– Like any other asset, ability to generate cash flow
now and in future!!
– • Size of cash flows
• Timing of the cash flow
stream
• Riskiness of the cash flows
25. The Agency Cost Problem
• The interests of managers, stockholders,
bondholders and society can diverge. What is good
for one group may not necessarily for another.
– Managers may have other interests (job security, perks, compensation) that they put
over stockholder wealth maximization.
– Actions that make stockholders better off (increasing dividends, investing in risky
projects) may make bondholders worse off.
– Actions that increase stock price may not necessarily increase stockholder wealth, if
markets are not efficient or information is imperfect.
– Actions that makes firms better off may create such large social costs that they make
society worse off.
• Agency costs refer to the conflicts of interest that
arise between all of these different groups.
26. What can go wrong?
STOCKHOLDERS
Managers put
their interests
above stockholders
Have little control
over managers
BONDHOLDERS
Lend Money
Bondholders can
get ripped off
FINANCIAL MARKETS
SOCIETYManagers
Delay bad
news or
provide
misleading
information
Markets make
mistakes and
can over react
Significant Social Costs
Some costs cannot be
traced to firm
27. I. Stockholder Interests vs. Management Interests
• Theory: The stockholders have significant control
over management. The mechanisms for
disciplining management are the annual meeting
and the board of directors.
• Practice: Neither mechanism is as effective in
disciplining management as theory posits.
28. The Annual Meeting as a disciplinary venue
• The power of stockholders to act at annual
meetings is diluted by three factors
– Most small stockholders do not go to meetings because the cost of going to
the meeting exceeds the value of their holdings.
– Incumbent management starts off with a clear advantage when it comes to
the exercising of proxies. Proxies that are not voted becomes votes for
incumbent management.
– For large stockholders, the path of least resistance, when confronted by
managers that they do not like, is to vote with their feet.
29. II. Stockholders' objectives vs.
Bondholders' objectives
• In theory: there is no conflict of interests
between stockholders and bondholders.
• In practice: Stockholders may maximize their
wealth at the expense of bondholders.
– Increasing dividends significantly: When firms pay cash out as dividends,
lenders to the firm are hurt and stockholders may be helped. This is because
the firm becomes riskier without the cash.
– Taking riskier projects than those agreed to at the outset: Lenders base
interest rates on their perceptions of how risky a firm’s investments are. If
stockholders then take on riskier investments, lenders will be hurt.
– Borrowing more on the same assets: If lenders do not protect themselves, a
firm can borrow more money and make all existing lenders worse off.
30. III. Firms and Financial Markets
• In theory: Financial markets are efficient.
Managers convey information honestly and
truthfully to financial markets, and financial
markets make reasoned judgments of 'true
value'. As a consequence-
– A company that invests in good long term projects will be rewarded.
– Short term accounting gimmicks will not lead to increases in market value.
– Stock price performance is a good measure of management performance.
• In practice: There are some holes in the
'Efficient Markets' assumption.
31. Managers control the release of
information to the general public
• There is evidence that
– they suppress information, generally negative information
– they delay the releasing of bad news
• bad earnings reports
• other news
– they sometimes reveal fraudulent information
32. Even when information is revealed to financial markets,
the market value that is set by demand and supply may
contain errors.
• Prices are much more volatile than justified by
the underlying fundamentals
– Eg. Did the true value of equities really decline by 20% on October 19, 1987?
• Financial markets overreact to news, both good
and bad
• Financial markets are short-sighted, and do not
consider the long-term implications of actions
taken by the firm
– Eg. the focus on next quarter's earnings
• Financial markets are manipulated by insiders;
Prices do not have any relationship to value.
33. Are Markets Short Sighted?
Some evidence that they are not..
• There are hundreds of start-up and small firms, with
no earnings expected in the near future, that raise
money on financial markets
• If the evidence suggests anything, it is that markets
do not value current earnings and cashflows enough
and value future earnings and cashflows too much.
– Low PE stocks are underpriced relative to high PE stocks
• The market response to research and development
and investment expenditure is generally positive
34. IV. Firms and Society
• In theory: There are no costs associated with the firm
that cannot be traced to the firm and charged to it.
• In practice: Financial decisions can create social costs
and benefits.
– A social cost or benefit is a cost or benefit that accrues to society as a whole and NOT to the
firm making the decision.
• -environmental costs (pollution, health costs, etc..)
• Quality of Life' costs (traffic, housing, safety, etc.)
– Examples of social benefits include:
• creating employment in areas with high unemployment
• supporting development in inner cities
• creating access to goods in areas where such access does not exist
35. So this is what can go wrong...
STOCKHOLDERS
Managers put
their interests
above stockholders
Have little control
over managers
BONDHOLDERS
Lend Money
Bondholders can
get ripped off
FINANCIAL MARKETS
SOCIETYManagers
Delay bad
news or
provide
misleading
information
Markets make
mistakes and
can over react
Significant Social Costs
Some costs cannot be
traced to firm
36. Shareholder
value
Profitability
Invested
capital
Revenue
Costs
Working
capital
Fixed
capital
• Greater customer service
(higher market share,
increased gross margins).
• Greater product availability
• Lower cost of goods sold,
transportation, warehousing,
material handling and
distribution management
costs
• Lower raw materials and
finished goods inventory
• Shorter ‘order-to-cash’
cycles
•Fewer physical assets (e.g.
trucks, warehouses, material
handling equipment)
Increasing Shareholder Value
37. 10 ways to create shareholder value
• Do not manage earnings or provide earnings guidance
– Increase value-creating spending on
• R&D, Advertising, Maintenance and hiring
– Accountant’s bottomline approximates neither a company’s
value nor its change in value over the reporting period.
– Firms compromise value when they invest at rates below the
cost of capital (overinvestment) or forgo invt in value-
creating opportunities (underinvestment) in an attempt to
boost short-term earnings.
38. 10 ways to create shareholder value
• Make strategic decisions that maximize Expected
value, even at the expense of lowering near-term
earnings
• Make acquisitions that maximise expected value,
even at the expense of lowering near-term earnings.
• Carry only assets that maximize value
• Return cash to shareholders when there no credible
value-creating opportunities to invest in the
business.
39. 10 ways to create shareholder value
• Reward CEOs and other senior executives for
delivering superior long-term performance
• Reward operating-unit executives adding superior
multiyear value.
• Reward middle managers and frontline employees for
delivering superior performance on the key value
drivers that they influence directly.
• Require senior executive to bear the risks of ownership
just as shareholders do.
• Provide investors with value-relevant info.