WHAT IS CORPORATE FINANCE?

Primarily concerned with maximizing shareholder value

through long-term and short-term financial planning and
the implementation of various strategies

Everything from capital investment decisions to

investment banking falls under the domain of corporate
finance

FIRM- any business large or small

•Area of finance dealing with the sources
of funding and the capital structure of
corporations and the actions that managers
take to increase the value of the firm to
the shareholders, as well as the tools and
analysis used to allocate financial resources
WHAT CONSTITUTES CORPORATE
FINANCE?
FIRST PRINCIPLES

• INVESTMENT PRINCIPLE
• FINANCING PRINCIPLE
• DIVIDEND PRINCIPLE
 Investment
• Generating Revenue
• Cost cutting
• Includes strategic decisions regarding which
markets to enter
• Whether to make acquisitions of other
companies
INVESTMENT PRINCIPLE
 INVESTMENT PRINCIPLE
• To decide if a project is acceptable:

• Returns vs. Minimum Returns

• Firms should invest in assets only when they

are expected to earn a return greater than a
minimum acceptable return.
 FINANCING PRINCIPLE
Financing Mix
•What proportions of debt and equity should
the firm use?

Financing Type
•What types of debt and equity financing should
the firm use?
FINANCING MIX
 BASIC PROPOSITION
 Firm will minimize its risks and maximise its
capacity to use borrowed funds
Match up to the cash flows on debts and
assets being financed
Add additional considerations relating to taxes
and external monitors such as CRAs and
Research Analysts
 DIVIDEND PRINCIPLE

Cash flows generated by existing investments in greater than the

funds needed to take on good investments
 How to return the excess (Private and Publicly Traded firms)
Dilemmas
Agency problems
 FIRM VALUE
• CONFLICT BETWEEN:

SHAREHOLDERS AND DEBENTURE HOLDERS

and
SHAREHOLDERS AND MANAGERS
• Net Worth (Assets minus Liabilities)
• Book Value vs. Market Value
• Combination of three principles
• Shareholder value

2019/8/25