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Stock Market

Stock Market

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Published by Binu Pandey

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Published by: Binu Pandey on Aug 05, 2011
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What is national stock exchange?The National Stock Exchange of India was promoted by leadingFinancial institutionsat the behest of theGovernment of India, and was incorporated in November 1992 as a tax-paying company. In April1993, it was recognized as astock exchangeunder theSecurities Contracts (Regulation) Act, 1956. NSE commenced operations in the WholesaleDebt Market(WDM) segment in June 1994. TheCapital market(Equities) segment of the NSE commenced operations in November 1994, while operations in theDerivativessegment commenced in June 2000.The
National Stock Exchange of India Limited
(Hindi:

 

 

) is aMumbai-basedstock exchange. It is the largest stock exchange inIndiain terms of daily turnover and number of trades, for both equities and derivative trading.
[1]
. NSE has a market capitalization of aroundRs47,01,923 crore (7 August 2009) and is expected to become the biggest stock exchange inIndia in terms of market capitalization by 2009 end.
[2]
Though a number of other exchanges exist, NSEand theBombay Stock Exchangeare the two most significant stock exchanges in India, and betweenthem are responsible for the vast majority of share transactions. The NSE's key index is theS&P CNXNifty, known as the Nifty, an index of fifty major stocks weighted by market capitalisation.
Q2)what is corporate finance?
Corporate finance
is an area of financedealing with financial decisions business enterprises  make and the tools and analysis used to make these decisions. The primary goal of corporatefinance is tomaximize corporate value 
[1]
while managing the firm's financialrisks. Althoughit is in principle different frommanagerial financewhich studies the financial decisions of allfirms, rather than corporations alone, the main concepts in the study of corporate finance areapplicable to the financial problems of all kinds of firms.The discipline can be divided into long-term and short-term decisions and techniques.Capitalinvestmentdecisions are long-term choices about which projects receive investment, whether to finance that investment withequityor debt, and when or whether to paydividendsto shareholders. On the other hand, the short term decisions can be grouped under the heading"Working capital management". This subject deals with the short-term balance of current assetsandcurrent liabilities; the focus here is on managing cash,inventories, and short-term  borrowing and lending (such as the terms on credit extended to customers).The terms corporate finance and
corporate financier
are also associated withinvestment banking. The typical role of aninvestment bank is to evaluate the company's financial needs and raise the appropriate type of capital that best fits those needs.
Capital investment decisions
Capital investment decisions
[2]
are long-term corporate finance decisions relating tofixedassetsandcapital structure. Decisions are based on several inter-related criteria. (1) Corporate management seeks to maximize the value of the firm by investing in projectswhich yield a positivenet present valuewhenvaluedusing an appropriatediscount rate. (2) These projects must also befinancedappropriately. (3) If no such opportunities exist, maximizing
 
shareholder value dictates that management must return excess cash to shareholders (i.e.,distribution via dividends). Capital investment decisions thus comprise an investmentdecision, a financing decision, and a dividend decision.
y
 
Th
e investment decision
Main article:Capital budgeting 
M
anagement must allocate limited resources between competing opportunities (projects) in a process known ascapital budgeting 
[3]
.
M
aking this capital allocation decision requiresestimating the value of each opportunity or project, which is a function of the size, timing and predictability of future cash flows.
y
 
P
roject valuation
urther information:Business valuation ,stock valuation , and  fundamental analysis 
In general
[4]
, each project's value will be estimated using adiscounted cash flow(DCF)valuation, and the opportunity with the highest value, as measured by the resultantnet presentvalue(NPV) will be selected (applied to Corporate Finance byJoel Deanin 1951; see also Fisher separation theorem,John Burr Williams: theory). This requires estimating the size and timing of all of the incremental cash flows resulting from the project. Such future cash flowsare thendiscountedto determine their 
 present value
(seeTime value of money). These present values are then summed, and this sum net of the initial investment outlay is the NPV.The NPVis greatly affected by thediscount rate. Thus, identifying the proper discount rate - often termed, the project "hurdle rate"
[5]
- is critical to making an appropriate decision. Thehurdle rate is the minimum acceptablereturnon an investment²i.e. the project appropriate discount rate. The hurdle rate should reflect the riskiness of the investment, typicallymeasured byvolatilityof cash flows, and must take into account the financing mix.
M
anagersuse models such as theCAP
M
or theAPTto estimate a discount rate appropriate for a particular project, and use theweighted average cost of capital(
WACC 
) to reflect thefinancing mix selected. (A common error in choosing a discount rate for a project is to applya WACC that applies to the entire firm. Such an approach may not be appropriate where therisk of a particular project differs markedly from that of the firm's existing portfolio of assets.)In conjunction with NPV, there are several other measures used as (secondary)selection criteriain corporate finance. These are visible from the DCF and includediscounted payback  period,IRR ,
M
odified IRR ,equivalent annuity, capital efficiency, andROI(see
list of valuation topics
).
y
 
