CORPORATE FINANCEBA8014 – REGULATION - 2013

OVERVIEW

UNIT TITLE

UNIT – I (9) INDUSTRIAL FINANCE

UNIT – II (6) SHORT TERM WORKING CAPITAL FINANCE

UNIT – III (12) ADVANCED FINANCIAL MANAGEMENT

UNIT – IV(10) FINANCING DECISION

UNIT – V(8) CORPORATE GOVERNANCE

UNIT – I – INDUSTRIAL FINANCE (9 Hours)

(1) Indian Capital Market

(2) Basic problem of Industrial Finance in India.

(3) Equity , Debenture financing

(4) Guidelines from SEBI, advantages and disadvantages and cost

of various sources of finance

(5) Finance from international sources, financing of exports

(6) Role of EXIM bank and commercial banks.

(7) Finance for rehabilitation of sick units

UNIT – II – SHORT TERM WORKING CAPITAL FINANCE (6 Hours)

Estimating working capital requirements

Approach adopted by Commercial banks,

Commercial paper

Public deposits and inter corporate investments.

UNIT – III – ADVANCED FINANCIAL MANAGEMENT (12Hours)

Appraisal of Risky Investments, certainty equivalent of cash flows and

risk adjusted discount rate,

Risk analysis in the context of DCF methods using

Probability information

Nature of cash flows,

Sensitivity analysis;

Simulation and

Investment decision,

Decision tree approach in investment decisions.

UNIT – IV – FINANCING DECISION (10 Hours)

Simulation and financing decision

Cash inadequacy and cash insolvency

Determining the probability of cash insolvency

Financing decision in the Context of option pricing model

and agency costs

Inter-dependence of investment

Financing and Dividend decisions.

UNIT – V – CORPORATE GOVERNANCE (8 Hours)

Corporate Governance

SEBI Guidelines

Corporate Disasters and Ethics

Corporate Social Responsibility

Stakeholders and Ethics

Ethics, Managers and Professionalism.

TEXT BOOKS

Richard A.Brealey, Stewat C.Myers and Mohanthy,

Principles of Corporate Finance, Tata McGraw Hill, 9th

Edition, 2011

I.M.Pandey, Financial Management, Vikas Publishing House

Pvt., Ltd., 12th Edition, 2012.

REFERENCES

Brigham and Ehrhardt, Corporate Finance - A focused Approach,

Cengage Learning, 2nd Edition, 2011.

M.Y Khan, Indian Financial System, Tata McGraw Hill, 6 th Edition,

2011

Smart, Megginson, and Gitman, Corporate Finance, 2nd Edition, 2011.

Krishnamurthy and Viswanathan, Advanced Corporate Finance, PHI

Learning, 2011.

Website of SEBI

INTRODUCTION

It is the area of finance dealing with the sources of funding

and the capital structure of corporations and the actions that

managers take to increase the value of the firm to the

shareholders.

Primary goal is to increase the shareholders value.

WHAT IS CORPORATE FINANCE?

Corporate Finance addresses the following three questions:

1. What long-term investments should the firm engage in?2. How can the firm raise the money for the required

investments?3. How much short-term cash flow does a company need to pay

its bills?

THE BALANCE-SHEET MODEL OF THE FIRM

Current Assets

Fixed Assets

1 Tangible

2 Intangible

Total Value of Assets:

Shareholders’ Equity

Current Liabilities

Long-Term Debt

Total Firm Value to Investors:

THE BALANCE-SHEET MODEL OF THE FIRM

Current Assets

Fixed Assets

1 Tangible

2 IntangibleShareholders’

Equity

Current Liabilities

Long-Term Debt

What long-term investments should the firm engage in?

The Capital Budgeting Decision

THE BALANCE-SHEET MODEL OF THE FIRM

How can the firm raise the money for the required investments?

The Capital Structure Decision

Current Assets

Fixed Assets

1 Tangible

2 IntangibleShareholders’

Equity

Current Liabilities

Long-Term Debt

THE BALANCE-SHEET MODEL OF THE FIRM

How much short-term cash flow does a company need to pay its bills?

The Net Working Capital Investment Decision

Net Working Capital

Shareholders’ Equity

Current Liabilities

Long-Term Debt

Current Assets

Fixed Assets

1 Tangible

2 Intangible

INTRODUCTION

The main concept of corporate finance are applicable to the

financial problems of all kinds of firms.

Outline of corporate finance:

Investment analysis

Maximizing shareholders value

Return on investment

INTRODUCTION

Investment analysis or capital budgeting is the allocation of firm’s

resources between competing opportunities which is one of the

main focus of capital budgeting.

The primary goal of financial management is to maximize or to

continually increase shareholder value.

Return on investment is the concept of an investment in some

resource or asset yielding an upward growth trend or

appreciation in value to the investor.

1. THE INDIAN CAPITAL MARKET

► The capital market in India is a market for securities, where

companies and governments can raise long term funds.

► It is a market designed for the selling and buying of stocks and

bonds.

► Stocks and bonds are the two major ways to generate capital and

long term funds.

► Thus the bond market and stock markets is considered as

capital markets.

