1. Why is corporate finance important to all managers ? Everyone has to do work, whether one likes it or not.

Numerous and various activities that a human undertakes during his lifetime comprise different roles that he/she has to play in an entire lifetime. All of these activities, which lead to earn a livelihood are usually called occupation. We can classify human occupations under the following categories; Professions : A profession provides a means of livelihood which require certain qualities like systematic body of knowledge and skills, formulation of code of conduct, knowledge by education, service motives etc. Employment : When a person works under a contract or agreement or rules of service and the work is assigned to him by the employer, it is said that he is under the employment. The remuneration of such work is paid in the form of wages. Business : The literal meaning of business is busy-ness or being busy. Essentially a business is defined as any occupation in which man at the risk of loss, seeks to make money by selling the products he bought or manufactured. The purpose of selling and buying activities is to earn profit. Moreover, if anything is produced or bought for personal consumption, the transaction will not be treated as a business activity. In short, business is a very wide term. It includes a large number of economic activities. Business firms works in the midst of laws of the country, government, economic conditions, consumer tastes and preference, culture, competitors, technology and business ethics of the society.

To understand the whole business environment and working of the business system, all the managers should know the corporate finance. It provides the managers necessary skills to identify and select the various strategies for an individual project. A marketing and sales manager should always know the financial condition and troubles of the company before he is going to sell his product in the market. The profit should meet the company requirements. Corporate Finance also helps in forecasting the economic condition of the company.

2. Describe the organizational forms a business might have as it evolves from a startup to a major corporation. List the advantages and disadvantages of each form. A firm cannot survive if it is slow to react to the competition it is facing on the front. A business when hit by a fierce competition in the market can go either upwards provided it is fit to survive or it fails and go to sink if it is not competent enough. Two set of factors affect the firms survival, internal and external. The internal factors consist of choice of technology, competency of staff and employee, efficiency of labour, company image, financial resources etc. Most of the old textile mills ruined because they failed to manage the technological changes and poor management of financial resources. The external factors comprise existing government policies, laws of the country, customer preferences and tastes, increasing competition etc. A business firm may be promoted and operated in different forms or types based on ownership as non-corporate (sole proprietorship, partnership, hindu undivided

family) and corporate (cooperatives,joint stock companies, public utilities and state enterprises). Some major forms a business might have are as follows ; 1. Sole-proprietorship : An individual promoter owns, finances, manages and controls the whole business. He makes all the efforts to carry the entire load of promotion. It is an old form of a business organization. Advantages : It is very simple and easy to form. No legal formalities are involved for setting up business. Individual decision making. Disadvantages : Proprietor has unlimited liability. The greater risk is at the stake. The proprietorship has to bear all the costs. 2. Partnership : Partnership is the next step after sole proprietorship. The desire for expansion. As per the section IV of the Indian Partnership Act of 1932 the share profit of a business should be carried out by all or any of them acting for all. A single individual cannot bear all the risk. To shoulder the burden of risk and responsibility of the business in the partnership. Advantages and disadvantages are merely same. 3. Hindu Undivided Family or Joint Hindu Family Business : The father or for the time being some other senior member of the family, known as KARTA normally manages such a business. In a joint Hindu Family Business, the right and the liabilities of co-partners are as per the provisions of the general rules of the Hindu Law. 4. Cooperatives : Under cooperative society people voluntarily come together for the enhancement of their economic interests. Cooperatives dont have the motive of profit, it is basically the division and fulfillment of well needed services. It is a legal entity in India. The formation of cooperatives is regulated by the Indian Cooperatives Societies Act, 1912.

5. Joint Stock Company : The company or corporate form of the organization has more advantages as compare to sole proprietorship or partnership. The credit facilities are better. It can undertake a greater degree of risk as liability is limited. It can have unlimited expansion facilities. Advanatges : Unlimited life, limited liability, Easy transfer of ownership and capital can be raised easily. Disadvantages : Double taxation is a big disadvantage of JSC. Daily and weekly reports consume the cost and time. 6. Public Enterprise or State Enterprise : These enterprises are formed to serve the nation at large. They are formed to organize the business operations that are vital to the national economy and public welfare. The private enterprise doesnt suit for such purpose.

3. How do corporations go public and continue to grow ? What are the agency problems ?

Most of the companies go public when they want to obtain some additional resources to finance their activities and projects. If a company has a good business initiative but it lack resources, it can consider the option of going public. To go public means that you have to list the company on a stock exchange and offer stock to the public, known as initial public offering. The money you get from the stock sale will be used for the financing purposes you target. You will have to pay commission to the investment bankers, whose services you have used to execute the offering. The investors, who purchase shares of the company, are referred to as shareholders. They have the right to elect a Board of Directors. BODs will be responsible for the management of the business. Most founders of companies tend to keep a majority stake for themselves in order to keep a control over the major issues of the company. The relationship between the manager and the shareholders is a critical principle agent relationship. It is essential for the image of company, the manager should act in the interests of the shareholders. But in general, managers tend to maximize their own wealth and work for increasing their salaries and perks. Hence it raises the conflicts between manager and the shareholders , which is known as Agency problem. The cost incurred due to this problem is known as Agency cost.

