CORPORATE FINANCE

- Dr. Sandeep Goel

CORPORATE FINANCE


Investment Decision - Determining the assets structure of the firm (a) Capital Budgeting (Investment in fixed assets) (b) Working Capital Management (Investment in current assets)

Financing Decision - Determining the capital structure of the firm Dividend Decision - Formulating the dividend policy of the firm

FINANCIAL STATEMENTS VIEW OF FINANCIAL MANAGEMENT

Firms Investment and Financing activities

Balance Sheet

Firms Dividend activities

Profit and Loss Account

BHARAT ELECTRONICS LTD. Balance Sheet as at 31st March, 2010

Schedule SOURCES OF FUNDS Shareholders Funds Share Capital Reserves & Surplus Government Grants Loan Funds Secured Loans Unsecured Loans TOTAL
Financing Decision (Capital Structure)

(Rs. in Lakhs) 2010 2009

1 2 3 4

8,000.00 424,525.59 432,525.59 2,041.96 72.61 72.61 434,640.16

8,000.00 370,368.15 37,368.15 2,344.31 121.08 121.08 380,833.54

-contd.APPLICATION OF FUNDS Fixed Assets Gross Block Investment Decision Less: Depreciation (Capital Budgeting) Net Block Capital Work-in-Progress Investments Deferred Tax Assets Current Assets, Loans & Advances Inventories Sundry Debtors Cash & Bank Balances Loans & Advances Less: Current Liabilities and Provisions Current Liabillities Provisions Net Current Assets Miscellaneous Expenditure (to the extent not written off or adjusted) TOTAL

5 6 7

170,217.05 121,220.77 48,996.28 3,142.85 52,139.13 1,198.11 15,673.88 244,870.52 216,836.20 357,840.50 43,332.83 862,880.05 443,102.49 54,148.52 497,251.01 365,629.04 434,640.16

157,990.36 111,244.63 46,745.73 4,672.16 51,417.89 1,198.11 14,661.91 242,096.11 227,652.76 264,194.52 49,754.61 783,698.00 413,853.75 56,288.62 470,142.37 313,555.63 380,833.54

8 9 10 11

(Working Capital Management)

12 13

BHARAT ELECTRONICS LTD. Profit and Loss Account for the year ended 31st March , 2010
Schedule INCOME Sales less returns Revenue from Long Term Contracts Income from services Turnover(Gross) Less: Excise Duty Turnover(Net) Other Revenues Accretion/(Decretion) to Work-in-Progress, Finished Goods and Scrap Profit on Sale of Fixed Assets(Net) Transfer from Grants 14 15 (Rs. in Lakhs) 2009-10 2008-09 501,539.47 450,268.38 1,908.50 20,437.93 10,192.01 521,977.40 462,368.89 3,933.52 4,015.50 518,043.88 458,353.39 36,334.89 22,571.07

2,810.80 64,958.38 341.96 105.69 964.34 320.29 558,495.87 546,308.82

EXPENDITURE Consumption of Raw Materials and Components Consumption of Stores & Spares Purchase of Finished Goods Employees Remuneration and Benefits Other Expenses of Manufacturing, Admn., Selling &Distribution Interest Depreciation/Amortisation on Fixed Assets Less: Expenditure allocated to Capital Jobs Profit before Prior Period and extraordinary items Less: Exceptional Items - Expense Less: Extraordinary Items Profit for the Year Less: Prior Period Items (Net) Profit Before Tax (PBT) Less: Provision forTaxation - Current Year - Earlier Years - Deferred Taxes - Fringe Benefit Tax - Total Provision for Taxation Profit After Tax (PAT) Less: Transfer to Capital Reserve (Capital Profit) Add: Balance Brought Forward from previous year Profit available for appropriation Appropriations: Dividends: Interim Dividend Proposed Final Dividend Dividend Tax Transfer to General Reserve Balance carried to Balance Sheet

16 17 18

19

20

227,395.21 4,134.69 70,923.75 100,958.47 35,813.23 53.48 11,594.23 450,873.06 35.74 450,837.32 107,658.55 3,134.91 104,523.64 104,523.64 21.29 104,502.35 33,500.00 (72.78) (1,011.97) 32,415.25 72,087.10 90.77 177,236.84 249,233.17

