Corporate Finance

Corporate Finance
By Yogesh Chauhan
What is corporate finance?
• Normally, it is assumed that corporate finance deals only with finance. However,
corporate finance includes all decisions that a firm takes (such as accounting,
marketing, strategy, hr, and OB).
Course objectives
• To give you the capacity to understand the theory (common sense) and apply, in
real-world situations, the techniques that have been developed in corporate
finance.
• Motto for class: Who cares if it cannot be applied?
• To give you the big picture of corporate finance so you can understand how things
fit together.
• To show you that corporate finance is fun, and we confront it daily.
• This course may help you to answer the following questions (and many more)
• Why does Zomato use equity financing instead of debt financing?
• Why does Tata motor have long-term borrowing, but TCS short-term?
• Why does PAYTM buyback not make sense?
Requirements for the course
Common sense
Common sense
Common sense
Common sense
Price Vs. Value
Yogesh Chauhan, IIM Raipur

Price Vs. Value
• A Rose can be of more value than a dress to your Wife or Girlfriend on Valentine’s
Day. Even though that Rose is significantly less expensive than a Dress ( personal
experience ).
• People perceive value more based on the experience they get when purchasing
and using the product or service they have paid for rather than the price they paid.
• Customers are willing to pay more price to Apple products because of the best
experience, rather than buying Apple products since it is expensive.

Price Vs. Value: Financial assets
• Mostly, financial investors do not buy financial assets based on emotional or

aesthetic reasons; we buy financial assets for cashflows (returns) that we expect to
receive from them, such as dividends, capital gains, interest, etc. Consequently,
the price we pay for any financial asset should reflect the future cashflows it is
expected to generate.

Hindustan Unilever Limited’s balance sheet
What do I miss?
Nifty Price to book value Ratio is 3.77 on 24-Dec-2019

The financial balance sheet
Liabilities Assets
Equity (Residual Claim on cash flows, Assets in place (value from Existing
Perpetual lives) investments’ cashflows)
Debt (Fixed claim on cash flows, Fixed life) Growth assets (Expected value that will be
created by future investments)
Corporate Finance: The Big Picture
Maximize the value of the business (firm)
The Financing Decision

The Investment Decision The Dividend Decision
Find the right kind of debt for
Invest in assets that earn a If you cannot find investments that
your firm and the right mix of
return greater than the make your minimum acceptable rate,
debt and equity to fund your
minimum acceptable hurdle return the cash to owners of your
operations and obtain a lower
rate. business
financing cost.
• The optimal mix of
How you choose to return cash
The return should debt and equity
The hurdle rate should to the owners will depend on
reflect the cash flow’s maximizes firm
reflect the riskiness of whether they prefer dividends
magnitude, timing, value.
the investment. or buybacks.
and side effects. • The right kind of
debt.
Value of firm: the role of Corporate finance
Investment activities (project investment)

add value to firm value when a manager
chooses a project whose return is more
than the cost of the fund.
Corporate financing creates value for shareholders

when the financing mix has a lower cost of funds.
Principle 1: Corporate finance is “common sense”
• You should invest in a project that earns more than the cost of funds (Investment
decision).
• If you cannot find a project that earns more than the cost of funds. It is best to return
the cash to the owners and shrink the business (The Dividend Decision).
• If you can raise, find a financing mix that costs 10% instead of 11%(The financing
Decision).
Principle 2: Corporate finance is focused
• The sole objective of corporate finance is maximizing the value of the business.
For that, we can,
• Choose the “right” investment
• Determine the “right” mix of debt and equity for a specific business
• Examine the “right” amount of cash that should be returned to the owners of a
business and the “right” amount to hold back as a cash balance.
Principle 3: : Corporate finance is universal
• Every business, small or large, public or private, US or emerging market, must
make an investment, financing, and dividend decisions.
• While the constraints and challenges that firms face can vary dramatically across
firms, the first principles do not change.
• A publicly traded firm, with its greater access to capital markets and more
diversified investor base, may have much lower costs of debt and equity than
a private business. Still, they should look for a financing mix that minimizes
their capital costs.
• A firm in an emerging market may face greater uncertainty when assessing
new investments than a developed market. Still, both firms should invest only
if they believe they can generate higher returns on their investments than they
face their respective (and very different) hurdle rates.
Principle 4: If you forget first principles, you will pay a
price.
• Some investors/analysts/managers convince themselves that the first principles don’t
apply to them because of their superior education, standing, or past successes. They
then proceed to implement strategies or schemes that violate first principles.
• Recently, Paytm announced a share buyback, and Nayaka reported Bonus stocks.
• Almost every corporate disaster or bubble originates in a violation of first principles.
Corporate life cycle
Grading..
• Project =20%
• Quiz=20% (2quizzes)
• End term=30% ( I don’t commit for an open book examination)
• Mid-term=30% ( I don’t commit for an open book examination)
Project details
• Two project reports must be submitted before the mid-term and one before the
end-term.
• Each student must choose two publicly listed firms with at least one year of
trading history and replicate what I will explain in class. More details, I will
forward to the course very soon.
• Avoid financial services and loss-making firms.
• Each firm should be unique to the batch. Hence, it would be best if you quickly
chose your firms.
• I prefer to review your work after every five classes.

Corporate Finance

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Corporate Finance

Yogesh Chauhan, IIM Raipur

Yogesh Chauhan, IIM Raipur

• Mostly, financial investors do not buy financial assets based on emotional or

Yogesh Chauhan, IIM Raipur

Nifty Price to book value Ratio is 3.77 on 24-Dec-2019

Maximize the value of the business (firm)

The Financing Decision

Investment activities (project investment)

Corporate financing creates value for shareholders

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