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Corporate Finance

• Overview
• Cost of Capital
• Capital Structure
Finance Functions

Corporate Finance

Accounting &
Control

Financial Cost Management


Accounting Accounting Accounting
Corporate Finance

Resource
Mobilisation
Risk Management
Investment
Decisions
Short Term
Financial Financial
Finance
Strategy Derivatives
Long Term
Finance
Physical Financial
Assets Assets
Investment Decisions

Physical Assets Financial Assets

Fixed Variable
Technical Financial Income Income
Feasibility Viability Security Security
Capital
Budgeting
Techniques
Investment in Security
• Short-term and Long-term Instruments

• Treasury Bill, Certificate of Deposit


• Bonds, Shares
Valuation of Securities
• Time Value of Money

• Valuation of Bonds – NCD, PCD & FCD


• Coupon Rate, Current Yield and YTM
• Computation of Current Yield & YTM
• Valuation of Shares
• Shares with constant Dividend
• Shares with constantly growing Dividend
• Fundamental Analysis & Technical Analysis
Computation of Current Yield & YTM

Current Yield Annual Interest Income


p.a.
for a Bond = Current Market Price

Yield to Maturity for a Bond is that yield for which -


Market Price = Sum of the Present Values of all
Inflows from the Bond till its maturity

Annual Interest Redemption Value – Market Price


Income + Residual maturity in years
YTM (approx.) =
Market Price + Redemption Price
2
Investment Decisions
• Intrinsic Value & Market Price
• If Market Price > Intrinsic Value,

Security is overvalued, sell it


• If Market Price < Intrinsic Value,

Security is undervalued, buy it


Problem 1
A Bond has the following features:-
Face Value: Rs. 1000/-
Coupon Rate: 12% p.a., payable annually
Tenure: 5 years
Redemption: Bullet, at a premium of 10%
Current Market Price: Rs. 1200/-
Compute its Current Yield and Yield to
Maturity.
Problem 1 (continued)
In the above problem, if the rate of return
expected by the market on a similar
security is 10% p.a., is the Bond
overvalued or undervalued?

Will you recommend buying the Bond?


Sources of Finance

Long Term Finance Short Term Finance


(Project Finance) (Working
Capital)
Sources of Long-term Finance

Share Capital
Long-term Debt
Equity Preference Bond /
Lease

DomesticInternational Term Loans Debenture


GDR/ADR etc. International Domestic
Rupee Foreign
Currency Euro Foreign
Retained New Issue (ECB) NCD
Bond Currency
Earnings Bond PCD
(Dividend
Policy) Public Issue Rights Issue FCD
Sources of Long-term Finance

Share Capital
Long-term Debt
Equity Preference Bond /
Lease

DomesticInternational Term Loans Debenture


GDR/ADR etc. International Domestic
Rupee Foreign
Currency Euro Foreign
Retained New Issue (ECB) NCD
Bond Currency
Earnings Bond PCD
(Dividend
INTERNATIONAL
Policy) Public Issue Rights Issue FCD
FINANCE
Sources of Short-term Finance

Working Capital Loan Commercial Paper


(Money Market)

Rupee Foreign
Currency

Working Capital Management


Dividend Policy
- Dependence of Share Price on Dividend
Policy
- Cash Dividend & Stock Dividend (Bonus
Issue)
Dividend Policy:
- If Return on Investment > Cost of Capital
- If Return on Investment < Cost of Capital
- If Return on Investment = Cost of Capital
Export & Import Finance
• Export Credit:
- EPC & Bill Negotiation
- PCFC & FBD

• Import Credit:
- Buyer’s Credit
- Supplier’s Credit

• Quasi Credit Facilities:


- LC, Bank Guarantee
Types of LCs, ICC & UCPDC,
Types of Bank Guarantees; Deferred Payment Guarantee
Cost of Capital
2. Risk Return Trade-Off
3. Debts (Long-term & Short-term), Preference
Shares & Equity Shares and their Risk
Profiles
4. Cost of Debt Capital; Cost of Preference
Capital; Cost of Equity Capital
5. Weighted Average Cost of Capital
6. Interest Tax Shield
Cost of Capital

Preference
Share Equity
Short-term Share
Cost of
Capital Debt
Long-term
Debt

Risk

WACC K0 = WdKd (1-T) + WpKp + WeKe


Problem 2
The total assets of Radiant Industries Ltd
is Rs. 3000 Crore, which is funded equally
by Debt Capital, Preference Capital and
Equity Capital.
If the cost of Debt Capital, Preference
Capital and Equity Capital are 12%, 9%
and 15% p.a. respectively, compute the
Company’s WACC.
Assume the Tax Rate to be 35%.
Problem 3
The Dividend declared by XYZ Ltd. Is Rs.
10 per share. The Market Price of each
share is Rs. 100.
If the Dividend of the Company is
expected to grow at a uniform rate of 5%
p.a., what is the Cost of Equity Capital of
XYZ Ltd.?
Capital Structure
• What is Capital Structuring?
• Guidelines of RBI for Working Capital Loans
• Tandon Committee’s Norms for Current Ratio
• Debt/Equity Ratio – Significance
• Market Practices
• Selection of Optimal Capital Structure
Impact of Capital Structure
on Cost of Capital
Project Financing – Project Cost & Means
of Financing
Project Cost = All Non-Current Assets
+ 25% of Current Asset
Means of Financing: To be decided by
Project Capital Structure
Requirement of Working Capital Finance
Problem 4
The total assets of ABC Ltd for a project
are estimated to be Rs. 2000 Crore, of
which 40% is Current Asset.
If the Current Ratio is 1.33 and
Debt/Equity Ratio is 1.5, find out the
Capital Structure of ABC Ltd.
Financial Markets
• Segments of Financial Market
• Market Liberalisation and Volatility
• Market Risk and Risk Management
• Role of RBI and SEBI
• New Issue Guidelines
• Due Diligence: Issue Requirements
• Pricing Norms; Underwriting
• Credit Rating