Introduction:

Meaning of Finance:
1.      Science of Money. Finance been called as the science of Money management. Observation or
Understanding of the money management.

2.      Control of Money: It studies the principles and the method of obtaining Control of Money.
3.      Decision: The decision made by Business firm for production, Marketing, Finance and
personal depends up on the economic therefore finance is one of the aspect of economic body.
Circulatory system of the economic body.
4.      Conversion: Finance is the process of conversion of accumulates funds to productive use.
5.      Definition: Finance may be defined as the administrative area or set of administrative
functions in an organization which relate with the arrangement of cash and credit so that the
organization may have the means to carry out its objective as satisfactorily as possible.
6.      Financial Planning: The successful administration of the finances of any organization
comprise financial planning, raising the needed funds financial analysis and control.
7.      Classification of Finance: Finance divided into two fold( i) Public Finance and( ii)
Business Finance
8.      Public Finance: Raising capital and Administration of Public fund by the Government.
9.       Private Finance: Securing money for private Business and the administration of this money
by individuals, company and corporation etc.
10.  Objective of Public Finance: will invest   for welfare of the public and society. ex: all
Revenue
11.  Objective of business Finance: Getting maximum return irrespective of its effect on
public welfare.

12.   Classification of Business Finance :(:i) Personal Finance ( ii) Partnership

Finance( iii)Corporation or Company Finance.

13.  Corporate :It is an association of persons together for a common object to carry on some
business for profit or promote the art,science,education and charitable purpose.

14.  Corporate: A Corporate enterprises may be defined as an organization sanctioned by

government to carry on some specific and clearly defined undertaking(.i)it is Separate from its
member, Separate Property, sue and be sued, effecting agency for raising of Capital.
15.  Raising Capital (i) The division of capital into small units in the form of shares or bonds to
attract funds from people. (ii)Division of Shares and debentures reduce the risk to the minimum.
(iii)easy transferability through organized stock exchanges (iii)The principle of  Limited liability
required vast amount of capital..(iv)The large aggregation of capital provides stability and face
competitive strength.(v) Small and scattered savings are mobilized for producing and distributing
goods on a large scale.
16.   Pulse: Corporate undertaking is the economic pulse of the nation. and It reflects the economic
progress of a country.
17.  Classification of Corporate: Corporate classified into two groups (i) Public Corporations
which are generally established under special act like LIC,IFCI,Damodora Valley Corporation
etc.
(ii)Private Corporation: which are engaged in commerce industry and finance

Definition and Scope Corporate Finance:

Corporate finance is the area of finance dealing with the sources of funding and the capital of
corporations and the actions that managers take to increase thevalue of the firm to
the shareholders, as well as the tools and analysis used to allocate financial resources. The
primary goal of corporate finance is to maximize or increase shareholder.

1.      Corporate Finance broadly speaking business finance can be defined as the activity concerned
with the raising and administering of funds used in business.
2.      Precedents: Corporate finance deals with precedents, practice and policies based  or
experience, accident or anticipation,
3.      Financial Problem: Corporate finance deals with the financial problems of corporate. Also
deal with distinction between capital and Income.
4.      Capital required: It examine the extent form of Capital required by Corporate.
5.      Income: It scrutinizes the practice and policies of administering corporate Income.
6.      Dividend: It looks into propriety of Dividend, Depreciation and reserve policies of the
companies.
7.      Financial Institution: It studies the importance of financial institutions Insurance, stock
exchanges, investment bankers etc.
8.      Role of State: It examine the role of state in regulating and controlling the financial Practices
and policies of Corporate.
9.      Divorce ownership and Management: Management is provided with a number of
opportunities to manipulate the financial statements. Corporate finance separate between
ownership and management.
10.  Protector of share holders: Corporate finance is likely to stand as a protector of
shareholders.

The Objective of Corporate Finance:

Objective of Corporate Finance: A firm is a group of claimants of share holders,
creditors, suppliers, customers and employees. The shareholders appoint a Board of directors to
see the functioning and directing the company. The directors will act in the interest of the
claimant not act in their own interest. In corporate finance theory generally agrees that the
objective of a firm is to maximize the profit and wealth maximization. Wealth maximization
rules require managers to work towards a sustainable increase in the price of the firm’s stock.

