Unit 1

What Is a Corporation?
A corporation is a legal entity. In the view of the law, it is a legal person that is owned by its
shareholders. As a legal person, the corporation can make contracts, carry on a business,
borrow or lend money, and sue or be sued. One corporation can make a takeover bid for
another and then merge the two businesses. Corporations pay taxes—but cannot vote!
In India, corporations are formed under central law (The Companies Act 2013), based on
memorandum of association that set out the purpose of the business and how it is to be
governed and operated. For example, the memorandum of association specifies the
composition and role of the board of directors. A corporation’s directors are elected by
shareholders. They choose and advise top management and are required to sign off on
some corporate actions, such as mergers and the payment of dividends to shareholders.
A corporation is owned by its shareholders but is legally distinct from them. Therefore, the
shareholders have limited liability, which means that shareholders cannot be held
personally responsible for the corporation’s debts. When the U.S. financial corporation
Lehman Brothers failed in 2008, no one demanded that its stockholders put up more
money to cover Lehman’s massive debts. Shareholders can lose their entire investment in a
corporation, but no more.
Corporations do not have to be prominent, multinational businesses. You can organize a
local plumbing contractor or barber shop as a corporation if you want to take the trouble.
But usually corporations are larger businesses or businesses that aspire to grow.
When a corporation is first established, its shares may be privately held by a small group of
investors, perhaps the company’s managers and a few backers. In this case the shares are
not publicly traded and the company is closely held. Eventually, when the firm grows and
new shares are issued to raise additional capital, its shares are traded in public markets
such as the Mumbai Stock Exchange. Such corporations are known as public companies.
Most well-known corporations in India are public companies with widely dispersed
shareholdings. In other countries, it is more common for large corporations to remain in
private hands, and many public companies may be controlled by just a handful of investors.
The latter category includes such well-known names as Fiat, Porsche, Benetton, Bosch,
IKEA, and the Swatch Group.
A large public corporation may have hundreds of thousands of shareholders, who own the
business but cannot possibly manage or control it directly. This separation of ownership
and control gives corporations permanence. Even if managers quit or are dismissed and
replaced, the corporation survives. Today’s stockholders can sell all their shares to new
investors without disrupting the operations of the business. Corporations can, in principle,
live forever, and in practice they may survive many human lifetimes. One of the oldest
corporations is the Hudson’s Bay Company, which was formed in 1670 to profit from the fur
trade between northern Canada and England. The company still operates as one of
Canada’s leading retail chains.
The separation of ownership and control can also have a downside, for it can open the door
for managers and directors to act in their own interests rather than in the stockholders’
interest. We return to this problem later in the chapter.

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The Role of the Financial Manager
What do financial managers do for a living? That simple question can be answered in
several ways. We can start with financial managers’ job titles. Most large corporations have
a chief financial officer (CFO), who oversees the work of all financial staff. The CFO is deeply
involved in financial policy and financial planning and is in constant contact with the Chief
Executive Officer (CEO) and other top management. The CFO is the most important
financial voice of the corporation, and explains earnings results and forecasts to investors
and the media.
Below the CFO are usually a treasurer and a controller. The treasurer is responsible for
short-term cash management, currency trading, financing transactions, and bank
relationships.
The controller manages the company’s internal accounting systems and oversees
preparation of its financial statements and tax returns. The largest corporations have
dozens of more specialized financial managers, including tax lawyers and accountants,
experts in planning and forecasting, and managers responsible for investing the money set
aside for employee retirement plans.
Financial decisions are not restricted to financial specialists. Top management must sign off
on major investment projects. But the engineer who designs a new production line is also
involved, because the design determines the real assets that the corporation holds. The
engineer also rejects many designs before proposing what he or she thinks is the best one.
Those rejections are also investment decisions, because they amount to decisions not to
invest in other types of real assets.
The term financial manager to refer to anyone responsible for an investment or financing
decision. Often we use the term collectively for all the managers drawn into such decisions.
What is the essential role of the financial manager? Figure 1.1 gives one answer. The figure
traces how money flows from investors to the corporation and back to investors again. The
flow starts when cash is raised from investors (arrow 1 in the figure). The cash could come
from banks or from securities sold to investors in financial markets. The cash is then used to
pay for the real assets (investment projects) needed for the corporation’s business (arrow
2). Later, as the business operates, the assets generate cash inflows (arrow 3). That cash is
either reinvested (arrow 4a) or returned to the investors who furnished the money in the
first place (arrow 4b). Of course, the choice between arrows 4a and 4b is constrained by the
promises made when cash was raised at arrow 1. For example, if the firm borrows money
from a bank at arrow 1, it must repay this money plus interest at arrow 4b.

