CHAPTER 1 Flashcards
Meaning of Corporate finance
Corporate finance deals with the raising and using of finance by a corporation. It deals with the financing activities of a corporation, capital structuring and making investment decisions.
Definition of Corporate finance by Henry Hoagland
Corporate finance deals primarily with the acquisition and use of capital by business corporation.
Meaning of Financing decision:
A business firm has access to Capital market to fulfil its financial needs. The firm can decide whether it wants to raise equity capital by issuing shares and utilising retained earnings or raise debt capital by choosing instruments of debt such as bank loans, public deposits, debentures, bonds etc. The finance manager ensures that the firm is well capitalised, i.e. they have the right amount of capital and that the firm has right combination of debt and equity.
Meaning of Investment Decision:
“Once a business firm gains access to capital, the finance manager must decide how to use the funds systematically to maximize returns for the owners. Considering the cost of capital, the firm can deploy the funds in a way that generates returns exceeding this cost.”
What is Capital budgeting?
Finding investments and deploying them successfully into the business is known as Capital budgeting.
Importance of Corporate finance:
- Helps in decision making
- Helps in raising capital for a project
- Helps in research & development
- Helps in smooth running of business
- Brings co-ordination between various action
- Promotes expansion and diversification
- Managing risk
-Replace old assets - Payment of dividend and interest
- Payment of Taxes and Fees
Financial Plan meaning?
Financial plan refers to assessment of financial requirement and arranging sources of capital.
What is Fixed Capital?
Fixed Capital refers to the capital used for acquiring fixed assets in a business. These assets are intended for long-term use and are not meant for resale. E.g. Land, Building, furniture, Plant and Machinery etc. In simpler terms, Fixed capital represents the funds invested in acquiring permanent assets that remain in the business for an extended period of time.
Factors affecting Fixed Capital Requirement:
- Nature of Business
- Size of Business
- Scope of Business
- New/old/Replacement/Lease or Renting of Assets
- Arrangement of a Sub-contract
- Acquisition of Fixed Assets at Concessional
rates - International Conditions
- Trend in Economy
- Population Trend
- Consumer Preference
- Competitive Factor
What is Working Capital?
Working Capital is that portion of capital required to manage day-to-day business operations. It ensures smooth functioning of a business by covering essential activities. It is essentially required for storage of finished goods, arranging of funds till debtors repay in cash and for overhead expenses (e.g. advertising expenses)
Net Working Capital
Gerstenbergh defines working capital as “The excess of current assets over current liabilities “ This is referred to as Net Working Capital. Gerstenbergh referred to it as Circulating Capital.
Gross Working Capital
According to J.S. Mill “The sum of current assets is working capital” This is referred to as Gross Working Capital.
Factors affecting Working Capital Requirement
- Nature of business
- Size of Business
- Volume of Sales
- Production Cycle
- Business Cycle
- Terms of Purchases and Sales
- Credit Control
- Growth and Expansion
- Management Ability
- External Factors (fin. institutes.)
Meaning of Capital Structure
Capital Structure refers to the mix of debt and equity funds a company uses to finance its operations and assets. Debt capital includes borrowed funds that need to be repaid, often with interest, while equity represents ownership stakes in the company. It is basically a mix - up of various sources of funds in a desired proportion, thus it is a securities mix.
Definition of Capital structure by R.H. Wessel:
The long-term sources of funds employed in a business enterprise.
