S 1 - Introduction to Corporate

Finance, Financial Markets and

Indian Financial System

Prof. B.B.Chakrabarti
IIM Calcutta
 Objectives of Corporate Business
• The primary objective is to create value for
shareholders.
• The term value indicates the market price of
share capital of a business.
• The creation of value implies that a shareholder
earns money by investing in the share capital of
the business more than he or she could earn by
investing in some other opportunity.
 Financial Business Model
The balance sheet of a corporate business can
be represented as follows.

LT Liab.
FA

Capital

CA
CL
 Four Basic Financial Decisions
A business manager has to answer four basic questions.

a) What will be the long-term investment in land, buildings,

machinery, utilities and other equipment?
Take capital investment decision i.e. invest in projects that yield
a return greater than the minimum acceptable hurdle rate.

b) Wherefrom the long-term capital can be arranged to fund the

above mentioned fixed assets and to provide margin money for
commercial bank loans for funding the current assets?
Choose a capital structure or financing mix that minimizes the
hurdle rate and matches the assets being financed.
 Four Basic Financial Decisions
c) What amount of investment is needed in inventories and
debtors? How much cash is to be held for smooth operation?
Wherefrom short-term capital can be raised to pay suppliers?
These decisions call for appropriate working capital
management (of current assets and current liabilities) for
maximizing the shareholder value.

d) If there are not enough investments that earn the hurdle rate,
return the cash to the owners of the firm or shareholders.
The form of returns - dividends and share buybacks - will
depend upon the shareholders’ characteristics.
Managers have to decide on the dividend policy.
Financial Decisions for Shareholder Value
Creation
Shareholder Value
CreationValue Creation
Increase Expected
Decrease Cost of Capital

Cash Flow

1) Capital Investment Decision 1) Capital Structure

2) Working Capital Management 2) Dividend Policy
3) Mergers, Acquisitions, 3) Risk Management
Divestment
4) Capital Investment Decision

Financial Decisionsecisions

5) 2) Working
 Financial Markets and Their Roles
• A financial market is a marketplace where buyers and sellers
participate in the trade of assets such as equities, bonds,
currencies and derivatives. 
• A capital market is one in which individuals and institutions
trade financial securities like stocks and bonds. Organizations
and institutions sell securities in the capital markets in order
to raise long-term funds.
• The money market is a segment of the financial market in
which financial instruments like commercial papers, CDs, T-
bills, Repos etc, with high liquidity and less than one tear
maturity are traded.
 Financial Markets and Their Roles
• Derivative markets (forwards, futures, options and swaps) are
used for price risk management of equities, bonds, currencies,
commodities etc. and for speculation.
• Forex markets are used to exchange currencies for
international trade and movement of goods, services and
personnel.
• Commercial banks are used to raise term loans as well as
working capital loans.
• A primary market issues new securities. The secondary
market is where investors purchase securities or assets from
other investors, rather than from issuing companies.