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What is Finance?: The word finance was originally a French word, which was adapted by
English speaking communities to mean “the management of money.” In today’s world
Finance is organized as a branch of Economics. Finance can be defined as an art of
managing various available resources like money, assets, investments, securities, etc.
Finance is the procurement of funds and then its effective utilisation. It also deals with
profits that adequately compensate for the cost and risks borne by the business
Scope and functions of financial management:
The scope of financial management includes three groups in general. First group relates to
finance and cash, second one relates to raising the funds and third group relates to their
administration. In view of funds utilisation third group has wider scope. Financial
management plays two main roles, one – participating in funds utilisation and controlling
productivity, two – Identifying the requirements of funds and selecting the sources for
those funds. Liquidity, profitability and management are the functions of financial
management.

The Scope of Financial Management includes:

1. Financial Planning,
2. Raising Funds,
3. Financial Supervision,
4. Financial Control,
5. Financial Decisions,
6. Preparation of Annual Financial Statements,
7. Estimation of Financial Performance,
8. Evaluating the Impact of New Financing,
9. Miscellaneous Functions

Financial Decisions: The key aspects of financial decision-making relates to

financing decisions, investment decisions, dividend decisions and working
capital management. Decision-making helps to utilise the available resources for
achieving the objectives of the organization.
The types of financial decisions can be classified as:
(i) Long-Term Financing Decisions
(ii) Short-Term Finance Decisions
There are four main financial decisions:
(i) Capital Budgeting or Long term Investment Decision
(ii) Capital Structure or Financing Decision

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(iii) Dividend Decision
(iv) Working Capital Management Decision

(I) Investment Decision:

A financial decision which is concerned with how the firm’s funds are invested in different
assets is known as investment decision. Investment decision can be long-term or short-
term.
A long term investment decision is called capital budgeting decisions which involve huge
amounts of long term investments and are irreversible except at a huge cost. Short-term
investment decisions are called working capital decisions, which affect day-to-day working
of a business. It includes the decisions about the levels of cash, inventory and receivables.

Factors Affecting Investment Decisions / Capital Budgeting Decisions:

1. Cash flows of the project- The series of cash receipts and payments over the life of an
investment proposal should be considered and analyzed for selecting the best proposal.
2. Rate of return- The expected returns from each proposal and risk involved in them
should be taken into account to select the best proposal.
3. Investment criteria involved- The various investment proposals are evaluated on the
basis of capital budgeting techniques. Which involve calculation regarding investment
amount, interest rate, cash flows, rate of return etc. It is to be considered which technique
to use for evaluation of projects.

(II) Financing Decision:

A financial decision which is concerned with the amount of finance to be raised from
various long term sources of funds like, equity shares, preference shares, debentures, bank
loans etc. is called financing decision. In other words, it is a decision on the ‘capital
structure’ of the company.
The risk of default on payment of periodical interest and repayment of capital on ‘borrowed
funds’ is called financial risk.

Factors Affecting Financing Decision:

1. Cost- The cost of raising funds from different sources is different. The cost of equity is
more than the cost of debts. The cheapest source should be selected prudently.
2. Risk- The risk associated with different sources is different. More risk is associated with
borrowed funds as compared to owner’s fund as interest is paid on it and it is also repaid
after a fixed period of time or on expiry of its tenure.
3. Flotation cost- The cost involved in issuing securities such as broker’s commission,
underwriter’s fees, expenses on prospectus etc. Is called flotation cost. Higher the flotation
cost, less attractive is the source of finance.

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4. Cash flow position of the business- In case the cash flow position of a company is good
enough then it can easily use borrowed funds.
5. Control considerations- In case the existing shareholders want to retain the complete
control of business then finance can be raised through borrowed funds but when they are
ready for dilution of control over business, equity shares can be used for raising finance.
6. State of capital markets- During boom period, finance can easily be raised by issuing
shares but during depression period, raising finance by means of debt is easy.

