Corporate Finance


 


Business enterprises have various areas of responsibilities, and one area that considered    a major key in running the business smoothly is the   This area of Corporate Finance Department is dealing with the monetary decisions  that the organization make; as well as  to support financially  whatever marketing tools and analysis  that are appropriate for the more effective operation and production of the entire company.    In fact, the primary goal of corporate finance is to maximize shareholder value  while managing the firm’s financial risks.  The principal role of corporate finance is to solve any financial problems of all types of organizations.  Additionally, the discipline is divided into long-term, as to short-term decisions and techniques.  The capital investment decisions are considered  long-term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders.  On the other side, a  short term decision  deal with the short-term balance of current assets and current liabilities;  it  focuses  on managing cash, inventories, and short-term  financial borrowing and lending  from financial institutions.


(http://en.wikipedia.org/wiki/Corporate_finance)


 Furthermore, corporate finance as well as the corporate financier are both related to investment banking.  The normal role of investment banking is to assess the company’s financial needs and raise the appropriate type of capital that best fits those needs. Therefore, the terms “corporate finance” and “corporate financier” may be related to the transactions in which capital is provided in order to create, develop, grow, acquire or expand businesses. Specifically, capital investment decisions are considered long term finance decisions which are connected to fixed assets and capital structure of the business. Business decisions are based on several inter-related criteria.   First,  corporate management  should seek to maximize the value of the firm by investing in projects which provides  a positive net present value when valued using an appropriate discount rate in consideration of  certain risks. Second, these projects must also be financed appropriately.  Third, if no such opportunities available, maximizing shareholder value dictates that management must return excess cash to shareholders like distribution through dividends. Also, capital investment decisions, hence, must comprise an investment decision, a financing decision, and a dividend decision. (http://en.wikipedia.org/wiki/Corporate_finance)


Correspondingly, the corporate finance should allocate budget for the potential projects, and this financial process is otherwise known as “capital budgeting”.  In making this kind of financial investment, the decision requires estimating the value of each opportunity or project, which is a function of the size, timing and predictability of future cash flows.  Typically, every project costs will be calculated by the use of a discounted cash flow (DCF) valuation; and the opportunity with the highest value as measured by the Net Present Value (NPV).  And, this needs to be estimated through the size and timing of all the incremental cash flows from the project. All those future cash flows will be then discounted in order to determine their present value. Then, these present values will be totaled, whatever the net amount of the initial investment is the Net Present Value (NPV). On the other hand, to be able to achieve the goals of corporate finance, it must require corporate investment that can be financed properly by the company. The sources of financing are, usually the capital self-generated by the company.  In the same way, the debt and equity financing sources have both higher rate and cash flows, this financing combination will give significant impact on the valuation of the firm as well as long-term financial management decisions. In this event, there are two interrelated decisions that are very important to take into account in corporate finance.  Foremost is the management should identify the maximum   financial emergence.  Next, equity financing is less risky with respect to cash flow commitments, but results in a dilution of share ownership, control and earnings.  Aside from that, the cost of equity is also typically higher compared the cost of debt and so equity financing may result to an increased rate which may offset any reduction in cash flow risks. 


(http://www.economywatch.com/finance/corporate-finance/)


In the final event, corporate finance is also in charge of deciding on the dividend distributions among the stockholders of the company.  There are varied factors that   must be taken into consideration such as shareholders must shoulder their own taxes on the dividends.  In the same way, companies have an option to retain earnings or to perform a stock buy back.  Alternatively, some companies will pay dividends from stock than in cash.  Usually, it is accepted that dividend policy is value neutral; meaning, the value of the firm will be the same, whether it is issued cash dividends or repurchased it.


(http://www.economywatch.com/finance/corporate-finance/)


 References:


http://en.wikipedia.org/wiki/Corporate_finance


http://www.economywatch.com/finance/corporate-finance/


 


 



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