NATURE OF CAPITAL MARKET

► The nature of capital market is brought out by the

following facts:

► It has two segments

► It deals in long term securities

► It performs trade off function

► It helps in capital formation

► It helps in creating liquidity

CAPITAL MARKET

PRIMARY MARKET

•New issues are distributed to the investors.

SECONDARY

MARKET

•Existing securities are traded.

CAPITAL MARKET

The Indian Equity market and Indian debt markets do form

part of Indian capital market.

The Indian capital market depends mainly on monsoons,

global funds flowing into equities and the performance of

various companies.

It is dominated by two exchanges

BSE

NSE

BENCHMARK INDICES

BSE – BOMBAY STOCK EXCHANGE - Sensex

NSE – NATIONAL STOCK EXCHANGE – Nifty

INDEX: A stock index or stock market index is a method of

measuring the value of a section of the stock market.

It is computed from the prices of selected stocks (typically

a weighted average).

It is a tool used by investors and financial managers to describe

the market, and to compare the return on specific investments.

BENCHMARK INDICES

BSE – BOMBAY STOCK EXCHANGE – Sensex (Sensitive Index)

Commonly traded 30 stocks on the BSE

BSE allocates weightage to different stocks that reflect their importance in the

stock markets.

NSE – NATIONAL STOCK EXCHANGE – Nifty (National Stock Exchange Fifty)

India Index Services and Products Ltd, (IISL) owns Nifty.

IISL is a joint venture of NSE and CRISIL

CRISIL is a subsidiary of Standard and Poor (S&P)

And so NIFTY is also called as S&P CNX Nifty

MARKET CAPITALISATION

Market capitalization refers to the value of a company’s

outstanding shares.

Outstanding shares – Number of shares issued by the company

and subscribed by the public.

Market Capitalization = Current market price of stock

Shares outstanding

MARKET CAPITALISATION

Lets assume company ABC has 50,00,000 shares outstanding and

the current share price is Rs. 50. Based on this information and

the formula above

The company’s market capitalization is 50,00,000 50 =

25,00,00,000.

Free Float market – It is defined as the value of shares readily

available in the market for public trading excluding the promoters

equity.

SENSEX CALCULATION

The formula for calculation SENSEX

Sum of free float market capital of 30 blue chip companies

Index Factor

Index factor = 100/market value in 1978-79

Where 100 is the index value in 1978-79

SENSEX CALCULATION

Example:

Assume the sensex has only two stocks namely SBI and Reliance. total shares in SBI are 500 out of which 200 are held by govt. and only 300 are available for public trading. reliance has 1000 shares out of which 500 are held by promoters and 500 are available for trading.

assume price of SBI stock is rs.100 and reliance is rs.200.

then free floating market capital of these two companies,

(300*100+500*200)=30000+100000=130000

assume the market capital during the year 1978-79 was rs.25000

Then sensex =130000*100/25000=520.

PLAYERS OF INDIAN EQUITY MARKET

Mutual funds

Financial Institutions

FII

Venture Capital Funds

Private Equity Funds

MEMBERS OF INDIAN CAPITAL MARKET

The Industrial Financial Corporation of India (IFC).

The Industrial Credit and Investment Corporation of

India (ICICI).

The Refinance Corporation of India (RFC).

The State Financial Development Corporations (SFCs).

National Industrial Development Corporation (NIDC).

Unit Trust of India (UTI).

MEMBERS OF INDIAN CAPITAL MARKET

The State Industrial Development Corporation (SIDCs).

National Small Industries Corporation (NSIC).

Industrial Development Bank of India (IDBI).

Life Insurance Corporation of India (LIC).

Nationalized Commercial Banks (NCBs)

Merchant Banking Institutions (MBIs).

National Industrial Reconstruction Corporation of India (NIRC)

MEMBERS OF INDIAN CAPITAL MARKET

These members are mainly financial institutions which

provide the liquidity that is needed to propel the

machinery of the Capital Market.

The financial power of the Capital Market is in their

hands. SEBI has the responsibility to oversee their

proper functioning.

SEBI- SECURITIES EXCHANGE BOARD OF INDIA

It is the National regulatory body for the securities

market, set up under the Securities and Exchange

Board of India act 1992.

To protect the investors in securities and to promote

the development of, and to regulate the securities

market.

GENESIS

In 1988 the Securities and Exchange Board of India

(SEBI) was established by the Government of India

through an executive resolution, and was

subsequently upgraded as a fully autonomous body (a

statutory Board) in the year 1992 with the passing of

the Securities and Exchange Board of India Act (SEBI

Act) on 30th January 1992.

GENESIS

Effective regulation of the market, SEBI Act, 1992 was

enacted to establish SEBI with statutory powers for:

Protecting the interests of investors in securities,

Promoting the development of the securities market, and

Regulating the securities market.

CONSTITUTION OF SEBI

The Central Government has constituted a Board by the name of SEBI under

Section 3 of SEBI Act. The head office of SEBI is in Mumbai. SEBI may

establish offices at other places in India. SEBI consists of the following

members, namely:-

(a) a Chairman;

(b) two members from amongst the officials of the Ministry of the Central

Government dealing with Finance and administration of Companies Act, 1956;

(c) one member from amongst the officials of the Reserve Bank of India;

(d) five other members of whom at least three shall be whole time members to be

appointed by the Central Government.