CORPORATE FINANCE

Course Instructor:
Prof Jasbir Singh Matharu
SYLLABUS(IN BRIEF)

Introduction to Corporate Finance; Financial System;

Time Value of Money Discounting & Compounding
Risk & Return on Investments
Valuation of Securities
Shares
Debentures/Bonds
Introduction to Options and Futures
Cost of Capital & Required Returns
Capital Budgeting Decisions
Leverage
Books

Text:
Fundamentals of Corporate Finance by Parrino and Kidwell (Wiley)

References:
Principles of Corporate Finance by Brealey, Myers, Allen & Mohanty
Corporate Finance by Ross, Westerfield, Jaffe and Kakani
Corporate Finance by Damodaran
Fundamentals of Financial Management by Brigham and Houston
Financial Management, Theory and Practice by Chandra
Financial Management by Pandey
Financial Management by Khan and Jain
 Newspapers/Magazines E-Resources/Databases:
Economic Times http://www.wiley.com/co
Business Standard llege/parrino
Financial Express www.investopedia.com
Business Line www.nseindia.com
www.bseindia.com
Business India CapitaLine Plus
Business World Prowess
The Economist
Evaluation

Sr. No. Components Weight

1 Class Participation /Activity 10%

2 Quiz / Class Test (2) 15%

3 Assignment / Project Group 15 %

4 Mid Term Exam 20 %

5 End Term Examination 40%

Expectations from Students

Pre-class preparations /reading materials

Academic code does not allow students any form of
plagiarism in any part of their academic work
including projects, presentations, assignments etc.
Read/access materials, beyond books.
Scientific calculator in the classes and exams (but
No Financial Calculator)
Financial System
The financial system consisting of a variety of institutions,
markets, and instruments related in a systematic manner
provides the principal means by which savings are
transformed into investments.
Consists of:
Financial assets (loans, deposits, bonds, equities, etc.)
Financial institutions (banks, mutual funds, insurance companies,
etc.)
Financial markets (money market, capital market, forex market,
etc.)
Financial Services (Mutual Funds, Stock broking, Leasing etc.)
Regulation: RBI, SEBI, IRDA
Financial Markets

Capital
Money

Derivatives

Forex
Primary and Secondary Markets

Stocks and Investors

Bonds
Firms
securities
Money A B
money

Primary Market

Secondary Market
Financial assets/instruments
They represent a claim against the future income and
wealth
Equity
Debt

Preference Shares

Government Securities

Money Market Instruments

Financial Institutions
Facilitate smooth functioning of the financial system by making
investors and borrowers meet
Provide services to entities seeking advises on various issues ranging
from restructuring to diversification plans.

Banks
Non Banking Financial Companies
Insurance Companies
Mutual Funds
Merchant Banks
Stock Exchanges
Financial Services

Concerned with the design and delivery of advice

and financial products to individuals and businesses.
Fund Based
Lease financing; Factoring; Venture capital financing;
Housing finance
Fee Based
Merchant or Investment banking; Stock broking; Depository
services; Credit rating
Regulatory Infrastructure

Reserve Bank of India (RBI)

Securities and Exchange Board of India (SEBI)

Insurance Regulatory and Development Authority (IRDA)

National Housing Bank (NHB)

Change in the system- Proposals by Financial Sector Legislative

Reforms Commission (FSLRC)

Types of Business Organizations
Sole Proprietorship
Partnership
Limited Liability Partnership
One person company
Company
Private Limited
Public Limited
Listed:Reliance, ITC, TCS, Infosys
Unlisted: Sahara India Real Estate Corporation Limited
OPC
Introduced by The Companies Act, 2013
Enables Entrepreneur(s) carrying on the business in
the Sole-Proprietor form of business to enter into a
Corporate Framework.
Hybrid of Sole-Proprietor and Company form of
business, and has been provided with
concessional/relaxed requirements under the Act.
LLP
Combines the flexibility of a partnership and the
advantages of limited liability of a company at a low
compliance cost.
Provides the benefits of limited liability of a company,
but allows its members the flexibility of organizing their
internal management on the basis of a mutually arrived
agreement, as is the case in a partnership firm.
LLPs are the preferred vehicle of business, particularly
for service industry or for activities involving
professionals.
Introduction to Corporate Finance

Corporate Finance deals with acquisition, financing

and management of assets of a business concern in
order to maximize the wealth of its owners.
Finance Functions / Decisions

Investment Decision
Long Term
Capital Expenditure / Capital Budgeting
Short Term
Working Capital Management
Receivables, Inventory, Cash, Payables
Financing Decision
Debt vs. Equity
Dividend Decision
To give or not to give?
Financial Decisions and Balance Sheet
 Role of a CFO
Board of Directors

Chairman of the Board and

Chief Executive Officer (CEO)

Vice President Finance and

Chief Financial Officer (CFO)

Treasurer Controller

Cash Manager Credit Manager Tax Manager Cost Accounting

Capital Expenditures Financial Planning Financial Accounting Data Processing

1-20
 The Goal of the Firm
What Should Management Maximize?
Why not maximize profits?
Profit maximization does not tell us
when cash flows are to be received.

Profit maximization ignores the

uncertainty or risk associated with
cash flows.

Does not tell us whether to

maximize Operating profits or EBIT
or PAT
Objectives / Goals
In traditional corporate finance, the objective in
decision making is to maximize the value of the
firm.
A narrower objective is to maximize stockholder
wealth. (Bondholders are generally protected).

When the stock is traded and markets are viewed

to be efficient, the objective is to maximize the stock
price.
Agency Relationships
An agency relationship exists whenever a principal hires an agent to
act on his or her behalf.
Within a company, agency relationships exist between shareholders
and managers
Managers may have other interests (job security, perks,
compensation) that they put over shareholders wealth maximization.
To mitigate the agency problem, the firm has to bear agency costs.
Appropriate incentives have to be offered
which gives rise to costs such as performance bonuses and stock options.
Effective monitoring has to be done
Monitoring costs are the costs incurred by the owners to monitor the actions
of the manager, such as the cost incurred for the appointment of the
auditors, etc.
Ethics in Business
Ethics in general is concerned with human behavior
that is acceptable or "right" and that is not
acceptable or "wrong" based on conventional
morality.

Do we require a code of conduct?

Satyam Fraud
In one of the biggest frauds in Indias corporate history, B.
Ramalinga Raju, founder and CEO of Satyam Computers,
India's fourth-largest IT services firm, announced on January
7, 2009 that his company had been falsifying its accounts
for years, overstating revenues and inflating profits.

Raju acknowledged that Satyam's balance sheet included Rs.

7,136 crores in non-existent cash and bank balances,
accrued interest and misstatements.

It had also inflated its 2008 second quarter revenues by Rs.

588 crores to Rs. 2,700 crores, and actual operating
margins were less than a tenth of the stated Rs. 649 crore.
 Satyam had a reputation of excellent corporate
governance.

The World Council for Corporate Governance

awarded Satyam its Golden Peacock Award for
Corporate Governance in 2008.

Satyam's shares fell to Rs 11.50 on 10 January

2009, their lowest level since March 1998,
compared to a high of Rs 544 in 2008