#2 Introduction to Corporate Finance | Foundations of Accounting & Finance

Summary

This lecture by NPTEL-NOC IITM serves as an introduction to the principles of Corporate Finance, focusing on sourcing and investing funds. Corporate finance is essentially about sourcing money at the lowest possible cost and investing it in options that yield the best possible return, accounting for risk appetite. The importance of the time value of money is also discussed, emphasizing how money's value changes over time due to factors like inflation. The session ends by outlining how the course will cover financial accounting, cost accounting, and finance, addressing their interconnectedness in analyzing and decision-making processes.

Highlights

• Understanding corporate finance involves sourcing money cheaply and investing it wisely. 🌟
• Risk appetite plays a vital role in determining investment decisions in corporate finance. 🎲
• The time value of money is an essential concept affecting investment and borrowing decisions. ⏱️

Key Takeaways

• Corporate finance is about sourcing funds at the lowest cost and investing for the highest returns, considering risk. 💰
• The time value of money is crucial when making financial decisions, as today's money is worth more than future money. ⏳
• Financial accounting, cost accounting, and corporate finance are interconnected, assisting in comprehensive financial analysis. 📊

Overview

In this video from NPTEL-NOC IITM, the core principles of corporate finance are dissected and explained with clarity. The speaker emphasizes the importance of sourcing funds at minimal costs while making strategic investments that provide optimal returns, all within the framework of acceptable risk levels. This dual-focus on sourcing and investing forms the bedrock of solid corporate finance practices.

A notable concept reiterated throughout the session is the time value of money, which underscores how the value of money diminishes over time due to inflation and other economic factors. This principle is crucial in shaping both borrowing and investment strategies, ensuring that future financial outcomes are realistically appraised.

The lecture also discusses how financial accounting, cost accounting, and finance are intertwined, highlighting the role of thorough financial analysis and informed decision-making. By understanding each domain's contribution to the company’s financial health, students can better navigate and predict investment outcomes and company positions.

Chapters

• 00:00 - 05:30: Introduction to Corporate Finance In the 'Introduction to Corporate Finance' chapter, the content appears to initiate with an engaging tone, possibly starting with music to set the scene. It then transitions into the discussion of finance, potentially outlining what topics will be covered under this subject in subsequent sections of the material. The use of different colors could indicate a visual aid or emphasis on certain points. While the transcript provides limited details, the overall approach hints at an introductory exploration into various dimensions of corporate finance.
• 05:30 - 11:00: Understanding Finance and Risk Appetite The chapter titled 'Understanding Finance and Risk Appetite' begins by focusing on the concept of Finance, specifically Corporate Finance. It introduces two fundamental aspects associated with Corporate Finance though the details are not provided. The chapter appears to serve as an introductory exploration into financial concepts with an emphasis on Corporate Finance.
• 11:00 - 16:30: Investment Strategies and Source of Funds The chapter discusses strategies for investing and sourcing funds effectively. It emphasizes the importance of obtaining money at the lowest possible cost and investing it in opportunities that offer a high return on investment.
• 16:30 - 22:30: Time Value of Money The chapter delves into the concept of the time value of money, discussing how risk appetite is a significant component of financial decision-making. It highlights that in corporate finance, the primary objectives are to source money at the lowest cost possible.
• 22:30 - 30:00: Overview of Accounting and Finance Course The chapter provides an overview of the Accounting and Finance course, focusing on investment strategies. It emphasizes the importance of identifying options that offer the highest possible return relative to one's risk-taking ability. The discussion includes the role of risk in investment decisions, catering to different risk profiles while making investment choices.
• 30:00 - 36:30: Course Content Breakdown The chapter discusses the concept of return on investment (ROI) and how individuals approach the risk associated with investments. It contrasts responsible investing with gambling or high-risk financial decisions, using the example of betting borrowed money on a horse race to illustrate the dangers of high-risk investment strategies. This highlights the importance of understanding one's own risk appetite and ability to manage risk in financial decision-making.

