corporate finance

Presented by: Aditya Ahluwalia www.finstructor.in

Capital Budgeting
The process of identifying and evaluating projects where the cash flows will be received over a period longer than a year is called Capital Budgeting. 1. Idea Creation. 2. Analyzing project proposals. 3. Create the firm-wide capital budget. 4. Monitoring decisions and conducting a post-audit.

Capital Budgeting Projects

Replacement projects to maintain the business. Replacement projects for cost reduction. Expansion projects. New product or market development. Mandatory projects. Pet management projects.

Capital budgeting Key Principles Decisions are based on cash flows, not accounting income Cash flows are based on opportunity costs Timing of cash flows is important Cash flows are analyzed on an after tax basis Financing costs are reflected in the projects required rate of return

 Independent Vs Mutually Exclusive projects Project Sequencing Unlimited funds v/s Capital rationing

NPV & IRR

Payback period

Discounted Payback Method

Profitability Index

Profitability Index

NPV Profile

NPV Advantages & Disadvantages Advantages

> Direct measure of expected increase in firm value > Theoretically the best method

Disadvantages
> Does not include any consideration of the size of the project

IRR Advantages & Disadvantages Advantages

> Measures profitability as a percentage, showing return on each dollar invested > Provides information on the margin of safety, which NPV does not

Disadvantages
> Conflicting rankings for mutually exclusive projects > Multiple IRRs and no - IRR

Conflicting Decisions

Conflicting Decisions
Difference in sizes of projects (initial outlay)

NPV implicitly assumes reinvestment at discount rate IRR implicitly assumes reinvestment at IRR Multiple IRRs and no IRR

WACC

WACC

Target Capital Structure

Optimal Capital Budget

Cost of Equity

Cost of Equity

Project Beta

Issues with Beta

Country Risk Premium

Marginal Cost of Capital

Floatation Costs

Working Capital Management

Cash Management

 Inventory Management Accounts Payable Management

Short term sources of funding

Uncommitted Line of Credit Committed (Regular) Line of Credit (Overdraft) Revolving Line of Credit Collaterals, pledging, blanket lien Bankers acceptances Factoring The factor (buyer) takes on the responsibility for the receivables

 NBFCs Commercial Paper

Financial Statement Analysis