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Manoj Sharma

Head

S.S.I.P.M.T

Raipur

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SoleProprietorships

Partnerships

LimitedPartnerships

No distinction between business and owner Easy to set up and operate

Business earnings taxed as personal income

Limited life, Limited access to capital,Unlimited personal liability

Similar to sole proprietorship, but has twoor more owners

Joint and several liability

Share of profits taxed as partnership income

One or more general partners with unlimitedpersonal liability

Most owners are limited partners, who arepassive investors with limited liability

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Corporations

Separate legal entity with many of the

economic rights and responsibilities of

individuals

Unlimited life, Limited liability, Separable

contracting, Improved access to capital

Owned by shareholders, who elect the

Board of Directors

Board appoints a President or CEO to

manage day-to-day operations

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It is the area of finance dealing withmonetary decisions that business enterprisemake and the tools and analysis used tomake these decisions.

The primary goal of corporate finance isto maximize shareholder value.

It is in principle different from managerial

finance which studies the financial decisionsof all firms, rather than corporations alone,the main concepts in the study of corporatefinance are applicable to the financial

problems of all kinds of firms.

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The discipline can be divided into long-term and

short-term decisions and techniques.Capital investment decisions are long-term

choices about which projects receive investment,whether to finance that investment with Equity

or debt, and when or whether topay dividends to shareholders.

Short term decisions deal with the short-termbalance of current assets and current liability; thefocus here is on managing cash, inventories, andshort-term borrowing and lending (such as the

terms on credit extended to customers).

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Financial Activity

Raising the Finance Investing the Finance

Objective Oriented

Types of Finance Relationship with Other Department

Dynamic in Nature

Require proper planning and control Managing Finance is an art and science

Legal Requirements

Important Part of Business Management

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Financing(Raising Capital)

Financial

Management

CapitalBudgeting

Risk Management

CorporateGoverance

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Time Value of Money

The opportunity to earn a return on invested funds

means that a dollar today is worth more than a dollar

in the future.

Compensation for Risk

Investors expect compensation for bearing risk. Dont put all your eggs in one basket.

Investors can achieve a more favorable tradeoffbetween risk and return by diversifying their

portfolios.

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Markets are smart.

Competition for information tends to make

markets efficient.

No arbitrage

Risk-free money-making opportunities are

extremely scarce.

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Invest in projects

1. The Hurdle RateHigher for riskier projectsReflect the financing mix

2.Returns on Projects on the Basis of Cash Flows

Timing of these cash flowsPositive & negative side effects(Yield a return greater than the minimumacceptable rate.)

Choose a Financing mix1. Maximize the value of Firm

2. Matches the assets being Financed

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If there are not enough investments that earn the

hurdle rate, return the cash to the owners of the firm.

1. Dividends

2. Stock buy backs

(depends on the stockholders characteristics)

Objective: Maximize the value of the Firm

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Adjusted Book Value Approach

Stock and Debt Approach

Direct Comparison Approach

Discounted Cash Flow Approach

Analyzing Historical Performance Estimating the Cost of Capital

Forecasting Performance

Determing the Continuing Value Calculating the firm value and interpreting the

result

DCF valuation: 2- stage and 3-stage growth models

Free cash flow to equity valuation

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There are two equivalent way of using theBalance Sheet information to appraise the value ofa firm.

The book values of investors claims may besummed directly.

The assets of the firm may be totaled and fromthis total non-investor claims (Like accountpayable and provision) may be deducted.

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Advantage

Net Book value of the assets reflect their fairvalues.

Disadvantage

Does not considered inflation which is

definitely a factor influencing market value.

Due to the technological changes assetsbecome obsolete and worthless.

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