cf intro

LBSIM-2013-15-Term-II

Introduction to Corporate Finance

Some Recent Business News

Reliance Industries declares 150% dividend
India Nippon shareholders approve 7:10 bonus issue

Introduction to Corporate Finance

2

1

LBSIM-2013-15-Term-II

What is Corporate Finance about?
• Financial Decisions made by Corporations.
• Financial decisions relate to:
Where to invest the firm’s resources
(Investment Decisions)
How to raise resources for the firm
(Financing Decisions)
How to reward the owners of the business
(Dividend Decisions)
• Corporate Finance provides answers to these issues.
3

Introduction to Corporate Finance

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

2

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

More Risky
5

Introduction to Corporate Finance

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