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DISCOVER . LEARN . EMPOWER
UNIT-1 –
Introduction to
Corporate Finance
INSTITUTE –University School of
Business
DEPARTMENT -Management
MBA
Financial Management Course Code:22BAT625
MSC Name: Dr. Muskaan Arora
Associate Professor
Chandigarh University
1
Learning Objectives
Introduction to
Corporate Finance
Will be covered in the
lecture
CO
Number
Title Level
CO1
To develop an understanding of the
basic fundamentals of the corporate
financial management
Rememb
er,
Understa
nd
CO2
To apply the knowledge of financial
statement analysis in managerial
decision making
Apply
CO3
To compare and select from different
sources of finance
Analyze
CO4
Evaluating capital budgeting- investing
& financing decisions based upon the
time value of money concepts
Evaluate
CO5
To design an optimal capital structure
and optimum dividend payout for a firm
Create
What is Finance?
• In our present day economy, finance is defined as the provision of money at the time
when it is required.
• Every enterprise (big or small) needs finance to carry on its operations and to achieve
its targets
• Finance is indispensible and therefore rightly called as Lifeblood of an enterprise.
Finance Function
• Focus of all other functions of business
• Business will close down in the absence of finance
• Starts with set up of business and remains at all times
• Money once received, have to be returned
• Inflows and outflow of funds should be properly matched
Historical Perspective
• In early 1900, financial managers had the responsibility
• to raise funds and manage cash position of the firm
• In 1950’s, they were also involved in :
• capital budgeting techniques
• Now, they are more dynamic in responding to
• changing economic conditions,
• managing volatilities, and other challenges.
Corporate Financial Management
Corporate Financial Management involves
Forecasting, planning, organizing, coordinating and controlling of
All the financial activities
Related to acquisition and allocation of funds
Towards achieving the financial goals of the business.
OR
• managerial decisions that result in the acquisition and financing of short term
and long term credits for the firm".
• selection of specific assets or combination of assets
• in relation to the value of the firm.
6
Approaches to Finance Function
7
• The Traditional Approach
• The Modern Approach
According to traditional approach, the scope of finance function was
confined to only procurement of funds needed by a business on most
suitable terms. The utilization of funds was considered beyond the purview
of finance function.
Finance manager of a business firm will perform:
(a) Arrangement of short term and
• long-term funds from financial institutions.
• (b) Mobilization of funds through financial instruments like equity shares,
• preference shares,
• debentures, bonds etc.
• (c) Orientation of finance function with the accounting function and compliance of
legal provisions relating to funds procurement.
Limitations of Traditional Approach
(i) It is outsider-looking in approach that completely ignores internal decision making as to
the proper utilization of funds.
• (ii) The focus of traditional approach was on procurement of long-term funds. Thus, it
ignored the important issue of working capital finance and management.
• (iii) The issue of allocation of funds, which is so important today, is completely ignored.
• (iv) It does not lay focus on day to day financial problems of an organisation.
Modern Approach
(Inside-Outside approach)
• The modern approach views finance function in broader sense.
• It includes both raising of funds as well as their effective utilization under the
purview of finance.
• Proper utilization of funds was given more importance in modern approach.
Finance function according to this approach covers
• financial planning,
• raising of funds,
• allocation of funds,
• financial control.
10
• The Finance manager of a modern business firm will generally
involve in the following three types of decisions:
• (1) Investment decisions,
• (2) Finance decisions, and
• (3) Dividend decisions.
Objectives of Financial Management
• 1. PROFIT MAXIMISATION
• Profit earning is the main aim of every economic
activity.
• Maximizingthe Rupee Income of Firm
• Profit is the remuneration paid to the entrepreneur after
deduction of all expenses.
• Maximization of profit can be defined as maximizing the
income of the firm and minimizing the expenditure.
Profits can be Maximized:
• By increasing the sales and thereby increasing the revenue
• By reducing the cost of production through efficient use of resources-
Resources are efficiently utilized
• By making judicious choice of payment
• By minimizing risk
The arguments in favor of Profit Maximization
• Profit is the prime motive which contributes to better and more efficient
performance.
• -Appropriate measure of firm performance
• It ensures maximum returns to the shareholders.
• Without this object there will be no competition
• It plays important role in growth of business
• It act as protection against risk
Arguments against the Profit Maximization
• It is vague
• It Ignores the Timing of Returns- Time value of money
• It Ignores Risk
• Assumes PerfectCompetition
• In new business environment profit
• Unrealistic
• Difficult
• Inappropriate
• Immoral
15
2. Wealth Maximization
• Main objective of financial management
• It means to maximize the wealth of a company in the long run.
