Chapter 1: Intro to Corporate Finance

Corporate finance :

Meaning : Corporate finance deals with the raising and using of finance by a corporation. It deals with financing the activities of the corporation, capital structuring and making investment decisions

Capital structuring- debts or equity

Factors affecting working capital requirement (8M)

1. Nature of business - public utility concerns maintain small working capital cuz continuous flow of cash

2. Size of business- large scale operations needs huge working capital

3. Volume of sales- inter-related to working capital direct relation

4. Production cycle- direct relation

5. Credit control- if credit policy is sound then company need to improve cash flow if liberal then it creates problem of collection of funds

6. Growth and expansion- direct relation

7. Management ability- coordination between production and distribution of goods

8. External factors- financial institutions and bank funds

What 2 decisions are the basis of corporate finance (4M)

1. Financing decision

2. Investment decision

Importance of corporate finance (8M)

1. Helps in decision making

2. Helps in raising capital for a project

3. Helps in research and development

4. Helps in smooth running of business firm

5. Managing risk

6. Replace old assets

7. Payment of dividend and interst

8. Payment of taxes /fees

Factors affecting fixed capital requirement

1. Nature of business - manufacturing industries and public utilises invest huge amount of funds to acquire fixed assets while trading business may not

2. Size of business- large scale operations hence high fixed capital

3. Scope of business- productions or distribution on large scale

4. Extent of lease or rent- if acquired assets on lease or rent, less amount of funds for fixed assets will be needed for the business

Components of capital structure (4M)

1. Equity shares capital- basic source, bear ultimate risk, carry dividend at fluctuating rate

2. Preference share capital- carry dividend at fixed rate

3. Retained earnings- internal sources of financing, ploughing back of profit

4. Borrowed capital- a) debenture

b) term loan