236,630.71 3,886.68 63,588.24 75,579.35 37,591.91 1,076.85 10,559.77 428,913.51 37.36 428,876.15 117,432.67 7,847.47 109,585.20 109,585.20 (98.39) 109,683.59 34,727.00 419.03 (418.41) 380.00 35,107.62 74,575.97 8.73 160,172.05 234,739.29

Dividend Decision (Distribution of Profits)

21 22

4,800.00 10,560.00 2,569.66 40,000.00 191,303.51 249,233.17

4,800.00 10,160.00 2,542.45 40,000.00 177,236.84 234,739.29

Notes to Accounts Balance Sheet Abstract & Company's General Business Profile

CORPORATE OBJECTIVE
Profit Maximization - It implies Maximization of PAT. It is criticised due to:  It is vague and ambiguous concept.  It ignores the time value of money.  It ignores cash flows.

Wealth Maximization - It implies Maximizing the shareholders wealth or value. - Takes into account (i) the present and expected future earnings per share, (ii) risk of these earnings, (iii) dividend policy of the firm (iv) the timing duration, and (v) other factors that bear on the market price of the stock.

Corporate Practices Regarding Corporate Objectives



`Increasing shareholder value over time is the bottom line of every move we make - The Coca-Cola Company `We aim to maximize long-term shareholder value ABN AMRO Hero Honda Motors Limited has a history of creating value and maximizing returns for its shareholders `Since large corporations employ a vast quantum of societal resources, these resources should be utilized in a manner that meets stakeholders aspirations and societal expectations ITC Limited

REAL VALUE CHALENGE FOR THE COMPANY

MAXIMIZATION OF ECONOMIC VALUE ADDED (EVA)

ECONOMIC VALUE ADDED

(Important for Shareholders)

Earnings from the operating activities

Total cost of funds

EVA = Net Operating Profit after Tax (NOPAT)* - WACC (Cost of Debt +Equity) If NOPAT If NOPAT Cost Cost + EVA - EVA

*(NOPAT) = Net Profit after tax but before Interest

EVA CASES
HUL (2004 2007)
2000 1500 1000 PAT 500 0 PAT EVA EVA

2003 1804 1429

2004 1,199 887

2005 1,355 1,014

2006 1,540 1,125

2007 1,769 1,340

In cr.

HUL
2000 1500 1000 NOPAT 500 0 NOPAT Less: Cost of capital EVA Less: Cost of capital EVA 2003 1847 418 1429 2004 1,282 395 887 2005 1,367 353 1,014 2006 1,547 421 1,125 2007 1,786 446 1,340

2003 2004 Cost of Equity 375 312

2005 341

2006 412

2007 422

DR. REDYYS (2004 2008)

10,000 8,000 6,000 4,000 2,000 0 -2,000 -4,000 PAT EVA 2004 2,474 80 2005 211 (2,400) 2006 1,629 (1,229) 2007 9,327 2,570 2008 4,678 (1,367) PAT EVA

In million

DR. REDYYS
10,000 8,000 6,000 4,000 2,000 0 -2,000 -4,000 NOPAT Less: Cost of capital EVA 2004 2,350 2,269 80 2005 171 2,571 (2,400) 2006 1,823 3,052 (1,229) 2007 9,405 6,475 2,570 2008 4,942 6,309 (1,367) NOPAT Less: Cost of capital EVA

HOW TO IMPROVE EVA VALUE DRIVERS

Increase Sales Increase NOPAT

Improve EVA
Reduce Cost of Capital

Control Costs Optimize Capital Employed Reduce Cost of Capital

AGENCY CONFLICT (Shareholders vs. Managers)

- Separation of Ownership and Control results in conflicts between mangers and owners The shareholders The principals The management The agents

Principal-agent relationship/problem in financial management

How to remove this Agency Conflict?

(How to motivate managers to work in shareholders interest?)  Appropriate Incentives to mangers o Employees Stock Options (ESOPs) o Bonuses and perquisites o Performance based remuneration  Monitoring and control arrangements o Management audit and internal control system  Direct intervention by shareholders  Threat of hostile takeovers

Case (ITC) - ITCs corporate governance structure, systems and processes are based on two core principles:


Management must have the executive freedom to drive the enterprise forward without undue restrains; and The freedom of management should be exercised within a framework of effective accountability.