Meaning of corporate finance, meaning of fixed and working capital, factors affecting requirement of fixed capital, factors affecting requirement of working capital, what is capital structure, and componenets of capital structure.

1. INDEX
Sr. No. Chapter
1. Introduction To Corporate Finance
2. Sources of Corporate Finance
3. Issue of Shares
4. Issue of Debentures
5. Deposits
6. Correspondence with Members
7. Correspondence with Debenture holders
8. Correspondence with Depositors
9. Depository System
10. Dividend and Interest
11. Financial Market
12. Stock Exchange

2. Chap :1 Introduction to Corporate Finance
1.1 Meaning
1.2 Importance of Financial Planning
1.3 Capital Requirements
(A) Fixed Capital and (B) Working Capital
1.4 Capital Structure (Components)
1.5 Distinction between Fixed Capital
and Working Capital

3. Meaning of Finance
• Finance is related to money or money
management.
• Financing is related to inflow and outflow
of funds.
• Success of any business organization
depends upon the effective use of
finance.

4. Meaning of Corporate Finance
• Corporate finance deals with the raising and
using of finance by a corporation.
• ‘‘Corporate finance deals primarily with the
acquisition and use of capital by business
corporation.’’-Henry Hoagland.
• The finance manager has to ensure that:
– the firm has adequate finance,
– they are using the right source of funds that
have minimum cost,
– the raised funds are used effectively,
– they are generating maximum returns for it’s
owners.

5. Basis of Corporate Finance:
• Financing Decision: The firm has multiple
choices of sources of financing. The firm can
choose whether it wants to raise equity
capital or debt capital. Firm can even opt for
bank loan, public deposits, debentures etc.
to raise funds.
• Investment Decision : The finance manager
has to take decision regarding the use of the
funds in systematic manner so that it will
bring maximum return for its owners. For
this, the firm has to take into consideration
the cost of capital.

6. Finding investments and deploying
them successfully in the business is
known as investing decision. It is also
called as ‘capital budgeting’.

7. Importance
of
Corporate
Finance
Helps in
decision
making
Helps in
Raising
Capital for
a project
Helps in
Research and
Development
Helps in
smooth
running of
business
firm
Brings co-
ordination
between
various
activities
Promotes
expansion
and
diversification
Managing
Risk
Replace
old assets
Payment of
dividend
and
interest
Payment
of
taxes/fees

8. CAPITAL REQUIREMENTS
• The first and foremost decision to take for running
the business is regarding the amount of capital
requirement.
• Therefore financial plan should be drafted keeping in
mind present and future requirement of the
business.
• While deciding about the capital requirement, an
entrepreneur has to take into consideration - fixed
capital requirement and working capital requirement.

10. Land, Building
equipment
Furniture, machinery,
trucks etc.

11. Nature of business
• Manufacturing
industries and public
utilities have to invest
huge amount of funds
to acquire fixed assets.
• While Trading business
may not need huge
investments in fixed
assets.
Size of business
• In case of large scale
operations, the fixed
capital requirements
are likely to be high.
• In case of small scale
operations, the fixed
capital requirements is
relatively lower.
Scope of business
• Manufacturing firms
have huge fixed capital
requirements.
• Trading concerns have
limited fixed capital
requirements.
Extent of lease or rent
• If assets are purchased,
huge fixed capital will
be needed for the
business.
• If assets are acquired
on lease or on rental
basis, lesser will be the
fixed capital need.
Arrangement of sub-
contract
• If the business wants to
sub-contract some
processes of
production to others,
limited assets are
required to carry out
the production. It
would minimize fixed
capital requirement of
business.
Acquisition of old assets
• The investment in fixed
assets will be low when
second hand or old
assets will be acquired.
• The investment in fixed
assets will be high for
acquiring new assets.
Factors affecting fixed capital requirement
Acquisition of assets on
concessional rate
• When plants and
equipment are made
available on instalment
basis by banks or at
concessional rates by
the government the
requirement of fixed
capital will be lower.
International conditions
• The fixed capital
investment of firms
that carry out business
at international level
depend on the
international
conditions.
Trend in economy
• If there is a positive
trend in the economy,
there will be increase in
business. As a result
business firms will
invest more in fixed
capital to increase their
capacity.
Population trend
• When the population is
increasing at high rate,
demand for
automobiles, electronic
goods, ready-made
garments, etc.
increases, which
necessitates huge
amount of fixed capital
by businessmen.
Consumer preference
• Industries providing
goods and services
which are in good
demand, will require
large amount of fixed
capital. For example -
Mobile phone
manufactures as well as
mobile network
providers.
Competitive factor
• In order to remain
competitive, when a
business increases fixed
capital investment, all
competitors also do the
same.

