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Manoj Sharma Head S.S.I.P.M.

T Raipur

Sole Proprietorships

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

Partnerships

Similar to sole proprietorship, but has two or more owners Joint and several liability Share of profits taxed as partnership income

Limited Partnerships

One or more general partners with unlimited personal liability Most owners are limited partners, who are passive investors with limited liability

Separate legal entity with many of the economic rights and responsibilities of

individuals

Corporations

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

It

is the area of finance dealing with monetary decisions that business enterprise make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize shareholder value. It is in principle different from managerial finance which studies the financial decisions of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms.

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 to pay dividends to shareholders.
Short

term decisions deal with the short-term balance of current assets and current liability; the focus here is on managing cash, inventories, and short-term borrowing and lending (such as the terms on credit extended to customers).

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

Financing (Raising Capital) Financial Management Capital Budgeting Risk Management Corporate Goverance

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 tradeoff between risk and return by diversifying their portfolios.

Markets are smart.

Competition for information tends to make


markets efficient. No arbitrage Risk-free money-making opportunities are extremely scarce.

Invest in projects

1. The Hurdle Rate Higher for riskier projects Reflect the financing mix 2.Returns on Projects on the Basis of Cash Flows Timing of these cash flows Positive & negative side effects (Yield a return greater than the minimum acceptable rate.)

Choose a Financing mix


1. Maximize the value of Firm 2. Matches the assets being Financed

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

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

There are two equivalent way of using the Balance Sheet information to appraise the value of a firm.

The book values of investors claims may be summed directly. The assets of the firm may be totaled and from this total non-investor claims (Like account payable and provision) may be deducted.

Advantage

Net Book value of the assets reflect their fair values.

Disadvantage

Does not considered inflation which is definitely a factor influencing market value. Due to the technological changes assets become obsolete and worthless.