Corporate Finance

Chapter 1

Introduction

OBJECTIVES

 Introduction to the goal of financial management.


 Competitors to the rule of wealth maximization and their limitations.


 Factors affecting value creation.


 Corporate governance around the world.

Corporate Financial Management deals with the decisions of a firm related to investment, financing and
dividend. To carry on business, a firm invests in tangible assets like plant and machinery, buildings, and
intangible assets like goodwill and patents. This comprises the investment decision. These assets don’t come
free; one has to pay for them, so a company needs to tap various sources of funds including promoter’s con-
tribution. This forms the financing decision. The investment in assets generates revenues and cash flows for
a specific period of time. The managers of the company can either retain cash with the company for further
investment or distribute to the owners of the company—the shareholders. This constitutes the dividend deci-
sion. In short, a finance manager will be concerned with such financial decisions as:

• Which investment/s should the company accept and what are the financial implications of undertaking
  the same?


• How should the company finance those investments? What should be the mix of owners’ contribution—
  equity and borrowed funds, i.e., debt at any given point in time?


• How much of the income generated from operations should be returned to shareholders in the form of
  dividends and how much is to be retained for further investment?

We could think of investment decision as managing the right-hand side of the balance sheet and financing
decision as managing the left-hand side of the balance sheet.