(III) Dividend Decision:

A financial decision which is concerned with deciding how much of the profit
earned by the company should be distributed among shareholders (dividend)
and how much should be retained for the future contingencies (retained
earnings) is called dividend decision.
Dividend refers to that part of the profit which is distributed to shareholders.
The decision regarding dividend should be taken keeping in view the overall
objective of maximizing shareholder s wealth.
Factors affecting Dividend Decision:
1. Earnings- Company having high and stable earning could declare high rate of
dividends as dividends are paid out of current and past earnings.
2. Stability of dividends- Companies generally follow the policy of stable
dividend. The dividend per share is not altered in case earning changes by small
proportion or increase in earnings is temporary in nature.
3. Growth prospects- In case there are growth prospects for the company in the
near future then, it will retain its earnings and thus, no or less dividend will be
declared.
4. Cash flow positions- Dividends involve an outflow of cash and thus,
availability of adequate cash is foremost requirement for declaration of
dividends.
5. Preference of shareholders- While deciding about dividend the preference of
shareholders is also taken into account. In case shareholders desire for dividend
then company may go for declaring the same. In such case the amount of
dividend depends upon the degree of expectations of shareholders.

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6. Taxation policy- A company is required to pay tax on dividend declared by it.
If tax on dividend is higher, company will prefer to pay less by way of dividends
whereas if tax rates are lower, then more dividends can be declared by the
company.
(iv) Working Capital Decision:
Working capital decision is related to the investment in current assets and
current liabilities. Current assets include cash, receivables, inventory, short-term
securities, etc. Current liabilities consist of creditors, bills payable, outstanding
expenses, bank overdraft, etc. Current assets are those assets which are
convertible into a cash within a year. Similarly, current liabilities are those
liabilities, which are likely to mature for payment within an accounting year.

Sources of Finance: Common sources of finance for business are equity, debt,
debentures, retained earnings, term loans, working capital loans, letter of credit
and venture funding etc.

(I)Long-term Sources:
A firm needs funds to purchase fixed assets such as land, plant & machinery, furniture, etc.
These assets are purchased from the funds, which have a longer maturity repayment

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period. The capital required for purchasing these assets is known as fixed capital. So, funds
required for fixed capital must be financed using long-term sources of finance.

(II) Medium-term Sources:

Funds required for say, a heavy advertisement campaign, the benefit of which lasts for
more than one accounting period, should be financed through medium-term sources of
finance. In other words, expenditure that results in deferred revenue should be financed
through medium-term sources.

(III) Short-term Sources:

Funds required for meeting day-to-day expenses, i.e. revenue expenditure or working
capital should be financed from short-term sources whose maturity period is one year or
less.

Profit maximization vs. Wealth maximization: What is desirable?

Profit maximization is not a well-defined financial objective for at least two reasons:

1. Maximize profits? Which year’s profits? A corporation may be able to increase current
profits by cutting back on outlays for maintenance or staff training, but those outlays may
have added long-term value. Shareholders will not welcome higher short-term profits if
long-term profits are damaged.

2. A company may be able to increase future profits by cutting this year’s dividend and
investing the freed-up cash in the firm. That is not in the shareholders’ best interest if the
company earns less than the opportunity cost of capital.

Profit maximization Wealth maximization

Profit Maximization consists of the activities The ability of the company to increase the
that manage the financial resources with the value of its stock for all the stakeholders is
aim to increase the profitability of the referred to as wealth maximization
company
It is mainly a short-term goal and mainly is Focus is on increasing the value of the
restricted to the accounting analysis of the stakeholders of the company in long term.
financial year.
Risk and uncertainty inherent in the business It considers the risk and uncertainty inherent
model of the company is not considered. in the business model of the company
The ability of the company to operate The wealth maximisation depends on a
efficiently in order to produce maximum number of tangible and intangible factors
output with limited input is considered. like sales, quality of products or services etc.
A profit-oriented business will spend just A wealth-oriented business will spend more
enough on its productive capacity to handle heavily on capacity in order to meet its long-
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the existing sales level and perhaps the term sales projections.
short-term sales forecast.

Corporate Finance:
(i) Nature –
Corporate finance is management of the required funding and its sources. Corporate
Finance personnel are also responsible for overseeing and optimizing the proficiencies of
the capital structure to enhance the value of the company. One of the main objectives of
corporate finance is to maximize the shareholder value in both short and long term.
(ii) Scope – The scope of corporate finance includes:
 Sanctioning or rejecting proposed investment. If the investment is approved, it is also to
be decided whether the company should raise the funds through debt or equity or both.
 Managing of short term assets and liabilities, investments, inventory control and other
short term financial issues by the financial manager.
 Deciding whether the dividends should be offered to shareholders or not and if offered
then how much?
Concept of Risk and Return:
Finance managers in corporate have the responsibility of minimising the risk of investment
and at the same time assure maximum returns on the invested capital. It is so because
investors expect to be compensated for risk.
A person, who makes an investment, expects to get some returns from the investment in
the future. However, as future is uncertain, the future expected returns too are uncertain.
The element of uncertainty associated with the returns from an investment into a project
introduces the risk factor.
Various components cause the variability in expected returns, which are known as elements
of risk. There are broadly two groups of elements classified as systematic risk and
unsystematic risk.
Systematic Risk:
Changes like economic, political and social systems have influence on the performance of
companies and thereby on their expected returns. These changes affect all organizations to
varying degrees. Hence, the impact of these changes is system-wide and the portion of total
variability in returns caused by such across the board factors is referred to as systematic
risk.

