Introduction
Corporate Finance has 4 broad sub-domains:
i. Capital Budgeting: Related to long-term investment decisions
ii. Cost of Capital and Capital Structure: Source of funds for long-term uses
iii. Working Capital Management: Management of Short-term assets and liabilities
iv. Dividend policy: A dividend policy is a set of guidelines a company's board of
directors follows to decide how to distribute its profits to shareholders, which can
include paying cash dividends or reinvesting earnings back into the business.
1. Capital budgeting decisions:
i. Time Value of Money: The Time Value of Money (TVM) is the core financial concept
that a sum of money today is worth more than the same amount in the future,
because money available now can grow through earning interest or returns
(opportunity cost), while future money loses purchasing power due to inflation and
risk.
ii. Project Appraisal methods: Project appraisal methods are systematic techniques
used to evaluate a proposed project's viability, profitability, and alignment with goals,
helping decide if it's worth investing in by analysing costs, benefits, risks, and various
factors like financial, technical, economic, and market aspects, often using tools like
NPV, IRR, and Payback Period.
IRR: Internal Rate of Return is the discount rate at which the Net Present Value of a
project equals zero.
NPV: NPV tells us how much money we gain or lose from a project today, after
considering the time value of money.
NPV=Present Value of Cash Inflows−Initial Investment
iii. Long-term investment decisions: Replacement, Make vs. Buy
iv. Risk-Return relationship
2. Cost of Capital and Capital Structure:
i. Sources of Capital: Source, Cost vs. Risk
ii. Cost of sources of capital: Debt vs. Equity
iii. WACC – Weighted Average Cost of Capital - The average rate of return the company
must pay for the money it uses
Imagine:
You borrow money from:
o Friend A at 10%
o Friend B at 6%
If you borrow equal amounts, your average cost is:
10 %+6 %
=8 %
2
✅ That 8% is like WACC.
iv. Capital structure and firm value
3. Working Capital Decisions:
i. Concept of Working Capital and Sources of Short-term funds
ii. Working capital: Inventory, Debtors, Creditors, Cash
iii. Management of Working Capital
iv. Why cash is the king?
4. Dividend Policy Decisions:
i. Whether to pay dividends to the shareholders?
ii. How much dividends to pay?
iii. Dividends payout vs. Share repurchases
iv. Payout, Plowback and Firm Value
(Plowback means the company keeps part of its profits and reinvests it back into the
business instead of paying it as dividends.)