#2 Introduction to Corporate Finance | Foundations of Accounting & Finance Transcription

• 00:00 - 00:30 [Music] we come to the next aspect Finance out there I'm just going to drop out here I'm going to use a different color
• 00:30 - 01:00 what is Finance in this particular case when I talk about Finance I am going to more be specific on Corporate Finance typical Corporate Finance has to do with two basic aspects what are two aspects one to Source
• 01:00 - 01:30 money at lowest cost second invest that money at a return which is high
• 01:30 - 02:00 given your risk appetite I use risk ability typical Corporate Finance it's to do with only two functions Source money at the lowest posit possible
• 02:00 - 02:30 cost invest that money in an option that gives you highest possible return given your risk taking ability given your risk taking ability now I can say somebody can why that risk taking ability comes in there because when you sort of make Investments of that
• 02:30 - 03:00 money money is going to give you return the investment is going to give you return and you could say I'm just going to go and gamble today or I'm going to just go and in bet bet all the money that I borrowed on a horse today on in a horse race today you can do that that means what's happening your risk your risk appetite or your ability
• 03:00 - 03:30 to take risk is extremely high in that case so the probability of failure is also going to be extremely high in that case so when you do that the source from which you borrow the cost from which you B the cost of the source from which you borrow will also be high let me give you simple example I will say I borrow money sorry as I borrow money to invest
• 03:30 - 04:00 in a very safe asset now the person who is lending me the money will certainly know if I invest in the safe asset I will get money returned back if I get the return back I will return his money so he is very confident that he will get back the money what he has given to me unless I have a very Wicked intention of not repaying keep that let us keep the wicked intention aside let us keep harness business so given that what does
• 04:00 - 04:30 that fellow say he will give me money at a very low interest cost he says I'm very happy with the small interest out there because I'm sure of getting the money back I go to him and say I will take the money borrow the money from you but I'm going to take the money directly to the race course today and bet on a particular horse he knows that if I lose
• 04:30 - 05:00 I may not return his money because I don't have the money I may not return his money I have borrowed so what is happening the risk that I'm taking is very very high because of that the the the lender who is giving me the money is also taking equally equal amount of risk so he is going to charge me more and more in that process out there for the money that he's going to lend it to me because he has to cover the risk out so in short when we talk about Corporate
• 05:00 - 05:30 Finance it is just that sourcing money at the lowest cost that is the first objective then investing money in an option that is going to give me the best possible return instead of the highest return you can even say you can even um rephrase it to what is called as the best possible return out best possible return given your risk appetite or risk ability given your risk
• 05:30 - 06:00 ability out there so when we say Finance fin Corporate Finance Corporate Finance the job of any Corporate Finance if we have CFO out there he's a CFO and X organization y organization etc etc etc out there what is the job of a CFO the job of a CFO if I have to put it in very very crude simple terms is to Source money at the lowest cost invest in the best possible what do
• 06:00 - 06:30 you call it as best invest in option which is going to give me the best possible return wow it is so easy then why are the cofs paid High then why is their job very tough you might ask me but sourcing money at the lowest cost is the toughest job and even tougher is investing money in an option which is basically going to be giving you the best possible return
• 06:30 - 07:00 And Timely return that is even more important timely return in the sense imagine I have borrowed money I have to repay it next year I have to invest also in a way that my return or I will get back the investment next year so that I can repay that flow if I invested in an option where I'm going to get the return only after three years next year when I have to repay that fellow from whom I have
• 07:00 - 07:30 borrowed I will not have money so what I will do I will go back and borrow again and I'm getting into a vicious circle in the process that is what we call it Alm asset liability mismanagement let's all get to all that as a goal so that is sourcing investing these are the two core aspects when we talk about Corporate Finance now I mean when we say when we say sourcing money there are various
• 07:30 - 08:00 options of sourcing money so how do you Source money you borrow no borrowing is One Source you can raise equity in the market issue shares and raise equity in the market we'll go to that as we go we we'll come to we'll discuss about equities per se specifically as we go even borrowing there are a multi-million ways I can borrow I can borrow from from the public by issuing
