CORPORATE FINANCE

DR HEMANT MANUJ

Hemant Manuj 1
 LEARNING OBJECTIVES

➢ Introduction to Corporate Finance

❖ Balance sheet & Stakeholders of a Firm
❖ Objectives of Financial Management

➢ Long Term Finance

❖ Types of Finance

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INTRODUCTION TO CORPORATE
FINANCE

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 FINANCIAL SYSTEM

FINANCIAL SYSTEM

FINANCIAL
FINANCIAL FINANCIAL
INSTITUTION FINANCIAL INSTRUMENTS
MARKETS SERVICES
S

EXCHA DIRECT CURRE COMM DEPOS OTEHR

BANKS NBFCs EQUITY BONDS LOANS
NGE (OTC) NCY ODITY ITS S

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POOR INVESTMENT DECISIONS

➢ Byju’s defaults on $40 mn loan payment, sues

lender, The Economic Times, 02 August 2023
➢ https://economictimes.indiatimes.com/tech/newsletters/tec
h-top-5/byjus-defaults-on-40-mn-dues-sues-lender-
sequoia-india-southeast-asia-is-now-peak-xv-
partners/articleshow/100797878.cms?from=mdr

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 GOOD INVESTMENT DECISIONS
➢ Adani Energy aims 16% rise in FY24 capex to
Rs. 7,000 cr, The Mint, 3rd August 2023
➢ https://www.livemint.com/companies/people/adani-energy-aims-
16-rise-in-fy24-capex-to-7-000-cr-11690999388982.html

Anil Sardana, MD & CEO, AESL

➢ AESL has strategically expanded its operations into distribution, intending to provide a range
of solutions to customers through a business-to-consumer (B2C) model, specifically catering
to their green power needs
➢ We generate close to about ₹ 7,750 crore free cash flow after taking care of repayments and
interest burden, which is what we will continue to work on," Anil Sardana

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 RAISING FUNDS
➢ Tata Motors board approves ordinary shares,
warrants to Tata Sons
➢ 05 Dec 2019, 08:15 PM IST Amit Panday, liveMint

➢ Last month, Moody’s Investors Service allotted Ba3 rating to the proposed senior
unsecured notes to be issued by Tata Motors with a negative outlook
➢ Tata Motors has approved allotment of 20,16,23,407 ordinary shares at a price of ₹150
each

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 FUTURE OUTLOOK
➢ Maruti raises output after nine months of
production cuts
➢ 08 Dec 2019, 11:41 PM IST Malyaban Ghosh

➢ Production of Maruti vehicles rose 4.33% year-on-year to 141,834 vehicles in November

following the mild sales recovery in October
➢ Increased demand for diesel vehicles such as Vitara Brezza compact SUV and new
products such as XL6 multipurpose vehicle have propelled the company to increase
production

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WHAT MAKES A GREAT FIRM ?

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 THE FIRM AND THE STAKEHOLDERS

➢ Maximise returns on
Sharehold investment
ers

Managers
➢ Maximise compensation

Creditors/
Lenders
➢ Maximise product / service
Firm Customers,
value
➢ Maximise margin on supplies
➢ Maximise wages
suppliers,
Employees ➢ Minimise default on borrowings
Governm
ent & ➢ Maximise tax payments
Society ➢ Maximise societal care
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 THE FIRM AND THE STAKEHOLDERS

➢ “In a free enterprise, the community is not just another stakeholder in business but is, in
fact, the very purpose of its existence.” Jamshetji Tata, 1890’s

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 THE BALANCE SHEET MODEL OF THE FIRM
ASSETS LIABILITIES P&L
Fixed Assets 80 Equity 30 Net Profit 20
Long Term Liabilities 40 Less: Dividend 10
Current Assets 20 Current Liabilities 30 Retained earnings 10

➢ Key Decisions for running a business:

❖ What is the ideal level of fixed assets ? – Capital Budgeting
❖ What is the ideal amount of current assets and current liabilities ? – Working capital
❖ What is the ideal mix of financing, between equity and debt ?– Capital structure management
❖ What is the ideal amount of dividend out of profits? – Dividend

➢ Long term financial decisions - Capital Budgeting and Capital Structure

➢ Short term financial decision – Working capital Hemant Manuj 14
 OBJECTIVE OF A FIRM

➢ Invest in projects that yield a return greater than the ➢ INVESTMENT

hurdle rate
➢ Choose a financing mix that minimizes the hurdle rate ➢ FINANCING
and matches the assets being financed
➢ If there are not enough investments that earn the hurdle
➢ DISTRIBUTION
rate, return the cash to stockholders

Central objective: Maximize the Value of the Firm

➢ There are other intermediate objectives

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22

LONG TERM FINANCE

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 QUESTIONS THAT ALL FIRMS NEED TO ANSWER

1. What should be our D/E ratio?

2. What instrument should be used?

❖ Plain debt (Senior/ junior/ subordinate), equity, convertible, etc.

3. Where and how should be raise the debt and equity?

❖ Banks, Funds, Insurance companies, P/E, VCs, markets, retail ?
❖ Public offer (IPO/ FPO), Rights, Preferential, etc
❖ Domestic, international
❖ Own / foreign currency, fully / partially hedged

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 QUESTIONS THAT ALL FIRMS NEED TO ANSWER

4. What price should be offer for debt, equity?

❖ Market price issue at peak / trough / middle of the equity / interest rate cycle ?
❖ Discount to market price

5. When to raise funds?

❖ At the time of need / before the need (if and whenever the funds are available cheap)
❖ Actively manage market (equity / interest / currency risk) or stay fully hedged in B/S ?

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 MEANS OF FINANCING

Internal Cash flows External Financing

Equity Debt Mezzanine

Common Preferred Bank Convertible Structured

Bonds
Shares shares Loans bonds Notes

➢ Sources of funds ➢ Relevant Points

❖ Domestic / International investors ❖ Regulatory restrictions – country wise
❖ Wholesale / Retail ❖ Cost of funds
❖ Availability of supply of funds
❖ Covenants
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 BONDS

➢ Parties ➢ Repayment
❖ Sources of funds -Corporate, retail ❖ Sinking fund – for payment of obligations
(individuals)
➢ Covenants
❖ Recipients of funds – Corporate,
❖ Affirmative or negative
government
➢ Options
➢ Trust deed
❖ Call, put
❖ Trustee, on behalf of bondholders –
Company appointed/ Public ➢ International offerings
❖ Terms, seniority, security, covenants, ❖ Eurobonds – investors in different
optionality countries than issuers and usually one
(home) currency
➢ Security
❖ Foreign bonds – investors in one foreign
❖ Collateral
country and currency
❖ Mortgage, hypothecation, pledge Hemant Manuj 26

➢ Seniority
❖ Senior, junior, subordinated,
 LOANS

➢ Parties ➢ Seniority
❖ Sources of funds - Banks, NBFCs, ❖ Senior, junior, subordinated,
corporates
➢ Repayment
❖ Recipients of funds – Corporate,
❖ Sinking fund – for payment of obligations
government, individuals
➢ Covenants
➢ Lender relationship
❖ Affirmative or negative
❖ Lone, multiple, consortium / syndicated
➢ Options
➢ Loan Agreement
❖ Prepayment, Acceleration
❖ Terms, seniority, security, covenants,
optionality

➢ Security
❖ Collateral
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❖ Mortgage, hypothecation, pledge 27
EQUITY MARKET

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