Van Horne: we assume that the objective of the firm is to maximize its value to its
stockholders"
Brealey & Myers: "Success is usually judged by value: The secret of success in financial
management is to increase value."
In traditional corporate finance, the objective in decision making is to maximize the
value of the firm.
Employees are often stockholders in many firms ¤ - Firms that maximize stock price
generally are profitable firms that can afford to treat employees well.
There are three principal in modern  wealth maximization rule namely i.Profit maximization ii
Social welfare iii growth. 
I Profit maximization: Profit is the excess of revenue over expenses. Profit maximization
requires manager to keep low expenses.
ii. Social welfare: Business persons are supposed to be socially responsible.
Iii Corporate Growth:

A corporation is seen as a legal entity that has assets and liabilities as an individual and can be
directly sued aside from its ownership. Corporate finance therefore deals with legal financial
matter of these corporations in a general sense. However, it deal more specifically with financial
investment and capital investment decisions, maximize shareholder value, and working capital
investment decisions. Many corporations therefore in corporate finance ensure maximization of
profits.
Further it aims at discussing the management-shareholder problems often referred to in
management as agent-principle conflict regarding wealth maximization/capital formation
maximisation and profit maximisation/ financial returns to investments.
Corporate finance is the study of capital, financial and investment decision making with the main
aim of maximising capital market shares value and returns for shareholders entailing greater
capital accumulation and greater capital formation generally resulting in greater wealth for the
corporate entity.
Wealth maximization therefore implies ensuring that the corporation’s capital investments and
business operations expands, stocks value increase, and financial market performance is
increased. profit maximisation however is the increase in the returns to investment
of shareholders are proprietors not necessarily resulting from business expansion. Profit
maximisation therefore is a short term business objective while wealth maximisationis long term
as it may sacrifice profits for wealth accumulation and wealth formation

Wealth-profit argument
Wealth maximisation according to the business dictionary b(2013) is a process thatincreases the
current net value of business or shareholder capital gains, with theobjective of bringing in the
highest possible return.While profit maximisation is the ability for company to achieve a
maximum profit with low operating expenses. The wealth maximization strategy generally
involves making sound financial investment decisions which take into consideration any risk
factors that would compromise or outweigh the anticipated benefits while the profit
maximisation strategy is cost reduction.

Wealth maximisation entails corporate benefit while profit maximization entails

owners benefit. Wealth maximisation has long term financial and capital market benefits while
profit maximisation has short term gains in immediate returns to investment.  It is argued that
management is really smart and intelligent and knows what is good and what is bad for the
business however self-interest also drives management to maximize short-term profits even if
that is detrimental to the long-term goal as they know that their salary and bonuses will be based
on these short-term profits only. Wealth maximisation therefore ensures a more stable, larger
market share, greater financial market performance in terms of value of stocks, more long term
financial benefits for stock holders this therefore makes wealth maximisation of greater benefits
compared to profit maximisation.

The importance of corporate finance can be classified as follows:

 Decision Making: There are several decisions that have to be done on the basis
of available capital and limited resources. If an organization has to start a new project,
then it has to consider whether it would be financially viable and if it would yield
profits. So while investing in a new project or a new venture, a company has to consider
several things like availability of finances, the time taken for its completion, etc. and
then makes decisions accordingly.

 Research and Development: In order to survive in a volatile market for a long

duration, a business organization needs to continuously research the market and develop
new products to appeal the consumers. It may even have to upgrade its old products to
compete with new vendors in the market. Some companies employ people to conduct
market surveys on a large scale; prepare questionnaire for consumers; do market
analysis, while other may outsource this work to others. All these activities would
require financial support.

 Fulfilling Long Term and Short Term Goals: Every organization has several
long term goals in order to survive in the market. The short term goals may include
paying the salaries of employees, managing the short term assets, acquiring corporate
finances like bank drafts, trade credit from suppliers, purchase of raw materials for
production etc. Some long term goals would include acquiring bank loans and paying
them off; increasing the customer base for the company etc.

 Depreciation of Assets: When you invest in a new software or a new equipment,

you would require to keep aside some amount to maintain it and upgrade it in the long
run. Only then you could be assured that it would yield good results over a period of
time. In the fast changing times of today, if this is not done, you might end up losing
business if you do not have finances for it.

