Unit 1: Financial management foundations and valuation
Corporate Finance and Policy notes · PTU syllabus (MBA 206-21)
On this page
Unit summary
Corporate finance is about raising funds wisely and investing them to create value. This unit covers the meaning, evolution, objectives and scope of corporate finance, the role of the financial manager, the time value of money, valuation of equity, debt and hybrid securities, and long-term and short-term sources of finance.
After this unit you can
- Explain the meaning, evolution, objectives and scope of corporate finance
- Explain the role of the financial manager
- Apply time value of money concepts
- Value equity, debt and hybrid securities and identify sources of finance
PTU syllabus topics
- Meaning
- evolution
- objectives and scope of corporate finance
- role of the financial manager
- time value of money
- valuation of equity/debt/hybrid securities
- sources of finance (long and short term)
Future value
FV = PV (1 + r)^n
Present value
PV = FV / (1 + r)^n
PV of annuity
A × [1 − (1 + r)^(−n)] / r
Perpetuity
PV = A / r
Bond value
Σ coupon / (1 + kd)^t + face value / (1 + kd)^n
Topic 1
Meaning and scope of corporate finance
Financial management is the planning, organising, directing and controlling of financial activities — procuring and using funds — to achieve the firm's objectives.
Investment decision
Where to invest: capital budgeting, working capital
Financing decision
How to raise funds: debt or equity mix
Dividend decision
How much profit to pay out or retain
Liquidity decision
Managing current assets for liquidity and profitability
Topic 2
Evolution of corporate finance
- 1Traditional phase (1920s–1940s)
Raising funds, company formation, mergers, legal aspects
- 2Transitional phase (1940s–1950s)
Day-to-day working capital and fund management
- 3Modern phase (1950s onward)
Investment, financing and dividend decisions; valuation, risk and return
- 4Contemporary
Shareholder value, risk management, ESG, fintech and global markets
- The traditional approach viewed finance as raising funds only; the modern approach covers both raising and using funds to maximise value.
Topic 3
Objectives: profit vs wealth maximisation
Focus
Total profit
Market value of shares (NPV)
Time value of money
Ignored
Considered
Risk
Ignored
Considered
Clarity
Ambiguous: which profit?
Clear: cash flows
Acceptance
Traditional
Modern, superior objective
Topic 4
Role of the financial manager
- Estimating capital requirements and determining capital structure.
- Choosing sources of funds — shares, debentures, loans, retained earnings.
- Investment of funds — evaluating projects (capital budgeting).
- Dividend decisions and retained earnings.
- Cash management and working capital management.
- Financial controls — ratio analysis, budgets, cost control.
- Relations with banks, investors and capital markets; risk management.
- Modern role: strategic partner in mergers, valuation, treasury, ESG reporting, digital finance.
Topic 5
Time value of money
A rupee today is worth more than a rupee tomorrow because money can earn interest, and because of inflation and risk.
Future value
FV = PV (1 + r)ⁿ
Present value
PV = FV / (1 + r)ⁿ
FV of an annuity
A × [(1 + r)ⁿ − 1] / r
PV of an annuity
A × [1 − (1 + r)⁻ⁿ] / r
Perpetuity
PV = A / r
Example
₹10,000 invested at 10% for 3 years grows to 10,000 × 1.331 = ₹13,310. The present value of ₹13,310 receivable in 3 years at 10% is ₹10,000.
Topic 6
Valuation of securities
The value of any security is the present value of the cash flows it is expected to generate, discounted at the investor's required rate of return.
Bond value
V = Σ I ÷ (1 + kd)^t + RV ÷ (1 + kd)^n
Perpetual bond
V = I ÷ kd
Yield to maturity (approx.)
[I + (RV − P) ÷ n] ÷ [(RV + P) ÷ 2]
Irredeemable preference share
V = D ÷ kp
Example
A ₹1,000 bond with a 10% coupon and 3 years to maturity, required return 12%: V = 100 × 2.402 + 1,000 × 0.712 = 240.2 + 712 = ₹952.2.
Single-period
P0 = (D1 + P1) ÷ (1 + ke)
Zero growth
P0 = D ÷ ke
Constant growth (Gordon)
P0 = D1 ÷ (ke − g)
P/E approach
P0 = EPS × appropriate P/E
Example
D0 = ₹4, g = 6%, ke = 14%. D1 = 4.24; P0 = 4.24 ÷ (0.14 − 0.06) = ₹53.
- Hybrid securities: convertible debentures are valued as straight debt plus the value of the conversion option (conversion value = conversion ratio × share price); warrants and convertible preference shares are valued similarly.
Topic 7
Long-term and short-term sources of finance
| Long-term sources | Short-term sources |
|---|---|
| Equity shares | Trade credit |
| Preference shares | Bank overdraft and cash credit |
| Debentures and bonds | Commercial paper |
| Term loans from banks and institutions | Bills discounting and factoring |
| Retained earnings | Customer advances |
| Venture capital, lease finance | Short-term loans |
- Modern sources: venture capital and private equity, lease and hire purchase, external commercial borrowings, ADRs and GDRs, green bonds, InvITs and REITs.
Key terms
- Wealth maximisation
- Maximising the market value of shareholders' wealth
- Present value
- Today's value of future cash flows
- Yield to maturity
- Return if a bond is held to maturity
- Gordon model
- Share value = next dividend ÷ (ke − g)
- Hybrid security
- Security with features of both debt and equity
Quick revision
- Corporate finance: investment, financing, dividend, liquidity decisions.
- Evolution: traditional → transitional → modern.
- Wealth maximisation preferred; financial manager's role.
- TVM: compounding, discounting, annuities.
- Valuation: bonds, preference and equity shares (Gordon); hybrids; sources of finance.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.Define corporate finance.
- Q2.Distinguish traditional and modern approaches to finance.
- Q3.What is the time value of money?
- Q4.How is a perpetual bond valued?
- Q5.State the Gordon growth formula.
- Q6.Name four short-term sources of finance.
Long-answer questions
- Q1.Explain the evolution, objectives and scope of corporate finance.
- Q2.Discuss the role of the financial manager in a modern company.
- Q3.Explain the valuation of bonds, preference shares and equity shares with examples.
- Q4.Discuss long-term and short-term sources of finance.
Stuck on this unit?
Message SBS on WhatsApp for help with Corporate Finance and Policy, or to ask about studying MBA at Synetic.