• 08:00 - 08:30 debenture I can borrow by issuing a bond I can borrow from a bank I can borrow from a financial institution I can borrow from what do you call it as by um from an institution which is abroad say for example you said today you would have learned seen read a lot of reports about soft Bank lend soft Bank of Japan lending money Etc and so on I can raise money through a venture funding I can raise money through various forms
• 08:30 - 09:00 out then my investment options there are empty number of options I will be very clear of the investment option that I have chosen before I raise money so that my interest rate on the borrowing will get dictated bed than that so that is basically deciding on the source multiple sources it will not be a single Source combination of sources and then finding Avenues to invest these are the two core aspects
• 09:00 - 09:30 out there of corporate finance we'll deal with this also while dealing with this you have to remember there is one more aspect when we talk about this and that is what we call it as let me use a different color we call it as time value of money what is this time value of money please
• 09:30 - 10:00 not a rupee today is not the same uh a rupee today is worth much more than the rupee tomorrow that is supposing you have 100 rupees you proc you buy a particular product for 100 rupees today one year down the line to buy the same product you will not be able to buy it at 100 rupees you will have to pay little more than 100
• 10:00 - 10:30 rupees so what is happening with time the value of money is reducing out there why it could be inflation so on and so forth out there I'm not getting into the economics are the reasons behind all of it and that is what we call it as time value of money so when I say sourcing money imagine I soured about $100,000 as of today or let us say 1 lakh rupees as of today
• 10:30 - 11:00 Ive made Investments and the investment is going to give me return after five years and after five years it is giving me 1 lak 110,000 is it worth investing well at the at the outset you'll say yes it is worth investing because you getting 10,000 rupees more but what is the value of that 1 lakh 10,000 5 years down the line as of today you are putting in one lakh you are going to get 1 lak 120,000 1 lak 10,000 five years later what is whether
• 11:00 - 11:30 the one lakh today is more than 1 lak2 10,000 5 years later or is it lower than what I'm going to get 5 years later let me repeat it I know it's it's a little confusing for you imagine I spent one lakh today five years later I'm getting 1 lak1 10,000 the value of money is depreciating at the rate of about 5%
• 11:30 - 12:00 everywhere that means over five years what happens the value of money would have depreciated about roughly about 25% out there so 1 lak1 10,000 if it is depreciated that is if it 1 lak 10,000 5 years down the line is worth what as of today it is basically worth far less than one lakh as of today because money is depreciating at the rate of 5% I mean hypothetically it depreciating at the rate of 5% every every year so 5 years
• 12:00 - 12:30 down the line in 5 years it depreciated about 25% am I right so that 1 lak 10,000 what is the value of that 1 lak 10,000 5 years later what I'm going to get value of that money as of today why as of today as of today I'm investing that one lakh what is the value of that 1 lakh 10,000 as of today so I will have to reduce it that is money value is reducing at 5% every year for five
• 12:30 - 13:00 years so that money value then naturally the 1 lakh 10,000 what I've got five years down the line what is the value of it today it'll certainly be less than one lakh if it reduces if money value decreases by 5% every year if money value decreases I'm not getting into the calculations of it money value depreciates by 5% every year so when you make these investment decisions that is I said you also will have to keep in mind what is called as is the time value of money sir how will
• 13:00 - 13:30 we know at what rate the money is going to depreciate every year well there are scientific methods of knowing that let us not even get into the methods of what is called as assessment of this discounting or time value of money there are many many many methods for assessing that so when you make this sourcing as well as the investing decision you will have to keep in mind what is called as this time value of money
• 13:30 - 14:00 also and when we say Corporate Finance Corporate Finance Deals Only with sourcing and investing sourcing lowest investing is the best possible return with time value of money that's all what we do in finance Corporate Finance out there of course having said that there are other number of other areas of Finance verticals somebody can say I
• 14:00 - 14:30 will do what is called as some one of your friends would be saying we will do what is called as Investment Management what is Investment Management you invest invest in Securities you invest in stocks you invest in real estate you invest various places and then objective is what the same invest get best possible return so it basically boils down to the same thing out there in and get best possible return out there