12. Working Capital
• Working capital is the capital which is used to carry out the
day to day business activities.
• A business firm requires funds to store adequate raw material
in stock.
• A firm would need capital to maintain sufficient stock of
finished goods.
• Goods sold on credit do not fetch cash immediately. Firm will
have to arrange for funds till the amount is collected from the
debtors.
• Cash is also required to pay overheads/ daily expenses.
• Some excess cash also should be maintained to meet
unexpected expenses.

13. Definition of Working Capital
Net Working Capital
Approach
• ‘The excess of current assets over
current liabilities.’’ – Gerstenbergh
• It is also called as circulating capital.
Gross Working Capital Approach
• “The sum of current assets is working
capital.”- J. S. Mill

14. Factors affecting Working capital requirement
Nature of business
•Manufacturers of essential products
would need relatively less working
capital.
•Public utility concerns (gas&
electricity supplies) will need small
working capital.
•Manufacturers of luxurious
products, requires huge amount of
working capital.
•Trading/merchandising firms need
large amount of working capital.
Size of business
• A firm with large scale
operations will require more
working capital.
• A firm with smaller scale
operations will require
limited working capital.
Volume of sales
• If volume of sales increases,
the amount of working
capital required also
increases.
• If volume of sales decreases,
the amount of working
capital required also
decreases.
Production cycle
• If the period of production
cycle is longer, then firm
needs more amount of
working capital.
• If manufacturing cycle is
short, it requires less working
capital.
Business cycle
• During boom in the economy,
sales will increase. Thus the
requirement of working
capital will increase.
• During recession, sales will
decline and hence the need
of working capital will also
decline.
Terms of purchases and
sales
• A firm that purchases on
credit and sells on cash
basis , will require lesser
working capital.
• When a firm Purchases on
cash basis and allows for
credit sales, may have bad
debts and will also require
more working capital.
Credit control
• If credit control policy is
sound, it required limited
working capital.
• If credit policy is liberal, it
creates a problem of
collection of funds.
Therefore a firm requires
more working capital.
Growth and Expansion
• The working capital
requirement of a growing
firm will increase.
• The working capital
requirement of a Slow
growing firm may remain
the same.
Management ability
• The requirement of
working capital is reduced
if there is proper co-
ordination between
production and
distribution of goods. A
firm stocking on heavy
inventory calls for higher
level for working capital.
External factors
• If financial institutions and
banks provide funds to the
firm as and when required,
the need for working
capital is reduced.

15. CAPITAL STRUCTURE
Capital structure means ‘mix up of various sources of
funds in desired proportion’. It is also known as
‘security mix.’
“ The long term sources of funds employed in a
business enterprise”. - R. H. Wessel

16. COMPONENTS OF CAPITAL STRUCTURE

17. •Those shares which are not preference shares are equity shares. They are also known as ordinary shares and they bear the ultimate risk
associated with ownership.
EQUITY SHARE CAPITAL
•They have preference for payment of dividend and for return of capital when the company is liquidated. These shares carry dividend at fixed
rate.
PREFERENCE SHARE CAPITAL
•It refers to that part of the profit that was retained in the business than distributed in the form of dividends. It is nothing but ‘Ploughing back
of profit’.
RETAINED EARNINGS
•Debentures
•When a Company needs funds for development, but does not want to increase its share capital, it can borrow money from the general
public by issuing certificates for fixed period of time and at a fixed rate of interest.
•Term loans
•Term loans are provided by bank and other financial institutions. They carry fixed rate of interest.
•Public deposits
•It means to accept funds from public in the form of deposits. The interest on the deposits are higher than bank and post office.
BORROWED CAPITAL

18. Points Fixed capital Working capital
1) Meaning
Fixed capital refers to any kind of physical asset i.e.
fixed assets.
Working capital refers to the sum of current
assets.
2) Nature It stays in the business almost permanently.
Working capital is circulating capital. It keeps
changing.
3) Purpose
It is invested in fixed assets such as land, building,
equipment, etc.
Working capital is invested in short term
assets such as cash, account receivable,
inventory, etc.
4) Sources
Fixed capital funding can come from selling shares,
debentures, bonds, long term loans, etc.
Working capital can be funded with short term
loans, deposits, trade credit, etc.
5) Objectives
of Investors
Investors invest money in fixed capital hoping to
make future profit.
Investors invest money in working capital for
getting immediate returns.
6) Risk Investment in fixed capital implies more risk. Investment in working capital is less risky.