What is Corporate Finance?
Corporate finance deals with the financial decisions that a business enterprise must evaluate and subsequently affirm. Not only does the field view the business in a macro sense, but corporate finance also concerns the necessary tools and analysis that is needed to deliver an economically efficient decision.The primary goal of such a decision is to maximize the value of the corporation, while effectively managing the financial decisions of the company.
Corporate finance is held in contrast to managerial finance, which studies the financial decisions of firms rather than just corporations; however, the principal concepts of corporate finance may be applied to the financial problems of all firms.
Long-term and Short-term Decisions within Corporate Finance:
The discipline of corporate finance can be broken-down into two specific categories or techniques: long-term and short-term decisions.
Decisions regarding capital investments are long-term decisions. These decisions typically involve evaluations regarding which projects of a business venture should receive investment and how to finance that particular investment (either through raising equity or debt) and when or whether to pay-out dividends to shareholders.
Capital investment decisions—which are the primary long-term decisions of corporate finance—relate to the capital structure and fixed assets of the underlying corporation. These decisions are based on the following inter-related criteria:
1.) Maximize the value of the corporation through investment—investing in various projects must yield a positive net present value.
2) The investment projects must be financed in adherence to an efficient and appropriate plan.
3) If a dearth of opportunities exists, the corporate management team should maximize shareholder value by delivering any excess cash to the underlying investors. As a result of these decisions, capital investment within the field of corporate finance revolves around investment decisions, dividend decisions, and a multitude of finance decisions.
Short-term decisions typically deal with the day-to-day balancing of current liabilities and assets. The primary focus of short-term decisions revolves around the management of cash, short-term borrowing and lending, as well as the management of the firm’s inventory.
Corporate Finance and Investment Banking:
The field of corporate finance is directly associated with investment banking. The typical responsibilities of an investment banker are to evaluate a company’s financial needs as they correlate to raising capital. Upon evaluating the need to raise capital, the investment bank will then structure a means to raise the appropriate type of capital and evaluate which grouping of capital is needed. Once received, the capital is then used to develop, create, or grow the particular business model.
Corporate Finance Project Valuation:
The field of corporate finance will evaluate each project and investment while using a discounted cash flow valuation. The project with the highest net present am to estimate the timing and size of the incremental cash flows, which result from the value, will be applied to the corporation’s business model. This process requires the management team to estimate the timing and size of the incremental cash flows subsequent to the investment. All future cash flows, in a corporate finance evaluation, are discounted to determine the asset’s present value. The present values are then compared to the initial investment, yielding the net present value.