CORPORATE FINANCE (CF)

NOTES
What is accounting?
Accounting is the process of Recording, Classifying, Summarizing &
Analyzing financial transactions pertaining to business.

And we know Recording is done in Journal, Classifying we do in Ledger

Accounts, Summarizing is done in the Statement of P/L & B/S & finally
for Recording there are various tools available to record the data but
what we have learnt in our 1st Sem is the Ratio Analysis tool.

So, Recording Journal

Classifying Ledger Accounts
Summarizing Statement of P/L & B/S
Recording Ratio Analysis

What is Ratio Analysis?

Ratio analysis is the process of ascertaining the financial ratios that are
used for indicating the ongoing financial performance of a company.

Types:-
1. Activity ratio
2. Liquid ratio
3. Solvency ratio
4. Profitability ratio
5. Market ratio

1. Activity Ratio:-
Activity ratio is used to determine to determine how efficiently the
financial assets & liabilities of an organization have been used for
generating revenues.
It determines the scale of operation.

2. Liquid Ratio:-
Liquid ratio helps in the measuring a company’s ability to pay off its
short term liabilities.

3. Solvency ratio:-
Solvency ratio helps in measuring a company’s ability to pay its long
term liabilities.

4. Profitability ratio:-
Such ratios help in measuring the ability of a company in earning
sufficient profits.
This indicates how good the company is managing its cost & revenues.

5. Market Ratios:-
Used to evaluate the current share price of a publicly held company’s
stock.

Now,

The Importance of Ratios:-

Customers will be interested in knowing the activity and profitability
ratio of the firm. Ex. Maruti Suzuki.

Short term investors will be interested in market ratio.

Bankers will be interested for solvency ratio which will give an insight
how much liquidity the company has.

Investors will look for all the ratios but at present time they will be
interested in knowing the solvency, liquid, activity ratios.
 Analyzing the B/S of L&T Ltd.

Balance sheet as of 31st March 2020

As of 31-3-2020 As of 31-3-2019

Assets Note In crores In crores In crores In crores

Non-Cureent Assets

Property, plant and equipment 2 6853.43 7582.52

Capital work in progress 2 796.55 567.31
Investment property 3 490.4 387.28
Intangible assets 4 83.72 228.72
Intangible assets under development 4 0.66 171.69
Right of use assets 54 C
Financial ssets
Investments 5 27975.28 18197.3
Loans 6 3507 1279.76
Other finacial assets 7 304.48 577
31786.76 20054.06
Deffered tax assets (net) 44 e 1428.2 841.86
Other non current assets 8 4068.94 3373.64

Current Assets
Inventories 9 2769.9 3149.24
Financial assets
Investments 10 6059.15 4706.85
Trade receivables 11 27912.96 28212.55
Cash and non cash equivalents 12 3262.83 2733.45
Other bank balances 13 675.56 4866.52
Loans 14 515.14 1305.94
Other financial assets 15 1997.59 1955.4

Equity and liabilites

Equity
Equity share capital 17 280.78 280.55
Other equity 18 51894.57 49767.87
Total equity 52175.35 50048.42
Liabilities
Non current laibilities
Financial liabilites
Let’s understand the parameters:-

1. Flow statement: - The statement which includes every details from

the inception of the company till date.

2. Position statement: - Includes the details of a specific time period.

Ex. 1 year.

3. Capital work in progress: - In capital work in progress depreciation is

not charged.
Once it is ready for commercially purpose it is put in property, plant &
equipment.

4. Investment property:-
Ex. Bombay dyeing
Bombay dyeing having its own plant supposed acquired another land
somewhere else. So this purchased land Bombay Dyeing can use it to
give it for rent or holding the land for increase in price i.e. investment
property.

5. Intangible assets:-
These are the non-physical assets that add value to a company or
business.
Ex. Patents, trademarks, copyrights, goodwill, brand, licensing
agreement etc.

Types:- Self developed

 Generated intangible assets.
 Acquired intangible assets Acquired intangible assets

Generated when the company doesn’t pay money for it.

Ex. Goodwill.
Acquired when the company pays money to acquire it.
Ex. Patent.

6. Right of use assets: - It means company reserves the rights to use it.

7. Financial assets: - A document representing a claim to income.

Ex. Bank deposits.

8. Current assets: - The assets which are expected to be converted to

cash in a year.
Ex. Inventories and supplies, accounts receivable, prepaid expenses etc.

9. Inventories: - Stocks available that are arising in the regular

production.
Types:-
 Raw materials
 Work in progress
 Finished goods
 Packing material

10. Trade receivables: - is the amount receivable for sale of

goods/services rendered in the course of business or the amount that is
to be received as given as credit sales.
It is the sum total of debtors + B/R.

11. Cash & cash equivalents: - Cash equivalents mean the long term
debtors or preference share holders.
Ex. Cheques, marketable securities, bank accounts etc.

