Dr Shakuntala Misra National Rehabilitation University, Lucknow

Faculty of Law

(CORPORATE FINANCE AND PROJECT

FINANCE)

Assignment
“ANALYSIS OF CORPORATE FINANCE (AN
OVERVIEW)”

By :
Shailesh kumar
8th semester
Roll no:164140060

Under the guidance of:

SANDEEP SIR

INDEX
 S.NO TITLE PA TEACHER’S
. GE SIGN.
NO.
1 Introduction 1
2 Objective of corporate finance 1
3 Importance of corporate finance 4
4 Scope of corporate finance 5
5 Types of corporate finance 6
6 Methods of corporate finance 6-7
7 Conclusion 8
8 Bibliography 9
9
10

Acknowledgement

This project is as result of dedicated effort. It gives me immense pleasure to prepare this project report
on “Analysis of Corporate Finance (An Overview)”
I would like to thank our project guide Sandeep Sir for consultative help and constructive suggestion
on the matter in this project. I would like to thanks our parents and our colleagues who have helped me
in making this project a successful one.

Thanks

INTRODUCTION
Corporate finance is the study of capital, financial and investment decision making with the main aim
of maximizing capital market shares value and returns for shareholders entailing greater capital
accumulation and greater capital formation generally resulting in greater wealth for the corporate
entity. It is deep rooted in our daily lives. All of us work in big or small corporations. These
corporations raise capital and then deploy this capital for productive purposes. The financial
calculations that go behind raising and successfully deploying capital is what forms the basis of
corporate finance.

Corporate finance is the area of finance dealing with the sources of funding and the capital of
corporations and the actions that managers take to increase the value of the firm to the shareholders, as
well as the tools and analysis used to allocate financial resources. The primary goal of corporate
finance is to maximize or increase shareholder.

The Objective of Corporate Finance:

A firm is a group of claimants of share holders, creditors, suppliers, customers and employees. The
shareholders appoint a Board of directors to see the functioning and directing the company. The
directors will act in the interest of the claimant not act in their own interest. In corporate finance theory
generally agrees that the objective of a firm is to maximize the profit and wealth maximization. Wealth
maximization rules require managers to work towards a sustainable increase in the price of the firm’s
stock. According to :

 Van Horne: He assume that the objective of the firm is to maximize its value to its stockholders"
 Brealey & Myers: "Success is usually judged by value: The secret of success in financial
management is to increase value."

In traditional corporate finance, the objective in decision making is to maximize the value of the
firm.

 Employees are often stockholders in many firms -Firms that maximize stock price generally
are profitable firms that can afford to treat employees well. There are three principal in modern
wealth maximization rule namely Profit maximization, Social welfare, growth.
 Profit maximization: Profit is the excess of revenue over expenses. Profit maximization
requires manager to keep low expenses.
 Social welfare: Business persons are supposed to be socially responsible.
 Corporate Growth: A corporation is seen as a legal entity that has assets and liabilities as
an individual and can be directly sued aside from its ownership. Corporate finance therefore
deals with legal financial matter of these corporations in a general sense. However, it deal
more specifically with financial investment and capital investment decisions, maximize
shareholder value, and working capital investment decisions. Many corporations therefore in
corporate finance ensure maximization of profits.

Further it aims at discussing the management-shareholder problems often referred to in

management as agent-principle conflict regarding wealth maximization/capital formation
maximisation and profit maximisation/ financial returns to investments.

 Corporate finance is the study of capital, financial and investment decision making with the main
aim of maximising capital market shares value and returns for shareholders

entailing greater capital accumulation and greater capital formation generally resulting in greater
wealth for the corporate entity.
Wealth maximization therefore implies ensuring that the corporation’s capital investments and
business operations expands, stocks value increase, and financial market performance is increased.
Profit maximization however is the increase in the returns to investment of shareholders are
proprietors not necessarily resulting from business expansion. Profit maximization therefore is a short
term business objective while wealth maximization is long term as it may sacrifice profits for wealth
accumulation and wealth formation

Wealth-profit argument

Wealth maximization according to the business dictionary b(2013) is a process that increases the
current net value of business or shareholder capital gains, with the objective of bringing in the highest
possible return. While profit maximization is the ability for company to achieve a maximum profit
with low operating expenses. The wealth maximization strategy generally involves making sound
financial investment decisions which take into consideration any risk factors that would compromise
or outweigh the anticipated benefits while the profit maximization strategy is cost reduction.

