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CORPORATE FINANCE *Mrs.B.Chitra, M.Com.,M.B.A., M.Phil., PGDCA **Dr.U.Vani M.Com.,M.B.A.,PGDCA.,M.Phil.,Ph.D.

INTRODUCTION: Corporate finance is the area of finance dealing with monetary decisions that business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize shareholder value. Although it is in principle different from managerial finance which studies the financial decisions of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms. The discipline can be divided into long-term and short-term decisions and techniques. Capital investment decisions are long-term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders. On the other hand, short term decisions deal with the short-term balance of current assets and current liabilities; the focus here is on managing cash, inventories, and short-term borrowing and lending. The terms corporate finance and corporate financier are also associated with investment banking. The typical role of an investment bank is to evaluate the companys financial needs and raise the appropriate type of capital that best fits those needs. Thus, the terms corporate finance and corporate financier may be associated with transactions in which capital is raised in order to create, develop, grow or acquire business. These may include

*Lecturer, Department of Commerce, PSG College of Arts and Science, Coimbatore -14., 99436-36240. **Head, Department of Commerce, PSG College of Arts and Science, Coimbatore 14., 98943-16150. Raising seed, start up, development or expanding capital.

Mergers, demergers, acquisitions of the sale of private companies. Mergers, demergers and takeovers of public companies, including public to private deals. Management buy-out, buy-in or similar of companies, divisions or subsidiaries typically backed by private equity. Equity issues by companies, including the flotation of companies on a recognised stock exchange in order to raise capital for development and to restructure ownership. Raising capital via the issue of other forms of equity, debt and related securities for the refinancing and restructuring of business. Financing joint ventures, project finance, infrastructure finance, public-private partnership and privatisation. Secondary equity issues, whether by means of private placing or further issue on a stock market. Raising debt and restructuring debt. The CEOs Guide to Corporate Finance: Four principles can help you make great financial decisions: Strategic decisions can be complicated by competing, often spurious notions of what creates value. Even executives with solid instincts can be reduced by the allure of financial engineering, high leverage, or the idea that well-established rules of economics no longer apply. What should do about it: Test decisions such as whether to undertake acquisitions, make divestitures, invest in projects, or increase executive compensation against four enduring principles of corporate finance. Doing so will often require managers to adopt new practices, such as justifying mergers on the basis of their impact on cash flows rather than on earnings per share, holding regular business exit reviews, focusing on enterprise wide risks that may lurk within individual projects, and indexing executive compensation to the growth and market performance of peer companies.

Its one thing for a CFO to understand the technical methods of valuation and for members of the finance organization to apply them to help line managers monitor and improve company performance. But its still more powerful when CEOs, board members, and other nonfinancial executives internalize the principles of value creation. Doing so allows them to make independent, courageous, and even unpopular business decisions in the face of myths and misconceptions about what creates value. When an organizations senior leaders have a strong financial compass, its easier for them to resist the siren songs of financial engineering, excessive leverage, and the idea common during boom times that somehow the established rules of economics no longer apply. Misconceptions like these which can lead companies to make value-destroying decisions and slow down entire economies take hold with surprising and disturbing ease. This shows how four principles, or cornerstones, can help senior executives and board members make some of their most important decisions. The four cornerstones are disarmingly simple:
1. The core of value principle:

It establishes that value creation is a function of returns on capital and growth, while highlighting some important subtleties associated with applying these concepts.
2. The conservation of value principle:

It says that it doesnt matter how we slice the financial pie with financial engineering, share repurchases, or acquisitions; only improving cash flows will create value. 3. The expectations treadmill principle: It explains how movements in a companys share price reflect changes in the stock markets expectations about performance, not just the companys actual performance in terms of growth and returns on invested capital. The higher those expectations, the better that company must perform just to keep up.
4. The best owner principle: 3

It states that no business has an inherent value in and of itself; it has a different value to different owners or potential owners. Value is based on how they manage it and what strategy they pursue. Ignoring these cornerstones can lead to poor decisions that erode the value of companies. Consider what happened during the run-up to the financial crisis that began in 2007. Participants in the securitized-mortgage market all assumed that securitizing risky home loans made them more valuable because it reduced the risk of the assets. But this notion violates the conservationof-value rule. Securitization did not increase the aggregated cash flows of the home loans, so no value was created, and the initial risks remained. Securitizing the assets simply enabled the risks to be passed on to other owners: some investors, somewhere, had to be holding them. CONCLUSION: Obvious as this seems in hindsight, a great many smart people missed it at the time. And the same thing happens every day in executive suites and board rooms as managers and company directors evaluate acquisitions, divestitures, projects, and executive compensation. As to see, the four cornerstones of finance provide a perennially stable frame of reference for managerial decisions. REFERENCE: NOVEMBER 2010 Richard Dobbs, Bill Huyett, and Tim Koller Source: Corporate Finance Practice
Investment Decisions and Capital Budgeting, Prof. Campbell R. Harvey; The Investment

Decision of the Corporation, Prof. Don M. Chance.