Unsystematic Risk:
The returns of a company may vary due to certain factors that affect only that company.
Examples of such factors are raw material scarcity, labour strike, management inefficiency,
etc. When the variability in returns occurs due to such firm-specific factors, it is known as
unsystematic risk. This risk is unique or peculiar to a specific organization.

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Corporate governance & Agency Problems:
The owners (shareholders) cannot control what the managers do, except indirectly through
the board of directors. This separation is necessary but also dangerous. Managers may be
tempted to buy costly items for their personal use from company funds. They may shy away
from attractive but risky projects because they are worried more about the safety of their
jobs than about maximizing shareholder value. They may work just to maximize their own
bonuses, and therefore redouble their efforts to make and resell flawed subprime
mortgages. Conflicts between shareholders’ and managers’ objectives create agency
problems. Agency problems arise when agents work for principals. The shareholders are the
principals; the managers are their agents. Agency costs are incurred when (1) managers do
not attempt to maximize firm value and (2) shareholders incur costs to monitor the
managers and constrain their actions.

Corporate valuation Models

(A) Asset Based Valuation Model: Corporate valuation model tries to find the value of
the assets a company already owns. This includes machinery, equipments, property,
vehicles and any other inventory or supplies. Asset – in – place are those items that a
company actually uses in its current operations.
The asset-based valuation model examines the total value of the assets in a company. It is
a form of valuation in business that focuses on the value of a company’s assets or the fair
market value (the value of an asset in market and not its book value after depreciation) of
its total assets after deducting liabilities. The assets include tangible items in the company
such as real estate and cars, as well as intangible assets like intellectual property, such as
copyrights and trademarks. In an asset-based valuation, we focus primarily on the assets in
place and estimate the value of each asset separately. The market value of some of these
items, mostly tangible ones, can be easily determined with the help of the company books.
But it becomes very difficult for calculating the worth of the intangible items. For
companies with lucrative growth opportunities, asset-based valuations will yield lower
values than going concern valuations.

Types of Asset Based Valuation Model:

(i) Asset accumulation valuation: In the asset accumulation method, all the assets and
liabilities of a business are compiled, and a value is assigned to each one. The value of an
entity is the difference between the value of its assets and liabilities. Each asset and liability
must be identified carefully. In addition, the asset accumulation method requires an
effective way of assigning values to assets and liabilities.
A few of the items typically used during valuation don’t always appear on a standard
balance sheet. They include internally generated intangible assets like trademarks, patents,
as well as trade secrets. The list also contains provisional liabilities, which may comprise
compliance costs or unresolved legal cases.

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(ii) Excess earning valuation: The excess earnings approach is a combination of the
income and assets valuation methods. Other than evaluating a company’s tangible
assets and liabilities, the method can also be used to work out a business’s goodwill. To
determine goodwill, the earnings of a business are treated like input, and then a connection
is drawn to the income method.

Here the assets in place are added with earnings ie. Assets plus income earned directly or
indirectly (P&L + Total of credits of trading side).

(B) Earning Based Valuation Model:

Earnings based valuation model takes into account the potential of earning of an entity to
evaluate the company. It doesn’t take into account the assets that a company has.
Earnings-based valuation methods use various metrics related to a company’s earnings to
assess its value. The Price/Earnings (P/E) ratio, for example, compares a company’s stock
price to its earnings per share, providing insight into the market’s valuation of its earnings
generating capacity. Other metrics like the Earnings Per Share (EPS) and Earnings Before
Interest, Taxes, Depreciation, and Amortization (EBITDA) are also commonly used for
earnings-based valuation.

(i) Capitalization of Earnings: It is a method of determining value of a company by

calculating the worth of its anticipated profit based on current earnings and expected
future performance. It's like figuring out how much a company is worth by looking at how
much money it's making now and how much it's expected to make in the future.