4.What are the objectives of financial management ? The objective of the financial management is to maximize the value of its shareholders. The market prices of a companys share depict the true value of the company. We all know that the market prices are never fixed. They always tend to vary. To cover day to day fluctuation in the market prices of shares, management takes decision that will raise the market price over the short run at the expense fo the long run. A company may avoid expending on its R&s share depicts the true value of the company. We all know that the market prices are never fixed. They always tend to vary. To cover day to day fluctuation in the market prices of shares, management takes decision that will raise the market price over the short run at the expense of the long run. A company may avoid expending on its R&D in order to increase current earning. But it will suffer in the long run due to lack of sufficient R&D. Objectives are of two types; Profit Maximization : It can be used in two senses; Owner oriented and Operation oriented. In owner oriented concept the owner wants all his money back and profit himself. In Operation oriented the cost of production is taken into consideration. But the profit maximization concept doesnt take into account the time patterns of returns. It also has the uncertainty of future earning stream. It doesnt consider the risk. Wealth Maximization : It represents the maximized returns to the equity holders. It considers the time value of money. Wealth(W) = Gross present worth (G) - Investment (I)

5.What are three important financial decisions ? The finance manager has to maintain and minimize the unproductive cash balance. If cash is surplus , it should be temporarily invested in the most advantageous way, and hence cash balance is maintained. A finance manager has to take three major decisions ; Investment Decisions : These decisions are concerned with the effective utilization of funds. So, assets are selected in which a firm is going to invest its surplus amount. Assets can be of two types , Long term assets and short term assets. Financial Decisions : These are related to the collection of capital for investment proposals. These decisions affect the ways through which a company decides to raise the money. The company issues different type of securities like shares and debentures. But before using any particular source of capital, their relative cost and the degree of risk should be thoroughly examined by the financial manager. Dividend Policy Decisions :The proper management of earning is vital for the success of the firm. These type of decisions help the management in the declaration and payment of dividends to the shareholders. It makes the decision as to how much of the earnings should be distributed among the shareholders by the way of dividend ,and how much should be retained in the business to meet the future financial needs of the business.

6. Do firms have any responsibilities to society at large ? It is a general notion ,which was intensely highlighted by the politicians , that firms put profit before people and solely neglect their social responsibility towards society. But it is changing and firms are more aware of their social responsibility

than some of our politicians. Companys shareholders are actually general public , which forms the society, so how can a firm move away from the issue of health and well-being of their owners. Since firms are fictitious persons created by law and sustained by government grants of limited liability for individual shareholders, they have obligations to society that surpass those of sole proprietorships or partnerships.

7. Define Capital Budgeting ? Why is it an important decision for the company ? Capital budgeting is a required managerial tool. One duty of a financial manager is to choose investments with satisfactory cash flows and rates of return. Therefore, a financial manager must be able to decide whether an investment is worth undertaking and be able to choose intelligently between two or more alternatives. To do this, a sound procedure to evaluate, compare, and select projects is needed. This procedure is called capital budgeting.

Capital budgeting is investment decision-making as to whether a project is worth undertaking. Capital budgeting is basically concerned with the justification of capital expenditures. Current expenditures are short-term and are completely written off in the same year that expenses occur. Capital expenditures are long-term and are amortized over a period of years are required by the IRS.

All general managers face capital-budgeting decisions in the course of their careers. The most common of these is the simple yes versus no choice about a capital investment. The following are some general guidelines to orient the

decision maker in these situations. 1. Focus on cash flows, not profits. One wants to get as close as possible to the economic reality of the project. Accounting profits contain many kinds of economic fiction. economic facts. Flows of cash, on the other hand, are

2. Focus on incremental cash flows. The point of the whole analytical exercise is to judge whether the firm will be better off or worse off if it undertakes the project. Thus one wants to focus on the changes in cash flows effected by the project. The analysis may require some careful thought: a project decision identified as a simple go/no-go question may hide a subtle substitution or choice among alternatives. For instance, a proposal to invest in an automated machine should trigger many questions: Will the machine expand capacity (and thus permit us to exploit demand beyond our current limits)? Will the machine reduce costs (at the current level of demand) and thus permit us to operate more efficiently than before we had the machine? Will the machine create other benefits (e.g., higher quality, more operational flexibility)? The key economic question asked of project proposals should be, How will things change (i.e., be better or worse) if we undertake the project?

