Sanjivani College of Engineering, Kopargaon

SC06- 402 FIN-CORPORATE FINANCE

Topic No 1 :
Introduction To Corporate Finance

Presented By:
Dr. S.P. Ghodake
HOD-MBA, SCOE
Dept. of www.sanjivanimba.org.in
MBA, Sanjivani COE, Kopargaon 1
 Content
• The advantages of corporate firm over the sole traders and partnerships.
• The life-cycle of the corporation at the capital market: funds raising,
investing and benchmarks, returning money to investors at the capital
market.
• Financial Management - Introduction to finance
• Objectives of financial management
• Firm Value and equity value
• Profit maximization and wealth maximization
• Changing role of finance managers
• Organization of finance function.

Dept. of MBA, Sanjivani COE, Kopargaon

 Corporate Finance
Capital
• Corporate finance is a field that Budgeting:

deals with the financial activities

Financial
of corporations, including Planning and
Analysis
Capital
Structure
funding sources, capital (FP&A):

structure, investment decisions,

and financial management. It Examples

involves analyzing and

managing the financial resources Mergers and
Acquisitions Dividend Policy:
of a company to achieve its (M&A):
objectives and maximize
shareholder wealth Risk Management:

Dept. of MBA, Sanjivani COE, Kopargaon 3

 Corporate Firm:

• A corporate firm, also known as a corporation or company, is a legal entity that is

separate and distinct from its owners (shareholders).
• It is formed by filing articles of incorporation with the appropriate government
authority and is governed by a board of directors elected by the shareholders.
• Corporations offer limited liability protection to their shareholders, meaning the
shareholders' personal assets are typically shielded from the company's debts and
liabilities.
• Examples of corporate firms include publicly traded companies like Apple Inc.,
Microsoft Corporation, and Coca-Cola Company, as well as private corporations.

Dept. of MBA, Sanjivani COE, Kopargaon

 Sole Trader (Sole Proprietorship):

• A sole trader, also known as a sole proprietorship, is the simplest form of

business structure owned and operated by a single individual.
• The owner has complete control over the business and is personally
responsible for all aspects, including profits, losses, debts, and liabilities.
• There is no legal distinction between the owner and the business entity,
meaning the owner's personal assets are at risk if the business incurs debts
or legal liabilities.
• Sole traders are common in small businesses and freelancers, such as
consultants, independent contractors, and small retail shops

Dept. of MBA, Sanjivani COE, Kopargaon

 Partnership Firm:
• A partnership firm is a business structure formed by two or more individuals
(partners) who agree to share profits, losses, and responsibilities according to the
terms of a partnership agreement.
• Partnerships can be formed with a formal written agreement or may be implied by
the actions and conduct of the partners.
• There are several types of partnerships, including general partnerships, limited
partnerships, and limited liability partnerships (LLPs), each with different levels of
liability protection and management structures.
• In a general partnership, all partners share equal responsibility and liability for the
business's debts and obligations.
• In a limited partnership, there are both general partners (with unlimited liability)
and limited partners (with limited liability, typically contributing only capital).
• Limited liability partnerships (LLPs) offer limited liability protection to all partners
while allowing them to participate in management and decision-making.
Dept. of MBA, Sanjivani COE, Kopargaon
 Corporate firms offer several advantages
over sole traders and partnerships
Points Corporate firms
❑ Limited Liability Shareholders have limited
liability (Distributed)
❑ Access to Capital Issue stocks and bonds to raise
funds from investors
❑ Continuity of Perpetual existence
Existence
❑ Transferability of Easily bought, sold, or
Ownership: transferred
❑ Specialization and Corporations allow for
Division of Labor
❑ Tax Advantages Corporations may benefit from
certain tax advantages
❑ Professional Image Corporations often have a more
professional image
Dept. of MBA, Sanjivani COE, Kopargaon
Sole traders and partnerships
Sole traders and partners in a
partnership are personally liable for
the business's debts
Depends on personal savings or loans
from banks,
Death, retirement, or withdrawal of a
sole trader or partner
Can be more complex
have limited resources and personnel
Not Available
have a less professional image
The life-cycle of the corporation at the capital market:

IPO (Initial Public Offering):

Public Trading:

Growth Phase:

Maturity Phase:

Decline Phase:

Restructuring or Liquidation:

Dept. of MBA, Sanjivani COE, Kopargaon

 Funds Raising:

• Initial Public Offering (IPO): The corporation enters the capital market
by conducting an IPO, where it sells shares of its stock to the public for the
first time. This primary offering raises capital for the company to fund its
operations, expansion, or other strategic initiatives.

• Follow-on Offerings: After the IPO, the company may conduct additional
offerings, such as secondary offerings or rights issues, to raise more capital
for specific purposes like debt repayment, acquisitions, or research and
development.

Dept. of MBA, Sanjivani COE, Kopargaon

 Investing and Benchmarks:
• Capital Allocation: The corporation allocates the funds raised from the
capital market to various investment opportunities. These investments
could include expanding production capacity, developing new products or
technologies, entering new markets, or acquiring other companies.

• Performance Benchmarks: Throughout its lifecycle, the corporation's

performance is evaluated against various benchmarks to assess its financial
health and market position. Common benchmarks include financial ratios,
stock price performance relative to market indices, and industry-specific
metrics like market share or revenue growth rates.