•
Maximization of Shareholder
Wealth!
Value creation occurs when we maximize the share price
for current shareholders.
Shareholders’ WealthMaximization
17
The market value of the firm is based on many factors like their
• goodwill,
• sales, services,
• quality of products, etc.
Features of WealthMaximization
• The present value of cash flow is taken into consideration.
• (Net Effect of Investment)
• It considers the time value of money
• It takes care of interest of owners, management, employees and customers.
• Judicious choice of funds
• Assess the risk involved in each source of funds.
• Focus on Long run value instead of ‘getting rich quick’
Key Differences Between Profit
Maximization and Wealth Maximization
• The process through which the company is capable of increasing earning capacity is
known as Profit Maximization. On the other hand, the ability of the company in increasing
the value of its stock in the market is known as wealth maximization.
• Profit maximization is a short term objective of the firm while long term objective is
Wealth Maximization.
• Profit Maximization ignores risk and uncertainty. Unlike Wealth Maximization,
which considers both.
• Profit Maximization avoids time value of money, but Wealth Maximization
recognizes it.
• Profit Maximization is necessary for the survival and growth of the enterprise.
Conversely, Wealth Maximization accelerates the growth rate of the enterprise and aims at
attaining maximum market share of the economy.
Strengths of Shareholder Wealth Maximization
• Takes account of:
• current and future profits and EPS;
• the timing, duration, and
• risk;
• dividend policy; and all other relevant factors.
• Thus, share price serves as a barometer for business performance.
21
Blackboard
Assessment Pattern
21
Components HT-1 HT-2 Assignment Surprise
Test
Business
Quiz
GD Forum Attendance Scaled
Marks
Max. Marks 10 10 6 4 4 4 2 40
References
• Pandey, I.M, 2115. Financial Management, 4th Edition, Vikas Publication House Pvt. Ltd, New Delhi. ISBN:
9789325982338.
• M Y Khan, P K Jain. 2112. Financial Management, 3rd Edition, Tata McGraw Hill. ISBN: 9781259004636.
• Damodaran, A. 1997. Corporate Finance –Theory & Practice, John Wiley and Sons, Inc. ISBN: 978-
0471076803.
• Mohanty, P., Richard, A.B., and Myers, S.C. 2114. Franklin Allen, Pitabas Mohanty., Principles of Corporate
Finance, McGraw Hill India. ISBN: 978-9332902701.
THANK YOU

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Lecture 1.1.pptx

  • 1. DISCOVER . LEARN . EMPOWER UNIT-1 – Introduction to Corporate Finance INSTITUTE –University School of Business DEPARTMENT -Management MBA Financial Management Course Code:22BAT625 MSC Name: Dr. Muskaan Arora Associate Professor Chandigarh University 1
  • 2. Learning Objectives Introduction to Corporate Finance Will be covered in the lecture CO Number Title Level CO1 To develop an understanding of the basic fundamentals of the corporate financial management Rememb er, Understa nd CO2 To apply the knowledge of financial statement analysis in managerial decision making Apply CO3 To compare and select from different sources of finance Analyze CO4 Evaluating capital budgeting- investing & financing decisions based upon the time value of money concepts Evaluate CO5 To design an optimal capital structure and optimum dividend payout for a firm Create
  • 3. What is Finance? • In our present day economy, finance is defined as the provision of money at the time when it is required. • Every enterprise (big or small) needs finance to carry on its operations and to achieve its targets • Finance is indispensible and therefore rightly called as Lifeblood of an enterprise.
  • 4. Finance Function • Focus of all other functions of business • Business will close down in the absence of finance • Starts with set up of business and remains at all times • Money once received, have to be returned • Inflows and outflow of funds should be properly matched
  • 5. Historical Perspective • In early 1900, financial managers had the responsibility • to raise funds and manage cash position of the firm • In 1950’s, they were also involved in : • capital budgeting techniques • Now, they are more dynamic in responding to • changing economic conditions, • managing volatilities, and other challenges.
  • 6. Corporate Financial Management Corporate Financial Management involves Forecasting, planning, organizing, coordinating and controlling of All the financial activities Related to acquisition and allocation of funds Towards achieving the financial goals of the business. OR • managerial decisions that result in the acquisition and financing of short term and long term credits for the firm". • selection of specific assets or combination of assets • in relation to the value of the firm. 6
  • 7. Approaches to Finance Function 7 • The Traditional Approach • The Modern Approach According to traditional approach, the scope of finance function was confined to only procurement of funds needed by a business on most suitable terms. The utilization of funds was considered beyond the purview of finance function.