3. Account for time. Time is money. We prefer to receive cash sooner rather than later. Use NPV as the technique to summarize the

quantitative attractiveness of the project. Quite simply, NPV can be interpreted as the amount by which the market value of the firms equity will change as a result of undertaking the project.

4. Account for risk. Not all projects present the same level or risk. One wants to be compensated with a higher return for taking more risk. The way to control for variations in risk from project to project is to use a discount rate to value a flow of cash that is consistent with the risk of that flow.

8. What is the Weighted average cost of capital? What affects it ?

The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. The WACC is the minimum return that a company must earn on an existing asset base to satisfy its creditors, owners, and other providers of capital, or they will invest elsewhere. Companies raise money from a number of sources: common equity, preferred equity, straight debt, convertible debt, exchangeable debt, warrants, options, pension liabilities, executive stock options, governmental subsidies, and so on. Different securities, which represent different sources of finance, are expected to generate different returns. The WACC is calculated taking into account the relative weights of each component of the capital structure. The

more complex the company's capital structure, the more laborious it is to calculate the WACC. Companies can use WACC to see if the investment projects available to them are worthwhile to undertake.

9. What is capital structure of financial assets?

Capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities. For example, a firm that sells $20 billion in equity and $80 billion in debt is said to be 20% equity-financed and 80% debt-financed. The firm's ratio of debt to total financing, 80% in this example, is referred to as the firm's leverage. In reality, capital structure may be highly complex and include dozens of sources. The Modigliani-Miller theorem, proposed by Franco Modigliani and Merton Miller, forms the basis for modern thinking on capital structure, though it is generally viewed as a purely theoretical result since it disregards many important factors in the capital structure decision. The theorem states that, in a perfect market, how a firm is financed is irrelevant to its value. This result provides the base with which to examine real world reasons why capital structure is relevant, that is, a company's value is affected by the capital structure it employs. Some other reasons include bankruptcy costs, agency costs, taxes, and information asymmetry. This analysis can then be extended to look at whether there is in fact an optimal capital structure: the one which maximizes the value of the firm.

10. Describe some financial instruments? A financial instrument is a tradable asset of any kind, either cash; evidence of an ownership interest in an entity; or a contractual right to receive, or deliver, cash or another financial instrument. Financial instruments can be categorized by form depending on whether they are cash instruments or derivative instruments:
y

Cash instruments are financial instruments whose value is determined directly by markets. They can be divided into securities, which are readily transferable, and other cash instruments such as loans and deposits, where both borrower and lender have to agree on a transfer.

Derivative instruments are financial instruments which derive their value from the value and characteristics of one or more underlying entities such as an asset, index, or interest rate. They can be divided into exchange-traded derivatives and over-the-counter (OTC) derivatives.

Alternatively, financial instruments can be categorized by "asset class" depending on whether they are equity based (reflecting ownership of the issuing entity) or debt based (reflecting a loan the investor has made to the issuing entity). If it is debt, it can be further categorised into short term (less than one year) or long term.

11. What are the Financial markets? Please define capital market and money market. A financial market is a market in which people and entities can trade financial securities, commodities, and other fungible items of value at low transaction costs and at prices that reflect supply and demand. Securities include stocks and bonds, and commodities include precious metals or agricultural goods. There are both general markets (where many commodities are traded) and specialized markets (where only one commodity is traded). Markets work by placing many interested buyers and sellers, including households, firms, and government agencies, in one "place", thus making it easier for them to find each other. An economy which relies primarily on interactions between buyers and sellers to allocate resources is known as a market economy in contrast either to a command economy or to a non-market economy such as a gift economy. CAPITAL MARKET: Capital markets are a kind of financial market which consists of: y Stock markets, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof. y Bond markets, which provide financing through the issuance of bonds, and enable the subsequent trading thereof. MONEY MARKET: Money market is also a type of financial market only, which provide short term debt financing and investment. Trading in the money markets involves Treasury bills, commercial paper, bankers' acceptances, certificates of deposit, federal funds, and short-lived mortgage- and asset-backed securities. Money markets and capital markets are parts of financial markets.

12. What is Risk-free rate of interest ?

Risk-free interest rate is the theoretically rate of return of an investment with no risk of financial loss. The risk-free rate represents the interest that an investor would expect from an absolutely risk-free investment over a given period of timeIn corporate finance and valuation, we start off with the presumption that the riskfree rate is given and easy to obtain and focus the bulk of our attention on estimating the risk.

Case study Financial management

SECTION E
Submitted by Praveen Kumar Ankit Singh Akshat Gupta Tapesh Dhullar