Corprate Finance - REVISION I

ESSENTIAL:
READING
THE
SUMMARY THOROUGHLY AT
THE
END
OF
RELEVANT
CHAPTERS pertaining to YOUR
SYLLABUS.
KNOWING THE AREAS
OUTLINED BELOW
THOROUGHLY UNDER EACH
UNIT.
Unit -1:
1) Scope of Financial Management:
Maximising shareholders wealth
Latest developments- Catering to the
interest
of
all
stakeholders-

Maximising the returns through

judicial decisions concerning capital
acquisition, utilisation of funds for
long term and short term uses 9
Investment decisions and working
capital decisions), retention vs use of
profits for dividends etc.
2) Financial Management is also
concerned with other facets like
Production ( Working capital
management, Investment Decisions),
marketing ( Pricing decisionsMarginal cost and Break even
analysis etc), and HR aspects
( Human capital).
3) The Goal of finance function
must be wealth maximisation and

taking care of the interests of all

shareholders.
While
profit
optimisation is a sub-aim, it should
satisfy ethics and compliance with
laws.
4) Agency
problem:
Modern
corporations are financed by
millions of shareholders. Expert
management is required for which
professionals as agents of the
Company are employed ( Directors
and managers). They may act in
their self-interest and may not be in
the long term interests of the
company and shareholders. Please
see pages 542-543 of your text
book- Brigham and Ehrhardt. This
agency problem requires effective
corporate governance.

5) Forecasting future economy is an

important function of managers
because all finance functions require
this. The study of the market for
raising of funds is related to cost of
capital. The market fluctuations is
concerned with production policies
and volume of production. This in
turn is related to working capital
finance. Investment in long term
assets is related to financing and
dividend decisions. Thus estimating
the future is an important aspect
related to all facets of financial
management.
6) Treasurer Raising Finance and
payment of debts etc. Controller
Accounting, Tax compliance etc.

Unit-2 : Time value of money:

7) Time value of money is
important for financial decision
making.
Compounding
and
discounting are significant. Please
see pages 176-177 of the text.
8)
Nominal Interest is the rate
quoted. It could be the APR- Annual
Percentage rate. Effective interest is
the rate which results due to periodic
compounding. More the number of
periods more is the amount
compounded due to interest earning
further interest.
Unit -3 Cost of capital:

CAPM is a significant factor in cost

of capital. See page no 986 of your
text and the slides posted to LCM.
Unit-4 Investment decisions
The various investment evaluation
techniques Please see pages 401-416.
See
pages
425-426.
VERY
IMPORTANT Points in Summary.
Modified IRR is similar to IRR except
that it assumes the cash flows are reinvested at the WACC. Please see page
no: 412 for Independent projects and
mutually exclusive projects.
Compounding
and
discounting
processes in investment analysis.

NPV and IRR may give contradictory

results page 405-409. 407 in
particular.
Unit-5 Capital Structure
Leverage is an important concept in
financial planning. If aa high
percentage of firms total costs are
fixed costs then the firm is said to have
a high degree of Operating leverage .
Financial leverage is the extent to
which a firm uses fixed interest cost
debt and fixed dividend preference
shares in a firms capital structure. If
the extent of fixed income securities are
high, the firm is highly leveraged
financially.

The impact of debt in capital structure

is to get tax advantages and to improve
Earnings per Share and Return on
Equity.
The risk in using a very high portion of
debt is if the company is unable to pay
instalments and interest the assets
purchased and offered as security may
be sold affecting companys operations.
In the worst case scenario an
application may be filed by the
creditors for winding up of company .
Unit-6 Dividend Policy
Various forms of dividend permissible
in India: Cash dividend and bonus
shares. Factors influencing declaration
of dividend: Refer Slides and page 580.

The dividend preference theory is also

called Bird in hand theory. It holds that
the firms value will be maximised by a
high dividend pay-out ratio. Investors
regard cash dividends as being less
risky than potential capital gains.-page
554.
Stable dividend policy refer slides.
No undue fluctuations in market prices.
Investors know what they can expect.
Evens out dividend variations.
Unit-7 Working Capital management
Working capital management though
related to sales can be estimated
through operating Cycle and providing
for unexpected contingencies. The
modern tools like scenario planning,

and trend analysis help in smoothing

out fluctuations.
Operating Cycle in working capital
management.
Factoring
in
management

Working

capital

The role of core current assets and long

term funds to fund it.
Gross and net working capital
The role of inventory management
Composition of current assets and
liquidity.
Circumstances of market- boom or
depression to be considered for credit
policy- extending credit period and
concessions.

Uses of float in cash Managemeent

see page : 650.
Unit-8 Long Term Sources of Financing
Bonus shares and stock split: Please see
pages: 576 and 580.
Buy-back of shares and effect on
market prices- no. of shares get
reduced. Income is shared with lesser
shareholders- market value of shares
can increase. Page-550.
Rights issue and impact- does not alter
the market value in the sense the new
equilibrium reflects the increased no. of
shares for the existing shareholders.