• 14:30 - 15:00 invest means Investments invest soures money at the lowest cost and get best possible return out there that is what we do we also talk about then what do you call it as somebody would say oh we will do investment banking we will also do what is called as valuation we'll also do what is called as derivatives d
• 15:00 - 15:30 derivatives so when we say what is derivative again instrument for investment invest instrument for sorry not investment hedging your risk again valuation valuation you you're valuing your Investments the future value assessing the future value of your Investments all these things basically again all of it boils down to these two simple things out there sourcing money at what do you call it as
• 15:30 - 16:00 the lowest cost investing money at what is called as the best possible option which has gives you the best possible return so in short in summary I'm going back here Accounting in finance Accounting in finance when I talk about I talk about two different forms first form Financial Accounting record a financial transaction then based on that assess the financial position do we learn this yes we will learn that
• 16:00 - 16:30 almost about 50% of the C this particular course will be focused only on this particular aspect Financial Accounting that is record a financial statements and assess the financial position of the financial assess the financial position of the company under that 20% of the time I'm going to spend on this cost accounting part of it when I say cost accounting part of it I'm pre predominantly talking about the kinds of decisions I'm not
• 16:30 - 17:00 going to go over all the kinds of decisions what management what a company would make using this information I'm going to touch upon very few key specific decisions out there that management may make using this particular information when I say few key decisions it could be basically your allocation of overheads or pricing decision and so on and so forth few key decisions using the accounting information what the manage company will make then the next 30% of my time will be spent on finance out
• 17:00 - 17:30 there that is in finance I'm going to talk about how do you what are the how do you assess the sourcing of funds out there and then how do you look at the time value of money and how how do you choose your investment options how do you discount it and make decisions out there and that is all what we are going to out you so it'll give you as I had said earlier a broad overview of financial assessing the
• 17:30 - 18:00 financial recording and assessing financial position assessing the information one of for the for accounting information for decision making by the company and analyzing what do you call it as the sources of funds and your investment options that you have and that is what this particular course is going to give you almost about close to about 40 to 50% of my time is going to be in financial accounting that will give you the assessment of financial position and
• 18:00 - 18:30 that assessment of financial position is required when you basically basically use even your what do you call it as choose your investment option out here even for this why because your investment option has to give you return best possible return how will it how will you know it is giving the best possible return only by analyzing the financial position of the investment how do you analyze the financial position of the investment using Financial Accounting
• 18:30 - 19:00 information very simple I go and invest my money in company X I want to know whether the company X is going to give me return How will I know whether company X is going to give me return I will analyze the financial position of the company how do I analyze the financial position of the company I will take the financial accounting information analyze the financial position of the company that will give me whether an idea whether I'm going to get the best possible return so again it is interconnected in that sense so that
• 19:00 - 19:30 is why I'll spend about 50% of my time 40 to 50% of my time in analyzing the financial position and about 30% of my time in sourcing and investing options out there and time value of money and so on so this gives you a complete overview of what I would be covering as far as this particular course is concerned in the next slass we will get into the what do you
• 19:30 - 20:00 call it as the details of financial account I'm going to start with financial account I'm going to have some numbers I'm going to have some uh uh some numbers which I'm going to sort of use for recording and analyzing the financial statements and and as assessing the financial statement out there and those numbers what I'll be using will be put up along with what do you call it as the recording for the next session that I'm
• 20:00 - 20:30 going after that we'll slowly move to cost accounting and finance thank [Music] you