Corporate Finance: Delhi University BBA

Corporate Finance/Financial Management Overview

• Course at Delhi University, previously known as Financial Management in BBA.
• Seminars include study material, past papers, and detailed concept explanations with answer writing practice.
• Key topics: Capital Budgeting, Capital Structure, Dividend Policy, Working Capital Management, and Corporate Restructuring.
• Capital Budgeting, Capital Structure, and Working Capital are highlighted for practical relevance.
• Aims to prepare students for roles in Investment Banking, Valuation, Credit Rating, and Mergers & Acquisitions.
• Excel skills are recommended for practical application alongside this course.
• The course is considered easy in terms of difficulty.

Nature and Scope of Financial Management

• Financial Management involves planning, organizing, directing, and controlling monetary resources for business activities.
• Aims to achieve efficiency and effectiveness in resource use.

Management Fields by Resource Type

• Human Resource Management focuses on workers/human resources.
• Financial Management focuses on finance/monetary resources.
• Logistics Management focuses on logistics.
• Supply Chain Management focuses on supply chain.
• Customer Relationship Management focuses on customer relations.
• Marketing Management focuses on marketing activities.
• Information Technology Management focuses on IT.

Efficiency in Financial Management

• Efficiency entails maximizing output while minimizing input.
• Factors of production: Land, labor, capital, and entrepreneur.
• Rent is the cost of using land.
• Wages are the cost of labor.
• Interest is the cost of capital, representing the renting cost of finance.
• Profit compensates the entrepreneur for risk assumption, idea generation, resource arrangement, and skill application.

Managing Finance as a Resource

• Managing finance involves acquiring funds at the lowest possible cost.
• Funds can be raised through equity, debt, or preference shares.
• Debt options include bank loans, public deposits, debentures, and bonds.
• Interest on debt is tax-deductible, unlike dividends on preference shares.

Balancing Cost and Risk

• Sole reliance on debt increases financial risk, despite tax benefits.
• Financial risk is the risk of not being able to repay debts, impacting cash flow.
• Objective: Minimize both financial cost and risk in funding decisions.
• Financing decisions involve selecting the optimal mix of funding sources.

Utilizing Funds Effectively

• Objective: Maximize returns while minimizing business risk.
• Business risk is related to the riskiness inherent in the business itself.
• Funds are invested in assets, which are categorized as long-term (non-current) and short-term (current).

Long-Term (Non-Current) Assets

• Include tangible assets, intangible assets, project investments, business acquisitions, long-term strategic investments, and Intellectual Property Rights (IPR).

Short-Term (Current) Assets

• Assets convertible to cash within 12 months or the operating cycle period, whichever is longer.
• Examples: Funds stuck in debtors/bills receivables, cash for expenses/salaries/rent, and short-term investments.

Investment Decisions

• Investment decisions relate to the utilization of funds.
• Decisions entail how much capital is allocated to short-term and long-term assets.

Key Definitions

• Non-current Assets: Assets that exit for longer than 12 months
• Current Assets: Assets that exist for shorter than 12 months
• Operating Cycle Period: To be discussed in later sessions

Components of Investment Decisions

• Capital Budgeting: Decisions about investments in fixed/long-term assets.
• Working Capital Management: Decisions about managing current assets.
• Entails maximising returns and minimising business risks.

Distribution of Profits

• Distribution decisions determine how much profit to distribute to shareholders as dividends versus retaining it for business growth (reserves).
• The goal is balancing shareholder satisfaction with the company's financial health and future growth potential.

Financial Decisions

• Involves a comprehensive problem-solving process
• Utilizes economic principles to manage a business.
• Includes applications of discipline, field knowledge, and career-oriented principles.

Understanding Finance Fields

• Sub-sectors of finance are interconnected but have unique characteristics.
• Financial Management (Corporate Finance) is the current focus.
• Investments is a separate course available later.

Components of Financial Decisions

• Investment decisions (Capital budgeting): Entail maximising returns and minimising business risks
• Financing decisions (Capital Structure): Involves where to acquire the funds to invest
• Dividend decisions: How the profit shall be disbursed
• Asset Management (Working Capital Management): Managing short-term investments

Capital Structure Deep Dive

• Structure is the mixture of key ingredients in a business or system.
• Businesses have two types of structures: Capital Structure and Financial Structure.

The Components of Capital Structure

• Capital Structure: How and in what proportion long-term funds have been raised.
• Financial Structure: Similar to capital structure, but it also includes short-term funds.
• Example: Company A has 500 CR of funds with a 2:3 owner-to-debt ratio, while Company B has 700 CR of funds with a 5:2 ratio.

Accounting Equations

• Business funds come from external or internal sources.
• Funds utilization creates assets.
• "Asset = Liability + Capital".
• The balance sheet has two sides (Assets and Equity + Liabilities).
• Two types of assets: Current and Non-Current.
• Two types of liabilities: Current and Non-Current.

Balance Sheet Breakdown

• Balance sheet contents: Assets (Current, Non-current), Equity, Liabilities (Non-current, Current).
• Capital structure focuses on: Equity + Non-current Liabilities.
• Financial structure focuses on: Equity + Non-current Liabilities + Current liabilities.

Capital and Financial Structure Differences

• Capital Structure only considers long-term sources of funds.
• Financial Structure considers both short- and long-term sources of funds.
• Key difference: Consideration of short-term sources of assets in the financial structure.