Corporate Finance

(Financial Management)
An Overview
Forms of Business Organisations
Sole Proprietorship:

• Simplest form, minimal regulation

• Legal & tax point: firm and owner are same
• Limited capital, hence limited growth
• Unlimited liability of owners

Partnership:

• Separate Legal entity

• However, tax is paid by partners
• Unlimited liability of owners (new form as limited liability partnerships)

Company:

• Separate legal & tax entity; owners (shareholders) are also separate from management (board of directors/top
mgt): ensures continuity of operations
• Limited liability of owners (to face value of shares)
• Marketability (transferability) of investment (shares can be listed)
• Scope for growth with wide options for raising capital (from financial markets)
• Private limited vs. Public limited company
Financial Decisions in a Firm
Investment Decisions
• Capital Budgeting decisions or
Cost of Project
• Where & how much to invest
funds for business growth
• Tangible or intangible assets;
Organic or inorganic growth
• Assess the feasibility or viability of
the project, esp. financial: Cash
flow projections, NPV/ IRR, etc.
Financing Decisions Funds Management Decisions
• Capital Structure Decisions or • Working Capital Decisions or
Means of Finance Short Term Funds Management
• In which form to raise funds: Debt (maturity of less than 1 year)
or Equity or hybrid form • Credit Policy (Current Liabilities):
• From where (which markets) to where to raise funds from
raise funds: money or capital • Where to deploy funds (Current
markets; national or international; Assets) : Cash, Debtors
equity or debt markets, and so on (Receivables), Inventory
• Which method to use to raise Management
funds: Public issue (IPO, FPO,
OFS), Rights issue, Private
Placement (QIP), Private Equity…..
• At what price: valuation of equity/
debt instrument
• Payout Decisions: Dividend Policy,
Buybacks, Bonus, etc.
Goal of FM

Value Maximisation: maximising the wealth of the

shareholders (owners)
• Wealth is market value of shares held by them (MPS* Number
of shares)
• Profit Maximisation is limited in its approach and may not be
objective
• Well-being of all stakeholders: customers, employees, society,
planet…. Triple bottom-line concept (People, Profit, Planet)
Broad Foundation Theories

• Efficient Markets Theory

• Portfolio Theory
• Capital Asset Pricing Theory
• Option Pricing Theory
• Agency Theory

Fundamental Principles:
• Time Value of Money
• Risk-Return Trade-off
All financing decisions involve evaluation & comparison of its inherent RISK & RETURN to maximise MARKET VALUE of the firm