Corporate Finance

Introduction :

Business Banking" tends to work with small-to-medium sized enterprises (SMEs). Business banking does all the things that retail banking does but adds the following things: 1) More services. Business Banking includes things like more treasury services, revolving credit, merchant credit, cash management, group insurance, corporate cards and secure Internet banking (e.g. server-to-server). 2) Better rates. Since SMEs bring in more money, they tend to get better rates than the retail banking customer, who tends to need lots of maintenance compared to their deposit sizes.

Retail, SME and corporate banking customers use the same infrastructure, but the sales platforms tend to be different to cater to their specific needs.kk

Definition :

Corporate banking mainly deals with companies.

Example of some of the Capital Investment decisions:

Should a proposed investment be made? How should the company pay for it; with equity or with debt, or combination of both? Should shareholders be offered dividends on their investment in the company?

Corporate Finance includes :

1 2
3 4

Planning the Finance Raising the Finance Investing the Finance

Monitoring the Finance

Planning the finance :

It includes questions like:

How much finance is required by the company? What are the sources of finance? How to use the finance profitably?

Raising the finance : Raising (collects) finance for the company which can
be collected from many sources, viz., shares, debentures, banks, financial institutions, creditors, etc.

Investing the finance : There are two types of corporate finance, viz.,
fixed capital and working capital. Fixed capital is used to purchase fixed assets like land, buildings, machinery, etc. While working capital is used to purchase raw materials, to pay the day-to-day expenses like salaries, rent, taxes, electricity bills, etc.

Monitoring the finance : It includes monitoring of the finance where

the finance manager has

to minimize the cost of finance

to minimize the wastage and misuse of finance

to minimize the risk of investment of finance to get maximum return on the finance.

Characteristics : 1
1 2 Investing the finance 3 Objective Oriented 4 Types of Finance 5 Relationships with other departments 6 Dynamic in nature 7 Requires Proper Planning and control Financial Activity

Raising the finance

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9 Legal Requirements

Financial Activity : It includes planning, raising, investing and monitoring

the finance of the company. It includes all the financial aspects of the company.

Raising the finance : Corporate finance includes raising (collecting) finance

for the company. Finance can be collected through shares, debentures, bank loans, etc.

Investing the finance : Corporate finance also includes investing (using) the
finance. The finance is used to achieve the objectives of the company. It is used to purchase fixed assets. It is also used for running the company.

Objective oriented : Corporate finance is used to achieve the

objectives of the company. The main objectives are, viz.,

To earn maximum profits, To give a proper dividend to the shareholders, and To create a proper reserve for future growth and expansion, etc.

Types of finance : There are two types of corporate Finance, viz., fixed
capital and working capital. Fixed capital is used to purchase fixed assets. Working capital is also called short-term finance. It is used to meet the shortterm needs of the company. It is used to pay the day-to-day expenses of the company.

Relationship with other departments : Corporate finance has a

close relationship with all other departments in the company, i.e. Production Department, Marketing Department, etc. This is because all departments need finance continuously.

Dynamic in nature : Corporate finance is dynamic in nature. It goes on

changing according to the changes in environment, circumstances, times, etc. So, the finance manager must use new and innovative ideas for collecting and investing money. He must use creativity while doing his job.

Requires proper planning and control : Corporate finance

requires proper planning and control. Planning is required to collect finance from the investors. It is also required for investing the finance. Control is required to find out whether the finance is invested properly or not. If the finance is not invested properly, then corrective measures must be taken.

Legal requirements : There are many legal requirements for corporate

finance. The company has to take permission, from the Controller of Capital Issues, for collecting finance from the public. The company also has to follow all the rules of SEBI. A Sole Trader and Partnership Firm need not follow these rules.

Need of Corporate Finance :

Finance is the life blood of business. It is required :

by all types of companies. for starting a company. for running a company. for the survival, stability and growth of a company. for expansion and diversification of a business. for closing down the company.

So, a company cannot survive without finance. It requires promotional finance to start the company. It requires long-term finance to purchase fixed assets. It requires development finance for growth, expansion and diversification of business.

Importance of Corporate Finance:

1
1 2 3 4 5 6 Research and Development

Motivating Employees
Promoting a Company Smooth conduct of Business Expansion and Diversification Meeting Contingencies Government Agencies Dividend and Interest Replacement of Assets

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8 9

Research and Development : Corporate Finance is needed for Research

and Development. Today, a company cannot survive without continuous research and development. The company has to go on making changes in its old products. It must also invent new products. If not, it will be get automatically thrown out of the market.

Motivating Employees : Manager and employees must be continuously

motivated to improve their performance. They must be given financial incentives, such as bonus, higher salaries, etc. They must also be given nonfinancial incentives such as transport facilities, canteen facilities (eatery), etc. All this requires finance. Promoting a Company : Finance is needed for promoting (starting) a company. It is needed for preparing Project Report, Memorandum of Association, Articles of Association, Prospectus, etc. It is needed for purchasing Land and Buildings, Plant and Machinery and other fixed assets. It is needed to purchase raw materials. It is also needed to pay wages, salaries and other expenses. In short, we cannot start a company without finance.

Smooth Conduct of Business : Finance is needed for conducting the business smoothly. It is needed as working capital. It is needed for paying day-to-day expenses. It is needed for advertising, sales promotion, distribution, etc. A company cannot run smoothly without finance. Expansion and Diversification : Expansion means to increase the size of the company. Diversification means to produce and sell new products. Modern machines and modern techniques are needed for expansion and diversification. Finance is needed for purchasing modern machines and modem technology. So, finance becomes mandatory for expansion and diversification of a company. Meeting Contingencies : The company has to meet many contingencies. For e.g. Sudden fall in sales, loss due to natural calamity, loss due to court case, loss due to strikes, etc. The company needs finance to meet these contingencies.

Government Agencies : There are many government agencies such as Income Tax authorities, Sales Tax authorities, Registrar of Companies, Excise authorities, etc. The company has to pay taxes and duties to these agencies. Finance is needed for paying these taxes and duties. Dividend and Interest : The company has to pay dividends to the shareholders. It has to pay interest to the debenture holders, banks, etc. It also has to repay the loans. Finance is needed to pay dividends and interest. Replacement of Assets : Plant and Machinery are the main assets of the company. They are used for producing goods and services. However, after some years, these assets become old and outdated. They have to be replaced by new assets. Finance is needed for replacement of old assets. That is, finance is needed to buy new assets.

Risk Associated with Corporate Finance:

Environmental and social issues may threaten the financial and operational viability of a commercial operation. A corporate transaction exposes a financial institution to the entire commercial operation of the investee company, which presents a liability, reputational, and credit risk.

Corporate Finance - Types of Risk

Like anything, projects do have risks. There are three types of project risks associated with capital budgeting:

Stand-alone risk
Corporate risk Market risk

1.Stand-Alone Risk
This risk assumes the project a company intends to pursue is a single asset that is separate from the company's other assets. It is measured by the variability of the single project alone. Stand-alone risk does not take into account how the risk of a single asset will affect the overall corporate risk.

2.Corporate Risk
This risk assumes the project a company intends to pursue is not a single asset but incorporated with a company's other assets. As such, the risk of a project could be diversified away by the company's other assets. It is measured by the potential impact a project may have on the company's earnings.

3.Market Risk
This looks at the risk of a project through the eyes of the stockholder. It looks at the project not only from a company's perspective, but from the stockholder's overall portfolio. It is measured by the effect the project may have on the company's beta.