Wealth maximisation entails corporate benefit while profit maximization entails owners benefit.
Wealth maximisation has long term financial and capital market benefits while profit maximisation has
short term gains in immediate returns to investment. It is argued that management is really smart and
intelligent and knows what is good and what is bad for the business however self-interest also drives
management to maximize short-term profits even if that is detrimental to the long-term goal as they
know that their salary and bonuses will be based on these short-term profits only. Wealth
maximisation therefore ensures a more stable, larger market share, greater financial market
performance in terms of value of stocks, more long term financial benefits for stock holders this
therefore makes wealth maximisation of greater benefits compared to profit maximisation.

 Separation of Ownership and Management

The basis of corporate finance is the separation of ownership and management. Now, the firm is not
restricted by capital which needs to be provided by an individual owner only. The general public needs
avenues for investing their excess savings. They are not content with putting all their money in risk
free bank accounts. They wish to take a risk with some of their money. It is because of this reason that
capital markets have emerged. They serve the dual need of providing corporations with access to
source of financing while at the same time they provide the general public with a plethora of choices
for investment.

 Liaison between Firms and Capital Markets

The corporate finance domain is like a liaison between the firm and the capital markets. The purpose
of the financial manager and other professionals in the corporate finance domain is twofold. Firstly,
they need to ensure that the firm has adequate finances and that they are using the right sources of
funds that have the minimum costs. Secondly, they have to ensure that the firm is putting the funds so
raised to good use and generating maximum return for its owners. These two decisions are the basis of
corporate finance and have been listed in greater detail below:

 Financing Decision
As stated above the firm now has access to capital markets to fulfill its financing needs. However, the
firm faces multiple choices when it comes to financing. The firm can firstly choose whether it wants to
raise equity capital or debt capital. Even within the equity and debt capital the firm faces multiple
choices. They can opt for a bank loan, corporate loans, public fixed deposits, debentures and amongst
a wide variety of options to raise funds. With financial innovation and securitization, the range of
instruments that the firm can use to raise capital has become very large. The job of a financial manager
therefore is to ensure that the firm is well capitalized i.e. they have the right amount of capital and that
the firm has the right capital structure i.e. they have the right mix of debt and equity and other financial
instruments.

 Investment Decision

Once the firm has gained access to capital, the financial manager faces the next big decision. This
decision is to deploy the funds in a manner that it yields the maximum returns for its shareholders. For
this decision, the firm must be aware of its cost of capital. Once they know their cost of capital, they
can deploy their funds in a way that the returns that accrue are more than the cost of capital which the
company has to pay. Finding such investments and deploying the funds successfully is the investing
decision. It is also known as capital budgeting and is an integral part of corporate finance.

Capital budgeting has a theoretical assumption that the firm has access to unlimited financing as long
as they have feasible projects. A variation of this decision is capital rationing. Here the assumption is
that the firm has limited funds and must choose amongst competing projects even though all of them
may be financially viable. The firm thus has to select only those projects that will provide the best
return in the long term.

 Financing and investing decisions are like two sides of the same coin. The firm must raise
finances only when it has suitable avenues to deploy them. The domain of corporate finance has
various tools and techniques which allow managers to evaluate financing and investing decisions.
It is thus essential for the financial well being of a firm.

Corporate finance is based on two fundamental rules.

All tools and techniques of corporate finance are mere ways and means of implementing these rules.
These rules can be found at the beginning of any and every corporate finance text book. One of these
rules relates to the concept of return while the other relates to the concept of risk. We have described
both these rules in this article. They are :

 Money today is worth more than money tomorrow

The fundamental rule of corporate finance is that the timing of cash flows is of paramount importance.
Also, we want the timing of the cash flows to be as soon as possible. The sooner we get the cash, the
better it is for our company. Every dollar that the company has in cash today is better than the same
dollar in cash tomorrow because of the following reasons:

Inflation: Inflation eats into the purchasing power of the company’s funds constantly with the passage
of time. Thus if the company had the same nominal amount of money today or a year from now, they
would be able to purchase more goods and services with the money that they have today as compared
to the same amount of money a year later. Thus, to offset the effect of inflation, companies must
conduct their business in a manner that they ensure that cash is received as soon as possible.
Opportunity Cost: Also, every dollar that the company is not receiving has an opportunity cost of
capital. Let’s say the company’s debtors owe it $100 and they pay $100 the next year. The nominal
value of the money that they have paid is $100 however the real value is less. This is because had the
debtors paid immediately, the company would have cash immediately on hand. They could then invest
this cash in risk free securities and could have earned a year’s interest on the same. By accepting the
same $100 a year later, the company has in effect loaned out $100 to its debtors and that too interest
free!

