What is Corporate Finance?

Corporate finance is a subdivision of finance that deals with financing, capital structuring, and investment decisions to maximize shareholder wealth: the short and long-term value of shares.

Ultimately, corporate finance seeks to acquire economic resources for the organization and allocate them as effectively as possible. The purpose is to reduce the implicit risk of certain decisions and achieve optimal company development, thereby creating greater value.

The corporate finance department’s functions include planning, defining the capital structure, determining the economic viability of a project, raising sufficient funds, designing investment policies, directing financial negotiations, and planning dividend payments.

Corporate Finance Activities

Corporate finance acts as a link between the company and the capital markets. On the one hand, they must ensure that the organization uses the appropriate sources of financing at the lowest possible cost. On the other hand, they try to ensure that the company uses the funds raised appropriately and maximizes returns for its owners.

Thus, we can classify activities in corporate finance into investment decisions, financing decisions, dividend decisions, and management decisions. The latter concerns Operational CRM decisions and day-to-day finances. Let’s look at the first three in-depth.

Investment Decisions or Capital Budgeting

The investment principle states that companies invest only in projects or actions (such as purchasing machinery, acquiring equipment, or expanding staff) that yield a return exceeding the required rate of return. Deciding where to place long-term capital assets to generate the highest returns while accounting for risk is part of capital investment, also known as capital budgeting.

To do this, the organization must know its cost of capital so it can put its funds to work, ensuring returns on investment exceed the cost of capital.

In developing this activity, a series of financial accounting tools for charities is used to compare capital expenditures and cash flows, and to compare investments. And, finally, the entity decides which projects are financially viable. And which ones will provide the best long-term financial performance and profitability?

Undoubtedly, capital investment decisions are crucial for corporate financing. Allowing the company to identify where it can make money and spend it. For more related articles visit our website

Equity Financing Decisions

The financing principle suggests that the appropriate financing mix for a company maximizes the value of its investments. Thus, financing decisions in corporate finance concern how to finance the firm’s capital investment objectives.

It can be achieved by investing the company’s capital or through social capital (money companies raise by selling shares to investors). Debt (borrowed financing, either as credit or debt capital by issuing debt securities through investment banks ), or a hybrid. The company can also opt for bank loans, corporate loans, and other fundraising possibilities.

The key is to achieve a sustainable balance between debt and equity. And other financial instruments to not depend on a single source or model of capital. Excessive debt can increase the risk of default. By contrast, relying too heavily on stocks will help dilute earnings and investor value.

Dividend and Return on Capital Decisions

The dividend principle requires that cash generated in excess of a good project’s needs be returned to the owners. This activity, inherent in corporate finance, decides whether to retain excess profits from a company or distribute them.

In the former scenario, the corporate finance department may choose to preserve earnings. For future investments, acquisitions, or expansions, after calculating a higher return rate on the investment than the cost of capital.

In the opposite case, if that rate is not guaranteed, it could be decided that it is time to distribute profits among shareholders. Either in the form of dividends or by repurchasing shares from their investors.

Every decision affects the stability of the company. Therefore, proper management of corporate finances is key to delivering the greatest added value and ensuring its growth.

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