  • 8. Finance manager of a business firm will perform: (a) Arrangement of short term and • long-term funds from financial institutions. • (b) Mobilization of funds through financial instruments like equity shares, • preference shares, • debentures, bonds etc. • (c) Orientation of finance function with the accounting function and compliance of legal provisions relating to funds procurement.
  • 9. Limitations of Traditional Approach (i) It is outsider-looking in approach that completely ignores internal decision making as to the proper utilization of funds. • (ii) The focus of traditional approach was on procurement of long-term funds. Thus, it ignored the important issue of working capital finance and management. • (iii) The issue of allocation of funds, which is so important today, is completely ignored. • (iv) It does not lay focus on day to day financial problems of an organisation.
  • 10. Modern Approach (Inside-Outside approach) • The modern approach views finance function in broader sense. • It includes both raising of funds as well as their effective utilization under the purview of finance. • Proper utilization of funds was given more importance in modern approach. Finance function according to this approach covers • financial planning, • raising of funds, • allocation of funds, • financial control. 10
  • 11. • The Finance manager of a modern business firm will generally involve in the following three types of decisions: • (1) Investment decisions, • (2) Finance decisions, and • (3) Dividend decisions.
  • 12. Objectives of Financial Management • 1. PROFIT MAXIMISATION • Profit earning is the main aim of every economic activity. • Maximizingthe Rupee Income of Firm • Profit is the remuneration paid to the entrepreneur after deduction of all expenses. • Maximization of profit can be defined as maximizing the income of the firm and minimizing the expenditure.
  • 13. Profits can be Maximized: • By increasing the sales and thereby increasing the revenue • By reducing the cost of production through efficient use of resources- Resources are efficiently utilized • By making judicious choice of payment • By minimizing risk
  • 14. The arguments in favor of Profit Maximization • Profit is the prime motive which contributes to better and more efficient performance. • -Appropriate measure of firm performance • It ensures maximum returns to the shareholders. • Without this object there will be no competition • It plays important role in growth of business • It act as protection against risk
  • 15. Arguments against the Profit Maximization • It is vague • It Ignores the Timing of Returns- Time value of money • It Ignores Risk • Assumes PerfectCompetition • In new business environment profit • Unrealistic • Difficult • Inappropriate • Immoral 15
  • 16. 2. Wealth Maximization • Main objective of financial management • It means to maximize the wealth of a company in the long run. • Maximization of Shareholder Wealth! Value creation occurs when we maximize the share price for current shareholders.
  • 17. Shareholders’ WealthMaximization 17 The market value of the firm is based on many factors like their • goodwill, • sales, services, • quality of products, etc.
  • 18. Features of WealthMaximization • The present value of cash flow is taken into consideration. • (Net Effect of Investment) • It considers the time value of money • It takes care of interest of owners, management, employees and customers. • Judicious choice of funds • Assess the risk involved in each source of funds. • Focus on Long run value instead of ‘getting rich quick’
  • 19. Key Differences Between Profit Maximization and Wealth Maximization • The process through which the company is capable of increasing earning capacity is known as Profit Maximization. On the other hand, the ability of the company in increasing the value of its stock in the market is known as wealth maximization. • Profit maximization is a short term objective of the firm while long term objective is Wealth Maximization. • Profit Maximization ignores risk and uncertainty. Unlike Wealth Maximization, which considers both. • Profit Maximization avoids time value of money, but Wealth Maximization recognizes it. • Profit Maximization is necessary for the survival and growth of the enterprise. Conversely, Wealth Maximization accelerates the growth rate of the enterprise and aims at attaining maximum market share of the economy.
  • 20. Strengths of Shareholder Wealth Maximization • Takes account of: • current and future profits and EPS; • the timing, duration, and • risk; • dividend policy; and all other relevant factors. • Thus, share price serves as a barometer for business performance.
  • 21. 21 Blackboard Assessment Pattern 21 Components HT-1 HT-2 Assignment Surprise Test Business Quiz GD Forum Attendance Scaled Marks Max. Marks 10 10 6 4 4 4 2 40
  • 22. References • Pandey, I.M, 2115. Financial Management, 4th Edition, Vikas Publication House Pvt. Ltd, New Delhi. ISBN: 9789325982338. • M Y Khan, P K Jain. 2112. Financial Management, 3rd Edition, Tata McGraw Hill. ISBN: 9781259004636. • Damodaran, A. 1997. Corporate Finance –Theory & Practice, John Wiley and Sons, Inc. ISBN: 978- 0471076803. • Mohanty, P., Richard, A.B., and Myers, S.C. 2114. Franklin Allen, Pitabas Mohanty., Principles of Corporate Finance, McGraw Hill India. ISBN: 978-9332902701.