12. Other financial assets: - these are the group of assets classified as
held for sale.
 Held till maturity.
 Held till trading & held for sale.
13. Equity share capital: - Capital is the owner’s contribution to
business. Share is the profit that will be shared among the
shareholders/collective ownership.
Equity share capital is the justifiable distributing the profit of the
company to the extent of share holders.

14. Provisions: - is an expense providing or allocating to be paid in

future.
 Benefit has been taken &
 Paid at the end of accounting year.
Ex. Outstanding salary.

Note: -
 Profit figure appears in B/S also. It appears in Reserve & Surplus.
 Financial lease lessy is the owner.
 Operating lease lesser is the owner.

15. Contingent liabilities: - any liabilities which may arise due to un

forcing event.

Role of Financial Manager

What challenges a financial manager may face while buying an asset?

An asset can be purchased from:-

1) Equity capital
2) Reserve & Surplus
3) Bank loans.

Now, the issues associated in buying from these are:-

1) Equity capital:-
 a) Whether adequate funds can be raised/ arranged.
b) Profit will be shared by larger nos.
c) Issue expenses.
d) Control may be diluted.
e) Dividend payment is optional.

2) Reserve and Surplus (Accumulation of Profit): -

a) Cost of R&S is zero.
b) Dividend will be less for high R&S.
c) Equity shareholder satisfaction.
d) Operating profit margin.

3) Bank loans: -
a) Interest payment is pre tax.
b) Financial credentials.
c) Int. payment is contractor.

* Working Capital Management I haven’t included. Refer to Sir’s

slides.

Profit Maximization

* Profit is shown in P/L statement.

Profit = Revenue – Expenses

Increase Reduce

Quantity Price

Issues which may arise while increasing: -

1) Quantity: -
 Inventory may pile up.
 More receivables.
 Price may go down.
2) Price: -
 Quantity may go down.
 Profit may reduce.
 Competitors will target the product.
 Competitors will capture the market share.
 Leads to consumerisation. (Not required by the society)

Time Value of Money

Time value of money refers to the fact that a rupee in hand today is
worth more than a rupee promised sometime in future.
Ex. The value of Rs.100 in today & its value after 5 years.

Consider a company with the following profit %s

1st year – 12% -10,000

2ndyear - 15% - 13,000
3rd year – 16% - 14,500

While the profit % is it’s not necessary that absolute number that we
see will also increase. It may fall which margin may increase.
This is the Case of Uncertainty/Probabilistic View.

Capital Profit Share

PAT 1,00,000 15,000 1,000
EPS 1,00,000 12,000 500
We see in the same capital invested profit is more if we consider PAT
but share is less if consider EPS.

So, it’s a probabilistic view.

Wealth Maximization

Valuation Approach: -

Suppose a project time period is 5 years.

We have to see whether it will generate profit or not?

0 1 2 3 4 5

1000 15000 12000 8000 14000

Reducing value of profit in present time

Let,
Terminal Value/Asset Value = 60,000.
Capital invested = 50,000

Thus by reducing the profits of respective years to present value (PV)

and reducing the terminal value (TV) to present value if we see the
summation is more than the capital invested than we can go for the
project i.e. profitable.

So, the possible fallacies which are taken care of by this approach are: -
a) If we only look for the profit of current year than inventories may
pile up for the next year which will affect the profit of the next
year.
b) Income flow has uncertainty.
c) Not to raise the receivable in the current year.
d) Not to increase price as competitor may enter.

Stakeholder Approach
Proposed by Dr. F. Edward Freman.
It signifies that Long Term is the right approach in calculating profits.
1) Investors/Shareholders :- dividend + capital gain
2) Employees: - long term profit. Ex. Tata Steel.
3) Customers: - Offering products/services at moderate price. Ex.
Maruti Suzuki.
4) Suppliers: - paying continuously in regular intervals of time so that
suppliers will be happy.

Agency Theory

Proposed by Stephen Ross & B Matrick in the year 1973.

Agency theory is a principle that is used to explain & resolve issues in

the relationship b/w the business principals & their agents.

Principals Shareholders
Agents Company executives/BOD
To safeguard the interest of shareholders:-
1) Need to constituent board of directors i.e. executives nominee & 1
women.
2) Qualifying shares b/w shareholders + BOD.
3) Committees: - Audit, Remuneration & Corporate governance. Ex.
Kumar Mangalam Birla, Anand Mahindra, Narayan Murty.
4) Whistle blower policy: - wrong happenings will be taken care of
without revealing the identity of the person in charge.

*Agency cost is the reduction cost and the cost to find out wrong
doings.

Compounding

Compounding is the accumulation of investment value in every

duration of time. &
Discounting is reducing the amount R in future to present value.

Future Value Compounding:-

FV = Principal*(1+r)^n

n = time period
r = rate of interest
principal = present value of money

Present Value Compounding:-

PV = FV/(1+r)^n

If asked half yearly, then r = r/2 & n = n/2.

If asked quarterly, then r = r/4 & n = n/4. (To be continued…)