(ii) Multiple of Earnings: This method values a company by assessing its future
profitability. This method, however, calculates an organisations worth by assigning a
multiplier to its current revenue.
(C) Cash Flow Based Valuation Model: It is a series of inward and outward cash flow
over time in which there is only one change in the cash flow direction. Conventionally, cash
flow for a project or investment is typically structured as an initial outlay (outflow) followed
by a number of inflows over a period of time.

(i) Discounted Cash Flow (DCF): A valuation method used to estimate the value of an
investment based on its expected future cash flows. This method tries to figure out the
present value of an investment, based on projections of how much money it will generate
in future.

CF1 = Cash flow for year 1

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CF2 = Cash flow for year 2
CFn = Cash flow for year n
r = Discount rate
With the help of DCF, we can find out the NPV.

(ii) Internal rate of return (IRR): This may be defined as that rate of interest which,
when used to discount the cash flow of an investment, reduces its NPV to zero. Internal
Rate of Return (IRR) is also known as Time-adjusted rate of return.
Internal rate of return is calculated for deciding which projects or investments under
consideration are investment-worthy and ranking them. IRR is the discount rate for which
the net present value (NPV) equals zero (when time-adjusted future cash flows equal the
initial investment).

CAPM Model (Capital Asset Pricing Model): Capital Asset Pricing Model
describes the relationship between systematic risk and expected return for assets,
particularly stocks. It establishes a connection between the inherent risks associated with
investing, both broadly and specifically in stocks, and the anticipated returns investors can
expect. This model is used for pricing risky securities and generating expected returns for
assets, provided the risk level of assets and cost of capital is known.

As per this model, the cost of equity is equal to the sum of risk-free interest rate and a
premium dependent on the systematic risk involved in the particular security. This model
directly focuses on the relationship between the risk and required return. The views of
CAPM are expressed by the following formula/ equation:

Cost of Equity (Or Expected return on investment) ERi= Rf + β*(Rm – Rf)

Here Rf is the risk-free rate, Rm is the expected rate of return for the market portfolio, β is
beta and (Rm – Rf) is called market risk premium.
Beta (β): Beta is the representative of systematic risk in the equation. Systematic risk is that
risk which is not avoidable by diversification. If β < 1: Asset is less volatile (relative to the
market), if β = 1: Asset’s volatility is the same rate as the market, if β > 1: Asset i is more

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volatile (relative to the market). Beta measures the responsiveness of a stock’s price to
changes in the overall stock market.
Expected Return of the Market Portfolio (Rm): It is the average return of all the securities
of the market. Some market securities pay higher and some other lower than the expected
return of the market portfolio.
The CAPM model can also be understood through following graph:

Assumptions of the Capital Asset Pricing Model (CAPM):

(i) By nature, all investors are risk-averse.
(ii) Risk and reward are correlated linearly.
(iii) Taxes, inflation, and transaction costs do not exist.
(iv) At the risk-free rate of return, limitless capital is available for borrowing.

Numerical: The yield on 5-year RBI bonds as on 30 December 2023 is 0.72%. Also, the XYZ
Co.'s share price as on 30 December 2023 is Rs. 86.81 per share while it has a beta (β)
coefficient of 1.86. Twelve months return on Nifty is 11. 52%. Estimate the cost of equity.
Solution:
Under the capital asset pricing model (CAPM), the rate of return on RBI bonds is used
for risk free rate (Rf = 0.72). We already have an estimate for beta coefficient (β = 1.86) and
market rate for return (Rm = 11.52), so we can find the cost of equity:
Cost of Equity (or Expected rate of return) = Rf + β*(Rm – Rf)
= 0.72% + 1.86 × (11.52% − 0.72%)
= 20.81%
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Arbitrage Pricing Theory (APT):
 Arbitrage pricing theory (APT) is a multi-factor asset pricing model based on the idea
that an asset's returns can be predicted using the linear relationship between the
asset’s expected return and a number of macroeconomic variables that capture
systematic risk (like unexpected changes in inflation, gross national product (GNP),
Gross domestic product (GDP), commodities prices, market indices, and exchange
rates).
 Unlike the CAPM, which assumes markets are perfectly efficient, APT assumes
markets sometimes misprice securities, before the market eventually corrects and
securities move back to fair value.
 Using APT, arbitrageurs hope to take advantage of any deviations from fair market
value.