Dept. of MBA, Sanjivani COE, Kopargaon

 Returning Money to Investors:
• Dividends: One way corporations return money to investors is through dividend payments.
Dividends are distributions of profits to shareholders, typically paid on a regular basis (e.g.,
quarterly or annually). Companies with stable earnings and cash flows often pay dividends to
reward shareholders and attract investors seeking income.
• Share Buybacks: Another method is through share buybacks (repurchases), where the
company purchases its own shares on the open market. Share buybacks reduce the number of
outstanding shares, increasing the ownership stake of existing shareholders and potentially
boosting the stock price.
• Mergers and Acquisitions (M&A): Corporations may also return money to investors
through mergers, acquisitions, or divestitures. M&A activities can generate returns for
shareholders by unlocking synergies, enhancing growth prospects, or realizing value from
non-core assets.
• Liquidation: In extreme cases, if the corporation decides to wind down its operations or
undergo liquidation due to insolvency or strategic reasons, it returns remaining capital to
investors through distributions of assets or proceeds from asset sales.

Dept. of MBA, Sanjivani COE, Kopargaon

 Finance
• Finance is the application of economic principles and concepts to business decision making
and problem solving. The field of finance broadly consists of three categories: Financial
Management, Investments and Financial Institutions.

• i) Financial Management:
This area is concerned with financial decision making within a business entity. Financial management
decisions, include maintaining optimum cash balance, extending credit, mergers and acquisitions, raising of
funds and the instruments to be used for raising funds and the instruments to be used for raising funds etc.

• ii) Investments:
This area of finance focuses on the behaviour of financial markets and pricing of financial instruments.

• iii) Financial Institutions:

This area of finance deals with banks and other financial institutions that specialises in bringing supplier of
funds together with the users of funds. There are three categories of financial institutions which act as an
intermediary between savers and users of funds, viz., banks, developmental financial institution and capital
markets

Dept. of MBA, Sanjivani COE, Kopargaon

 Financial Management
• Financial management is a crucial aspect of business
that involves planning, organizing, controlling, and
monitoring financial resources to achieve
organizational goals and objectives. It encompasses a
wide range of activities, including budgeting,
forecasting, investment decisions, financing
decisions, and risk management

Dept. of MBA, Sanjivani COE, Kopargaon

 Significance of FM
Determination of
Business Success

Optimum
Measurement of
Utilization of
Performance
Resources

Significance
of FM
Focal Point of
Advisory Role
Decision Making

Information
Basis of Planning,
Generator for
Control &
various
Coordination
stakeholders

Dept. of MBA, Sanjivani COE, Kopargaon

 Enterprise value
• The enterprise value (which can also be called firm value or asset value) is
the total value of the assets of the business (excluding cash).
• When you value a business using unlevered free cash flow in a DCF
model, you are calculating the firm’s enterprise value.
• If you already know the firm’s equity value, as well as its total debt and
cash balances, you can use them to calculate enterprise value.
• Enterprise value formula
• If equity, debt, and cash are known, then you can calculate enterprise value
as follows:
• EV = (share price x # of shares) + total debt – cash

Dept. of MBA, Sanjivani COE, Kopargaon

 Equity value
• The equity value (or net asset value) is the value that remains for the shareholders
after any debts have been paid off. When you value a company using levered free
cash flow in a DCF model, you are determining the company’s equity value. If you
know the enterprise value and have the total amount of debt and cash at the firm,
you can calculate the equity value as shown below.
• Equity value formula
• If enterprise value, debt, and cash are all known, then you can calculate equity
value as follows:
• Equity value = Enterprise Value – total debt + cash
• Or
• Equity value = # of shares x share price

Dept. of MBA, Sanjivani COE, Kopargaon

 Example

Conclusion :
if two companies have the same enterprise value (asset value, net of
cash), they do not necessarily have the same equity value. Firm #2 financed
its assets mostly with debt and, therefore, has a much smaller equity value
Dept. of MBA, Sanjivani COE, Kopargaon
 Case = Home analogy
• One of the easiest ways to explain enterprise value versus equity value is with the analogy of
a Home. The value of the property plus the house is the enterprise value. The value after
deducting your mortgage is the equity value.
• Imagine the following example:
• Value of house (building): Rs.500,000
• Value of property (land): Rs.1,000,000
• Box of cash in the basement: Rs.50,000
• Mortgage: Rs.750,000

• What is the enterprise value?

• Rs.1500000. (Value of house plus value of property equals the enterprise value)
• What is the equity value?
• Rs.800,000. (Value of the house, plus value of the property, plus value of the cash, less the
value of the mortgage)

Dept. of MBA, Sanjivani COE, Kopargaon

Profit Maximization and Wealth Maximization
Factors Profit Maximisation Wealth Maximisation
Motive Maximising a company’s Maximising the wealth of
profits. shareholders.

Strategy Time Period Short term Long term

Maximisation Procedure Increasing the business’s Enhancing stock value for
earning capacity. stakeholders and shareholders.

Main Focus Increasing a company’s capacity Improving the business’s share

to generate maximum returns price.
with the minimum input.

Time Value of Money Does not acknowledge the time Takes into account the time
value of money. value of money.

Dept. of MBA, Sanjivani COE, Kopargaon

Changing role of finance managers

Dept. of MBA, Sanjivani COE, Kopargaon

• Organization of finance function.

Dept. of MBA, Sanjivani COE, Kopargaon

Thank You

Dept. of MBA, Sanjivani COE, Kopargaon