V
aluing flexibility
Main articles:Real options analysisand decision tree 
In many cases, for exampleR&Dprojects, a project may open (or close) paths of action tothe company, but this reality will not typically be captured in a strict NPV approach.
[6]
 
M
anagement will therefore (sometimes) employ tools which place an explicit value on these
 
options. So, whereas in a DCF valuation themost likelyor average or scenario specificcash flows are discounted, here the ³flexibile and staged nature´ of the investment ismodelled,and hence "all" potential payoffsare considered. The difference between the two valuations isthe "value of flexibility" inherent in the project.The two most common tools areDecision Tree Analysis(DTA)
[7]
andReal options analysis (ROA)
[8]
; they may often be used interchangeably:
y
 
DTA values flexibility by incorporating
 possible events
(orstates) and consequent
management decisions
. (For example, a company would build a factory given that demandfor its product exceeded a certain level during the pilot-phase, andoutsourceproductionotherwise. In turn, given further demand, it would similarly expand the factory, and maintainit otherwise. In a DCF model, by contrast, there is no "branching" - each scenario must bemodelled separately.) In thedecision tree, each management decision in response to an"event" generates a "branch" or "path" which the company could follow; the probabilities of each event are determined or specified by management. Once the tree is constructed: (1)"all" possible events and their resultant paths are visible to management; (2) given thisknowledge of the events that could follow, management chooses the actionscorresponding to the highest value pathprobability weighted; (3) then, assumingrational decision making, this path is taken as representative of project value. SeeDecision theory:Choice under uncertainty.
y
 
ROA is usually used when the value of a project is
contingent 
on the
value
of some otherasset orunderlying variable. (For example, theviabilityof aminingproject is contingent on the price of gold; if the price is too low, management will abandon themining rights, if  sufficiently high, management willdeveloptheore body. Again, a DCF valuation would capture only one of these outcomes.) Here: (1) usingfinancial option theoryas a framework,the decision to be taken is identified as corresponding to either acall optionor aput option; (2) an appropriate valuation technique is then employed - usually a variant on theBinomialoptions modelor a bespokesimulation model, whileBlack Scholestype formulae are used less often - seeContingent claim valuation. (3) The "true" value of the project is then theNPV of the "most likely" scenario plus the option value. (Real options in corporate financewere first discussed byStewart Myersin 1977; viewing corporate strategy as a series of options was originally perTimothy Luehrman, in the late 1990s.)
y
 
Q
uantifying uncertainty
urther information:Sensitivity analysis ,Scenario planning , and Monte Carlo methods in finance 
G
iven theuncertaintyinherent in project forecasting and valuation,
[9]
analysts will wish toassess the
 sensitivity
of project NPV to the various inputs (i.e. assumptions) to the DCFmodel. In a typicalsensitivity analysisthe analyst will vary one key factor while holding all other inputs constant,
ceteris paribus
. The sensitivity of NPV to a change in that factor is thenobserved, and is calculated as a "slope": NPV / factor. For example, the analyst willdetermine NPV at variousgrowth ratesinannual revenueas specified (usually at set increments, e.g. -10%, -5%, 0%, 5%....), and then determine the sensitivity using thisformula. Often, several variables may be of interest, and their various combinations produce a"value-surface" (or even a "value-space"), where NPV is then afunction of several variables. See alsoStress testing.

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