 Minimizing Cost of Production: Corporate finance helps in minimizing the cost

of production. With the rising cost of prices of raw materials and labor, the management
has to come up with innovative measures to minimize the cost of production. In many
organizations that spend a lot of money on large scale production, deploy professionals
for this purpose. These people tend to buy quality products from vendors who offer it at
lowest possible rates. For example, a products based software company might buy
software from a vendor that sells it at a lower rate than an internationally acclaimed
company selling the same thing.
 Raising capital: When an organization has to invest in a new venture, it is very
important that it has to raise capital. This cab be done by selling bonds and debentures,
stocks of the company taking loans from the banks etc. All this can be done only by
managing corporate finances in a proper manner.

 Optimum Utilization of Resources: The resources available to organizations

may be limited. But if they are utilized efficiently, they can yield good results. For
example, a business organization needs to know the amount of money it can spend on
its employees and how much hike should be given to them. The proper management of
corporate finance would also help in utilizing its profits in such a manner that would
help in increasing them; for example, investing in government bonds, keeping up with
the latest technology trends to increase efficiency.

 Efficient Functioning: A smooth flow of corporate finance would enable

businesses to function in a proper manner. The salaries of employees would be paid on
time, loans would be cleared in time, purchase raw materials can be done when
required, sales and promotion for existing products and launch of new products, etc.

 Expansion and Diversification: Before an organization decides to expand or

diversify in to a new arena, it has to consider various aspects like the capital available,
risks involved, the amount to be invested for purchase of new equipment etc. All this
can be done by experts and this would be very beneficial for the organization.

 Meeting Contingencies: Running a business involves talking several risks. Not

all risks can be foreseen. Although you can transfer some of these risks to third parties
by buying an insurance policy, you cannot have every contingency covered by your
insurer. You would have to keep some amount aside to tide over these situations.

Corporate finance plays a very important role in the overall functioning, growth and
development of a business. In India, finance advisors help entrepreneurs and businesses
by providing them with vital information through market research and analysis. This
helps then to make decisions, expand their business, and survive in a competitive
market in the long run. Therefore, the management of corporate finance is very
important for profitable as well as non-profitable organizations. 
Posted by Gyanendra at 23:48 
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Wealth maximization is a modern approach to financial
management. Maximization of profit used to be the main
aim of a business and financial management till the
concept of wealth maximization came into being. It is a
superior goal compared to profit maximization as it
takes broader arena into consideration. Wealth or Value
of a business is defined as the market price of the
capital invested by shareholders.
Table of Contents [show]
THE CONCEPT OF WEALTH
MAXIMIZATION DEFINED AS FOLLOWS
It simply means maximization of shareholder’s wealth. It
is a combination of two words viz. wealth and
maximization. A wealth of a shareholder maximizes
when the net worth of a company maximizes. To be even
more meticulous, a shareholder holds share in the
company/business and his wealth will improve if the
share price in the market increases which in turn is a
function of net worth. This is because wealth
maximization is also known as net worth maximization.

Finance managers are the agents of shareholders and

their job is to look after the interest of the shareholders.
The objective of any shareholder or investor would be a
good return on their capital and safety of their capital.
Both these objectives are well served by wealth
maximization as a decision criterion for business.
HOW TO CALCULATE WEALTH?
 Wealth is said to be generated by any financial decision
if the present value of future cash flows relevant to that
decision is greater than the costs incurred to undertake
that activity. Increase in wealth is equal to the present
value of all future cash flows less the cost/investment.
In essence, it is the net present value (NPV) of a
financial decision.
Increase in Wealth = Present Value of cash inflows –
Cost.
Where,  

