Академический Документы
Профессиональный Документы
Культура Документы
Reliance Industries declares 150% dividend India Nippon shareholders approve 7:10 bonus issue
LBSIM-2013-15-Term-II
Investment Decisions
Firms have scarce resources which must be allocated among competing uses. Resources may be used for :
Revenue Generating Cost Saving Projects Strategic Decisions Introduction of a New Product Line Replacing old equipment with new equipment Which markets to enter Acquisition of other companies
While taking Investment Decisions, we measure the Benefits (Returns) from the proposed Investment projects and compare with Minimum Acceptable Hurdle rate to decide acceptance or rejection.
Introduction to Corporate Finance
4
LBSIM-2013-15-Term-II
Investment Decisions (Contd.) Minimum Acceptable Hurdle rate should be set so as to reflect: Risk profile of the project (Higher hurdle rate for riskier projects), and Financing mix of the project
Projects with different Risk Profiles
16% 9%
Less Risky
Introduction to Corporate Finance
More Risky
5
Investment Decisions (Contd.) Investment Decisions are concerned with: Establish Minimum Acceptable Hurdle Rate appropriate to the investment proposal Measuring Benefits (Returns) from the investment proposals, Comparing benefits with minimum acceptable hurdle rate in order to accept (or reject) the project. Invest in assets that earn a return greater than the minimum acceptable hurdle rate
Introduction to Corporate Finance 6
LBSIM-2013-15-Term-II
Financing Decisions
How should firms raise Financial resources required? Businesses can broadly raise funds either through:
Owners Fund (Equity) Borrowed Funds (Debt)
Choose a financing mix that matches the characteristics Introduction to Corporate Finance financed. of assets being
Dividend Decisions
Dividend is any reward by the firm to its shareholders. Firms have to decide about what to do with the surplus generated by the firm i.e.: Reinvest into the business (Plough back) , or Distribute as Dividend (reward the shareholders) Amount of Dividend (Dividend Payout) Stability of Dividend (Trend) Forms: Cash Share Repurchase
Introduction to Corporate Finance 8
LBSIM-2013-15-Term-II
Dividend Decisions (Contd.) Trade-off between retention & distribution is to be made. When the firm is small and has attractive investment opportunities, profits are retained and reinvested. At a later stage in a firms life cycle when the funds generated are greater than the investment requirements, the firm has to decide about ways of returning the excess cash to the owners. If there are not enough investments that earn the hurdle rate, return the cash to the owners.
Introduction to Corporate Finance 9
Investment Decision
Invest in assets that earn a return greater than the minimum acceptable hurdle rate
Financing Decision
Choose the financing mix that maximizes the value of the projects taken , and matches the assets being financed.
Dividend Decision
If there are not enough investments that earn the hurdle rate, return the cash to the owners.
LBSIM-2013-15-Term-II
12
LBSIM-2013-15-Term-II
Owners (Shareholders)
Level-I Management
Level-II Management :
Introduction to Corporate Finance
Level-V Management
13
Agency Problem
Shareholders appoint agents (Management) to conduct the business of the company. As agents, the management should take decisions to maximize shareholders wealth. Shareholders delegate decision-making authority to Management hoping that agents will act in shareholders best interests. However, in actual practice, the objectives of the management may differ from those of the shareholders. Managers may take decisions in their own interest rather than in the interest of the shareholders. This problem of management (agents) not acting in the interests of their principals (shareholders) is called the Agency Problem.
Introduction to Corporate Finance 14
LBSIM-2013-15-Term-II
15
LBSIM-2013-15-Term-II
Financial System
-An Overview
18
LBSIM-2013-15-Term-II
Financial System
Provide Funds Receive Funds
Financial System
Suppliers of Funds
Financial Markets Financial Institutions Financial Instruments & Services
Users of Funds
Buy Securities
Issue Securities
19
10
LBSIM-2013-15-Term-II
Financial System - Defined Financial system refers to a set of complex, interlinked markets, institutions, instruments and services in the economy which facilitate the transfer and allocation of funds efficiently and effectively.
