cf intro

Topics: Finance, Corporate finance, Stock exchange Pages: 32 (2787 words) Published: December 4, 2013
LBSIM-2013-15-Term-II

Introduction
to
Corporate Finance

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Introduction to Corporate Finance

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LBSIM-2013-15-Term-II

What is Corporate Finance about?
• Financial Decisions made by Corporations.
• Financial decisions relate to:
Where to invest the firm’s resources
(Investment Decisions)
How to raise resources for the firm
(Financing Decisions)
How to reward the owners of the business
(Dividend Decisions)
• Corporate Finance provides answers to these issues.
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Introduction to Corporate Finance

Investment Decisions
• Firms have scarce resources which must be allocated
among competing uses.
• Resources may be used for :
Revenue Generating
Cost Saving Projects
Strategic Decisions

Introduction of a New Product
Line
Replacing old equipment with
new equipment
Which markets to enter
Acquisition of other companies

• While taking Investment Decisions, we measure the
Benefits (Returns) from the proposed Investment
projects and compare with Minimum Acceptable
Hurdle rate to decide acceptance or rejection.
Introduction to Corporate Finance

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LBSIM-2013-15-Term-II

Investment Decisions (Contd.)
• Minimum Acceptable Hurdle rate should be set so as to
reflect:
Risk profile of the project (Higher hurdle rate for
riskier projects), and
Financing mix of the project
Projects with different Risk Profiles

16%
9%
Less Risky

More Risky
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Introduction to Corporate Finance

Investment Decisions (Contd.)
• Investment Decisions are concerned with:
Establish Minimum Acceptable Hurdle Rate
appropriate to the investment proposal
Measuring Benefits (Returns) from the investment
proposals,
Comparing benefits with minimum acceptable
hurdle rate in order to accept (or reject) the project.
Invest in assets that earn a return greater than the
minimum acceptable hurdle rate
Introduction to Corporate Finance

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LBSIM-2013-15-Term-II

Financing Decisions
• How should firms raise Financial resources required?
• Businesses can broadly raise funds either through:
– Owners’ Fund (Equity)
– Borrowed Funds (Debt)

• Financing Decision involves :
– Finding an optimal mix between Debt & Equity (Capital
Structure), and
– Type of Instrument
Long Term Vs. Short Term,
Fixed Rate Vs. Floating Rate,
Straight Vs. Convertible,
Domestic Markets Vs. International Markets.

Choose a financing mix that matches the characteristics
Introduction to Corporate Finance
of assets being financed.

7

Dividend Decisions
• Dividend is any reward by the firm to its shareholders.
• Firms have to decide about what to do with the surplus
generated by the firm i.e.:
– Reinvest into the business (Plough back) , or
– Distribute as Dividend (reward the shareholders)
Amount of Dividend (Dividend Payout)
Stability of Dividend (Trend)
Forms:
Cash
Share Repurchase
Introduction to Corporate Finance

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LBSIM-2013-15-Term-II

Dividend Decisions (Contd.)
• Trade-off between “retention” & “distribution” is to be made.
When the firm is small and has attractive investment
opportunities, profits are retained and reinvested.
At a later stage in a firm’s life cycle when the funds
generated are greater than the investment
requirements, the firm has to decide about ways of
returning the excess cash to the owners.
If there are not enough investments that earn the
hurdle rate, return the cash to the owners.
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Introduction to Corporate Finance

Linking Financial Decisions with Firm’s Objective

Investment Decision

Financing Decision

Dividend Decision

Invest in assets that
earn a return greater
than the minimum
acceptable hurdle rate

Choose the financing mix that
maximizes the value of the
projects taken , and matches
the assets being financed.

If there are not enough
investments that earn the
hurdle...
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