The Formula for the Arbitrage Pricing Theory Model:

E(R)i=R)f + (RP1×β1) + (RP2×β2) + (RP3×β3) +........... + (RPn×βn)
Where:
E(R)i=Expected return on the asset
Rf=Risk-free rate of return
βn=Sensitivity of the asset price to macroeconomic factor n
RPn=Risk premium associated with factor n

Numerical:
 Gross domestic product (GDP) growth: ß = 0.6, RP (Risk Premium) = 4%
 Inflation rate: ß = 0.8, RP = 2%
 Gold prices: ß = -0.7, RP = 5%
 Standard and Poor's 500 index return: ß = 1.3, RP = 9%
 The risk-free rate is 3%

Using the APT formula, calculate the expected return

Solution:

Expected return = 3% + (0.6 x 4%) + (0.8 x 2%) + (-0.7 x 5%) + (1.3 x 9%) = 15.2%

EVA (Economic Value Added): Economic Value Added (EVA), sometimes known as
Economic Profit, is a measure based on the Residual Income technique, which measures the
return generated over and above investors’ required rate of return (hurdle rate). EVA is the
calculation of what profits remain after the costs of a company's capital—debt and equity—
are deducted from operating profit.
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EVA serves as an indicator of the profitability of projects in which a company
invests. Its underlying premise (assumptions) consists of the idea that:
1) Real profitability occurs when additional wealth is created for investors and
2) Projects should generate returns above their cost of capital.

Features of EVA:

 Economic value added (EVA) calculates the profits that remain after deducting a
company's cost of capital.
 The consulting firm Stern Stewart developed and trademarked EVA, and many large,
global companies use it internally to measure performance.
 To calculate EVA, you'll need to know net operating profit after tax (NOPAT),
weighted average cost of capital (WACC), and total invested capital (TC).
 The formula for finding EVA is EVA = NOPAT – (WACC x TC).

Composite Cost of Capital (or WACC):

Composite cost of capital is also known as weighted average cost of capital. It also tells
about the component costs of common stock, preferred stock, and debt. Each of these
components is given weightage based on the associated interest rate and other gains and
losses with it. It shows the cost of each additional capital as against the average cost of
total capital raised. The process to compute this is first computing the weighted average
cost of capital which is the collection of weights of other costs summed together. The
formula is given as:-

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Since interest payments are tax-deductible, the cost of debt needs to be multiplied by (1
– tax rate), which is referred to as the value of the tax shield. This is not done for
preferred stock because preferred dividends are paid with after-tax profits.

Numerical: A company uses debt and equity both to finance its capital budget and uses
CAPM to compute its cost of equity. Company estimates that its WACC is 12%. The capital
structure is 75% debt and 25% equity. Before tax cost of debt is 12.5 % and tax rate is 20%.
Risk free rate is Rf = 6% and market risk premium (Rm - Rf ) = 8%: What is the β of the
company?
Solution:
WACC = (E/V) x Re + (D/V) * Rd x (1- Tc)
Here WACC = 0.12, E = 0.25, D =0.75 and V = 0.25 + 0.75 = 1, Tc = 0.20
Re = Not given (we need to find), Rd = 12.5% = 0.125
So, 0.12 = (0.25/1) x Re + (0.75/1) x 0.125 x (1 – 0.20)
0.12 = (0.25 x Re) + 0.075
Re = (0.12 – 0.075) / 0.25
Re = 0.18 = 18% (Cost of Equity)
Now, we know that
Re = Rf + β x (Rm - Rf )
0.18 = 0.06 + β x (0.08) or β = 0.12 / 0.08 = 1.5
Introduction to start-up finance: In this stage of financing, the angle investors
finance the production activity in most of the startups even if the commercial success or
flop of the production / service is not yet known. Sometimes the entrepreneurs invest their
own money to fund various activities. Level of financial contributions and risk is high in
start-ups.
Time Value of Money: A Rupee worth today is more than a Rupee worth tomorrow i.e.
money available now is worth more than the identical sum in the future due to its potential
earning capacity.
The time value of money (TVM) is the concept that money available at the present time is worth
more than the identical sum in the future due to its potential earning capacity. This core principle
of finance holds that, provided money can earn interest, any amount of money is worth more the
sooner it is received. TVM is also sometimes referred to as present discounted value.
The time value of money draws from the idea that rational investors prefer to receive money
today rather than the same amount of money in the future because of money's potential to grow
in value over a given period of time. For example, money deposited into a savings account earns a
certain Interest rate and is therefore said to be compounding in value.

Example: If we invest Rs.100 today for 1 year at a 10% interest rate, then at the end of the year,
we would have Rs.110. So, as per this example, Rs. 100 today is worth Rs. 110 a year from today.

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