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CORPORATE FINANCE - I

Course Instructor: Prof J S Matharu Email: jsmatharu@imtnag.ac.in Phone Ext: 152

SYLLABUS(IN BRIEF)
Introduction to Corporate Finance; Financial Markets, Instruments Mathematics of Finance /Time Value of Money Discounting & Compounding Risk & Return on Investments Valuation of Securities Shares, Debentures Cost of Capital & Required Returns Capital Budgeting Decisions Financial Planning & Forecasting Leverage

Books
Financial Management by Srivastava and Misra (Oxford) Principles of Corporate Finance by Brealey, Myers, Allen & Mohanty (TMH) Fundamentals of Corporate Finance by Parrino and Kidwell (Wiley) Corporate Finance by Ross, Westerfield, Jaffe and Kakani (TMH)

Financial System
An institutional framework existing in a country to enable financial transactions Four main parts
Financial assets (loans, deposits, bonds, equities, etc.) Financial institutions (banks, mutual funds, insurance companies, etc.) Financial markets (money market, capital market, forex market, etc.) Financial Services (Mutual Funds, Stock broking, Leasing etc.)

Regulation is another aspect of the financial system (RBI, SEBI, IRDA, FMC)

The financial system


The financial system consisting of a variety of institutions, markets, and instruments related in a systematic manner provides the principal

means by which savings are transformed into


investments.

Financial Markets
A financial market is a market for creation and exchange of financial assets. Financial markets play a very pivotal role in allocating resources in the economy by performing three important functions as they : Facilitate price discovery. Provide liquidity. Reduce the cost of transacting.

Financial assets/instruments
They represent a claim against the future income and wealth
for savers
deposits, equities, mutual fund units, etc.

for borrowers
loans, overdrafts, etc.

Financial Institutions
Facilitate smooth functioning of the financial system by making investors and borrowers meet Provide services to entities seeking advises on various issues ranging from restructuring to diversification plans. Banks, Insurance Companies, Mutual Funds, Merchant Banks, Stock Exchanges, Depositories,

Financial Services
Concerned with the design and delivery of advice and financial products to individuals and businesses.
Fund Based
Equipment leasing / Lease financing; Hire purchase and consumer credit; Factoring and forfaiting; Venture capital financing; Housing finance; Bills discounting

Fee Based
Merchant banking; Stock broking; Depository services; Credit rating

REGULATARY INFRASTRUCTURE
RESERVE BANK OF INDIA SEBI IRDA

FMC
NHB

Key Trends In The Indian Financial System


Market-determined interest rates Greater volatility of interest rates Emergence of universal banks Emphasis on prudential regulation and supervision

Gradual integration with the global financial system


Increase in financial innovation

Introduction to Corporate Finance


Corporate Finance deals with acquisition, financing and management of assets of a business concern in order to maximize the wealth of its owners.

Role of The Financial Manager


(2) (1)

Firm's operations
(3)

Financial manager

(4a)

Financial markets

(4b)
(1) Cash raised from investors

(2) Cash invested in firm


(3) Cash generated by operations (4a) Cash reinvested (4b) Cash returned to investors

Finance Functions
Investment or Long Term Asset Mix Decision Financing or Capital Mix Decision Dividend or Profit Allocation Decision Liquidity or Short Term Asset Mix Decision

Financial Goals
Profit maximization (profit after tax) Maximizing Earnings per Share Shareholders Wealth Maximization

Profit Maximization
Maximizing the Rupee Income of Firm
Resources are efficiently utilized Appropriate measure of firm performance Serves interest of society also

Objections to Profit Maximization


It is Vague It Ignores the Timing of Returns It Ignores Risk In new business environment profit maximization is regarded as
Unrealistic Difficult Inappropriate Immoral.

Maximizing EPS
Ignores timing and risk of the expected benefit Market value is not a function of EPS. Hence maximizing EPS will not result in highest price for company's shares Maximizing EPS implies that the firm should make no dividend payment so long as funds can be invested at positive rate of return such a policy may not always work

Maximizes the net present value of a course of action to shareholders. Accounts for the timing and risk of the expected benefits. Benefits are measured in terms of cash flows. Fundamental objectivemaximize the market value of the firms shares.

Shareholders Wealth Maximization

Agency Relationships
An agency relationship exists whenever a principal hires an agent to act on his or her behalf. Within a corporation, agency relationships exist between shareholders and managers The lack of perfect alignment between the interests of managers and shareholders results in the agency problem. To mitigate the agency problem, effective monitoring has to be done and appropriate incentives have to be offered.