 Risk free money is worth more than risky money

Corporate finance involves exchanging between present and future streams of cash flows. Companies
may come across different projects which offer different future cash flows. However, it is important to
realize that all cash flows are not equally likely to materialize in the future. Some cash flows may be
almost certain like investing in treasury bonds while others may be highly uncertain like projected
returns from stock market investments. Hence, the second rule states that the company must adjust
each of these cash flows for their risk before making any comparisons and selections. The following
factors must be considered:

 Return of Capital: Some projects are extremely risky. Here, the company is concerned about
whether or not the money they are investing will be recovered. A higher rate of return must be
demanded from such projects to offset the likelihood of losing their entire capital that the investors
face.
 Return on Capital: In other cases the cash flow may be a little less uncertain. In these cases,
companies must consider the low risk before making their decision.

The bottom line is that before making a choice, all projects have to be made comparable. This is
done by adjusting for cash flow that will be received in different time periods as well as
adjusting for the different amounts of risks that are involved in different projects.

IMPORTANCE OF CORPORATE FINANCE

 Decision Making: There are several decisions that have to be done on the basis of available
capital and limited resources. If an organization has to start a new project, then it has to consider
whether it would be financially viable and if it would yield profits. So while investing in a new
project or a new venture, a company has to consider several things like availability of finances,
the time taken for its completion, etc. and then makes decisions accordingly.
 Research and Development: In order to survive in a volatile market for a long duration, a
business organization needs to continuously research the market and develop new products to
appeal the consumers. It may even have to upgrade its old products to compete with new vendors
in the market. Some companies employ people to conduct market surveys on a large scale;
prepare questionnaire for consumers; do market analysis, while other may outsource this work to
others. All these activities would require financial support.
 Fulfilling Long Term and Short Term Goals: Every organization has several long term goals
in order to survive in the market. The short term goals may include paying the salaries of
employees, managing the short term assets, acquiring corporate finances like bank drafts, trade
credit from suppliers, purchase of raw materials for production etc. Some long term goals would
include acquiring bank loans and paying them off; increasing the customer base for the company
etc.
 Depreciation of Assets: When you invest in a new software or a new equipment, you would
require to keep aside some amount to maintain it and upgrade it in the long run. Only then you
could be assured that it would yield good results over a period of time. In the fast changing times
of today, if this is not done, you might end up losing business if you do not have finances for it.
 Minimizing Cost of Production: Corporate finance helps in minimizing the cost of production.
With the rising cost of prices of raw materials and labor, the management has to come up with
innovative measures to minimize the cost of production. In many organizations that spend a lot of
money on large scale production, deploy professionals for this purpose. These people tend to buy
quality products from vendors who offer it at lowest possible rates. For example, a products based
software company might buy software from a vendor that sells it at a lower rate than an
internationally acclaimed company selling the same thing.
 Raising capital: When an organization has to invest in a new venture, it is very important that it
has to raise capital. This can be done by selling bonds and debentures, stocks of the company
taking loans from the banks etc. All this can be done only by managing corporate finances in a
proper manner.
 Optimum Utilization of Resources: The resources available to organizations may be limited.
But if they are utilized efficiently, they can yield good results. For example, a business
organization needs to know the amount of money it can spend on its employees and how much
hike should be given to them. The proper management of corporate finance would also help in
utilizing its profits in such a manner that would help in increasing them; for example, investing in
government bonds, keeping up with the latest technology trends to increase efficiency.
 Efficient Functioning: A smooth flow of corporate finance would enable businesses to function
in a proper manner. The salaries of employees would be paid on time, loans would be cleared in
time, purchase raw materials can be done when required, sales and promotion for existing
products and launch of new products, etc.
 Expansion and Diversification: Before an organization decides to expand or diversify in to a
new arena, it has to consider various aspects like the capital available, risks involved, the amount
to be invested for purchase of new equipment etc. All this can be done by experts and this would
be very beneficial for the organization.
 Meeting Contingencies: Running a business involves talking several risks. Not all risks can be
foreseen. Although you can transfer some of these risks to third parties by buying an insurance
policy, you cannot have every contingency covered by your insurer. You would have to keep
some amount aside to tide over these situations.