CF1 CF1

Present Value of Cash Inflows = ——— + ——— +……….+

(1 + K)1 (1 + K)2

ADVANTAGES OF WEALTH
MAXIMIZATION MODEL
Wealth maximization model is a superior model because
it obviates all the drawbacks of profit maximization as a
goal of a financial decision.
 Firstly, the wealth maximization is based on cash
flows and not on profits. Unlike the profits, cash flows
are exact and definite and therefore avoid any ambiguity
associated with accountingprofits. Profit can easily be
manipulative, if there is a change in accounting
assumption/policy, 
 there is a change in profit. There is a change in
method of depreciation, there is a change in profit.
It is not the case in case of Cashflows.
 Secondly, profit maximization presents a shorter
term view as compared to wealth maximization.
 Short-term profit maximization can be achieved by
the managers at the cost of long-term sustainability
of the business.
 Thirdly, wealth maximization considers the time
value of money. It is important as we all know that
a dollar today and a dollar one-year latter do not
have the same value. In wealth maximization, the
future cash flows are discounted at an appropriate
discounted rate to represent their present value.
Suppose there are two projects A and B, project A is
more profitable however it is going to generate
profit over a long period of time, while project B is
less profitable however it is able to generate return
in a shorter period. In a situation of an uncertainty,
project B may be preferable. So, timing of returns is
ignored by profit maximization, it is considered in
wealth maximization.
 Fourthly, the wealth-maximization criterion
considers the risk and uncertainty factor while
considering the discounting rate. The discounting
rate reflects both time and risk. Higher the
uncertainty, the discounting rate is higher and vice-
versa.
ECONOMIC VALUE ADDED
In the light of modern and improved approach to wealth
maximization, a new initiative called “Economic Value
Added (EVA)” is implemented and presented in the
annual reports of the companies. Positive and higher
EVA would increase the wealth of the shareholders and
thereby create value.
Economic Value Added
= Net Operating Profits after tax – Capital
Employed x Weighted Average Cost of Capital.
In summary, the wealth maximization as an objective to
financial management and other business decisions
enables the shareholders to achieve their objectives and
therefore is superior to profit maximization. For financial
managers, it is a decision criterion being used for all the
decisions. For more clarity, refer Profit Maximization vs.
Wealth Maximization.
HOW TO MAXIMIZE SHAREHOLDER’S
WEALTH?
Capital investment decisions of a firm have a direct
relation with wealth maximization. All capital
investment projects with an internal rate of
return (IRR) greater than cost of capital or having
positive NPV or creates value for the firm. These
projects earn more than the ‘required rate of return’ of
the firm. In other words, these projects maximize the
wealth of the shareholders because they are earning
more than what they can earn by investing themselves.
By analyzing the projects with the methods of capital
budgeting, we come to know whether 
wealth will or won’t be created in a particular project.
But, what is the real source of wealth creation? What is
that characteristic of the project which becomes the
root cause of value creation?

SOURCE OF WEALTH CREATION

Normally, two types of environment are faced by us –
one is external and other is internal. If both the
conditions support an organization, it tastes the
success. A most important external factor which
 creates value is industry attractiveness and a similar
internal factor is the competitive advantage of the firm.

Two main sources of wealth creation or value creations

are the industry attractiveness and competitive
advantage of the firm. Let us discuss them in little more
details.

INDUSTRY ATTRACTIVENESS
One of the most important factors for a firm to make
profits is its industry attractiveness. Explained by
Michael Porter, there are five forces of industry
attractiveness which are as follows:
1. Barriers to Competitor’s Entry:  Higher the entry
barrier, higher is the chances for a firm to 
1. sustain for a long term.
2. Substitutes: Lower the substitutes, lesser are the
chances of consumers switching the products.
3. Bargaining Power of Buyers: Lesser the bargaining
power of buyers, the firm becomes in a better position to
dominate terms.
4. Bargaining Power of Suppliers: Lesser the bargaining
power of suppliers and buyers, the firm becomes in a
better position to dominate terms.
5. Competition among Competitors: It emphasizes the
degree of competition which exists between the current
competitors of the industry. Amicable conditions among
the competitors would make the firms enjoy the better
position.
 COMPETITIVE ADVANTAGE
There are two elements of competitive advantage as per
Michael Porter which are cost advantage and
differentiation advantage.

1. Cost advantage means the cost at which a firm

producing the goods cannot be produced by the
competing firms at that cost. Due to this advantage, the
firm can sell products at a lower price than the
competitors and still earn profit out of that. Customers
are cost conscious and therefore they are attracted
towards the firm’s products. The firm enjoys good sales
which lead to more profits and better cash flows and
therefore achieve wealth creation.
2. Differentiation advantage means the product offered
by the firm can be easily differentiated 
from other competitor’s products. The customers are
convinced with a different product which is available
only with the firm under concern. In such cases where
the product is unique, firms enjoy higher price and
therefore this becomes the real source of value creation
for those firms.