21
11
LBSIM-2013-15-Term-II
No physical location, but an Over-the-Counter (OTC) Market; trades are conducted via telephones, wire transfers, and 23 trading. IntroductionComputer to Corporate Finance
24
12
LBSIM-2013-15-Term-II
26
13
LBSIM-2013-15-Term-II
27
Functions of Financial System (Contd.) Risk Management: Financial System provides various instruments for pooling, pricing & sharing of risks by way of: Hedging (Forward Cover); Diversification (Mutual Funds- pooling & sub-division of risks) Insurance (the Insured retains the economic benefit of ownership while laying off the possible losses). Price Information for Decentralised Decision-making: Interest rates and security prices help in Investment decisions by each individual unit Surplus Units would want to the Highest returns while the Deficit Units would want the Lowest Costs.
28
14
LBSIM-2013-15-Term-II
15
LBSIM-2013-15-Term-II
Developmental Financial Institutions (DFIs) All India: State Level: -SFCs -IFCI -SIDCs -IIBI -TFCI -IDFC -PFC -IRFC
Introduction to Corporate Finance
Commercial Banks Public Sector: -SBI Group -Nationalised Private Sector: -Indian -Foreign
NBFCs
31
Governor:
Dr Raghuram Rajan
16
LBSIM-2013-15-Term-II
SIDBI
1988
NHB
1988
33
Specialised FIs
IIBI 1997 Industrial Investment Bank of India formerly IRBI: Industrial Reconstruction Bank of India(1971) Tourism Finance Corporation of India Power Finance Corporation Ltd Indian Railway Finance Corporation Ltd Infrastructure Development Finance Corporation
34
17
LBSIM-2013-15-Term-II
Mutual Funds Public Sector: -UTI, SBI & Others Private Sector: -Indian -Foreign
Capital Markets
-Stock Exchanges -Merchant Bankers -Underwriters -Stock Brokers -Custodians -Depositories/DP -FIIs -Investors
35
Securities & Exchange Board of India (SEBI) Regulatory Authority to oversee & regulate the functioning of the Capital Markets in India. Set up in 1988 through an administrative order but became a statutory organization in 1992. Objective : to protect the interest of the investors & promote the development, regulate the securities market.
www.sebi.gov.in
Introduction to Corporate Finance 36
18
LBSIM-2013-15-Term-II
Life Insurance
Non-Life Insurance
37
Insurance Regulatory & Development Authority (IRDA) Regulatory authority to oversee & regulate the functioning of the Insurance sector in India. Set up in 1999. Objective : To protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto.
Chairman Mr. T.S.Vijayan
www.irda.gov.in
Introduction to Corporate Finance 38
19
LBSIM-2013-15-Term-II
Established by the Government of India on 23rd August 2003 Objective: to promote old age income security by establishing, developing and regulating pension funds, to protect the interests of subscribers to schemes of pension funds and for matters connected therewith or incidental thereto
www.pfrda.gov.in
Introduction to Corporate Finance
39
www.fmc.gov.in
40
20
LBSIM-2013-15-Term-II
Tangible Assets:
Plant & Equipments Building
Finance Manager
Funds reinvested Funds generated by firms operations Funds returned to investors
Financial Markets
Investors holding Financial assets
Intangible Assets:
Patents
41
Credit Manager Capital Budgeting Manager Fund Raising Manager Portfolio Manager
Introduction to Corporate Finance
21
LBSIM-2013-15-Term-II
Credit Manager Capital Budgeting Manager Fund Raising Manager Portfolio Manager
43
Investment Decision
Invest in assets that earn a return greater than the minimum acceptable hurdle rate
Financing Decision
Choose the financing mix that maximizes the value of the projects taken , and matches the assets being financed.
Dividend Decision
If there are not enough investments that earn the hurdle rate, return the cash to the owners.
22