Scope of corporate finance

 Investment decisions that include analysis of different investment types to arrive at the best
available alternative.
 Financing decisions that extend to raising capital through different sources to restructure
business finance.
 Dividend decisions which include analysis of stockholders’ returns basis amount and time.
 Management of working capital for efficient day-to-day running of the business.
 Corporate financial services extending to the advisory role during M&As.
 Development of financial strategies for policy implementations, which also reflect the working
of advanced corporate finance.
Types of Corporate Finance

Corporate financing includes raising funds through:

Equity funds
Debt funds

The types of corporate finance also emphasise the difference between ownership and
management, the basis for the development of strategies and procedures under this concept.

 Owner’s funds – Equity or ownership finance is strictly limited to raising capital for the
owners of a company.
 Debt funds – Also known as external finance, debt funds come in multiple options like
debentures, corporate loans, private financing, etc. While debentures can be issued to the
general public for refinancing, institutional lenders are the primary source of private finance.
They also charge commercial rates of interest on the lent amount. For example, a business has
to pay a pre-determined interest to the lender as per the corporate loan interest rate if it opts for
corporate finance.

METHODS OF CORPORATE FINANCE

 CORPORATE RE-STRUCTURING: The process of corporate restructuring is considered

very important to eliminate the entire financial crisis and enhance the company’s performance.
The management of concerned corporate entity facing the financial crunches hires a financial
and legal expert for advisory and assistance in the negotiation and the transaction deals.
Usually, the concerned entity may look at debt financing, operations reduction, any portion of
the company to interested investors.
In addition to this, the need for a corporate restructuring arises due to the change in the
ownership structure of a company. Such change in the ownership structure of the company
might be due to the takeover, merger, adverse economic conditions, adverse changes in
business such as buyouts, bankruptcy, lack of integration between the divisions, over
employed personnel, etc.
 RIGHT ISSUE: A rights issue is a primary market offer to the existing shareholders to buy
additional shares of the company on a pro-rata basis within a specified date at a discounted
price than the current market price.
It is important to note that the rights issue offer is an invitation that provides an opportunity for
existing shareholders to increase their shareholding. It is a right that a shareholder may or may
not choose to exercise and not an obligation to buy the shares.
 BONUS ISSUE: A bonus issue, also known as a scrip issue or a capitalization issue, is an
offer of free additional shares to existing shareholders. A company may decide to distribute
further shares as an alternative to increasing the dividend payout. For example, a company
may give one bonus share for every five shares held.
 PRIVATE EQUITY INVESTMENT: Private equity is an alternative investment class and
consists of capital that is not listed on a public exchange. Private equity is composed of funds
and investors that directly invest in private companies, or that engage in buyouts of public
companies, resulting in the delisting of public equity. Institutional and retail investors provide
 The capital for private equity and the capital can be utilized to fund new technology, make
acquisitions, expand working capital, and to bolster and solidify a balance sheet.
A private equity fund has Limited Partners (LP), who typically own 99 percent of shares in a
fund and have limited liability, and General Partners (GP), who own 1 percent of shares and
have full liability. The latter are also responsible for executing and operating the investment.

 EXTERNAL COMMERCIAL BORROWING & DEPOSITS: External Commercial

Borrowings (ECB) refer to commercial loans [in the form of bank loans, buyers' credit,
suppliers' credit, securitised instruments (e.g. floating rate notes and fixed rate bonds)] availed
from non-resident lenders with minimum average maturity of 3 years.
CONCLUSION

Corporate finance is the division of finance that deals with how corporations deal with
funding sources, capital structuring, and investment decisions. Corporate finance is primarily
concerned with maximizing shareholder value through long and short-term financial planning
and the implementation of various strategies

Corporate finance is important in the overall functioning, growth and development of a business. In
India, finance advisors help entrepreneurs and businesses by providing them with vital information
through market research and analysis. This helps then to make decisions, expand their business, and
survive in a competitive market in the long run. Therefore, the management of corporate finance is
very important for profitable as well as non-profitable organizations.
 BIBLIOGRAPHY

 https://www.managementstudyguide.com/fundamental-rules-of-corporate-finance.htm
 https://www.managementstudyguide.com/corporate-finance.htm
 https://corporatefinace.blogspot.com/2017/06/meaning-importance-scope-and-
objectives.html
 https://www.bajajfinserv.in/corporate-finance
 https://cleartax.in/s/corporate-restructuring
 https://www.chittorgarh.com/article/rights-issue-of-shares-definition-benefits-prices/492/
 https://www.investopedia.com/terms/b/bonusissue.asp#:~:text=A%20bonus%20issue%2C
%20also%20known,for%20every%20five%20shares%20held.
 https://www.investopedia.com/terms/p/privateequity.asp