All About Corporate Finance

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Introduction

The financial activities of a firm are dealt with by corporate finance. It might be considered while choosing finances sources and considering the company’s capital structure. The target of any corporate finance is to increase shareholder value through varied strategic planning and execution. Corporate finance is essential for any business. Corporate finance assists a company in discovering financing sources, increasing operations, developing future strategies, managing money, and guaranteeing healthy profitability and economic sustainability. These considerations aid in determining whether to proceed with planned investment and fund it with stock, debt, or a combination of the two. The goal of corporate finance theory is to maximize the value of a company by minimizing risk.

Principle of Financing:

Businesses are initially financed by different venture. The finance principle determines whether or not the debt-equity combination is appropriate. The corporate financier must look into the circumstances in which the best financing mix lowers the cost of capital. After determining the appropriate finance mix, one must pursue it on a long-term or short-term basis. Other aspects like taxes, financing structure decisions, the risk-return trade-off, i.e., the riskier the asset, the greater the projected return, and so on, are examined.

Dividend Principle

In Dividend principle a firm grows to a point in its lifetime when the cash flows generated surpass the estimated cost of capital. The firm must next figure out how to repay the owners with it. As a result, a choice must be made whether the surplus cash should be distributed to the owners/investors or reinvested in the firm. A public organization has option to select between paying dividends and buy back shares. Otherwise organization may fall in risk because repay the loan should be the primary goal along with financial growth. A proper financial plan is required so that firm can take wise decision of how much percentage should reinvest and how much to keep for repayment of loan.

Investment Principle:

The primary premise of the investment principle is the most efficient deployment of the business’s resources. Investment selections should generate income while also saving funds for the future. This idea also applies to working capital choices such as allocating credit days to clients, among other things. Corporate finance also determines the viability of an investment or project by evaluating the return on investment and comparing it to the capital cost.

Capital Cost:

Capital, which has a cost, is a required element of production. Capital providers demand a return on their investment. A corporation must explicitly assure that the fund’s owners or lenders, such as financial institutions or banks, obtain the desired return. It’s the rate of return for a project. When the project’s return exceeds its cost, it will be considered satisfactory.

A common method of calculating the cost of capital is to take the weighted average of debt, preferred stock, and equity or regular stock expenditures.

Capital Budgeting:

It refers to the process of planning to spend on fixed assets that will create cash flows for longer than one year. In this context, “capital” refers to long-term assets, while “budget” refers to a precise plan of predicted cash flows (both in and out) for a specific future time.

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Important Takeaways

Corporate finance is concerned with a firm’s fund, which generates revenues while minimizing costs.
It is concerned with the day-to-day operations of its cash flows and long-term financial objectives (issuing-bonds).
In addition, corporate finance is involved with cash flow management, accounting, financial statement preparation, and taxation.

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Liquidity in the Short-Term

Corporate finance ensuring enough liquidity to continue ongoing activities. Short-term financial management is concerned with current assets and liabilities, often known as working capital and operational cash flows. When they become due, a business must satisfy its current liability commitments. It entails having enough current liquid assets to keep its operations running smoothly. Obtaining additional credit lines or issuing commercial papers as a source of cash are examples of short-term financial management.

Money’s Time Value:

Today’s money is worth more than tomorrow’s money. If a person has 10 Taka today, they can collect interest on it and end up with more than 10 Taka the following year. For example, after one year, Taka 100 invested now and receiving 5% interest for one year will be worth Taka 105.
Annuity

An annuity is a complete series of equal payments delivered regularly, such as monthly or yearly.

Working Capital Management (WCM):

Working capital management tries to keep a business running by paying off short-term debt and anticipating future operational needs. Working capital management consists with below:

  • Cash,
  • Inventory
  • Receivables
  • Payables

 

Leverage Metrics:

It’s a term for a company’s fixed costs. Permanent operating expenditures such as equipment or facility leases, as well as fixed finance costs such as debt interest, are included in these fixed costs. The more leverage, the more volatile the company’s operational earnings after tax deduction

Corporate finance is a broad subset of finance. Covered briefly here. Before accepting any business project, business people should have a solid grasp of the fundamentals of corporate finance to maximize the value of the company while avoiding risk.

Top six Business Schools for Finance

  • Stanford University (CA)
  • Massachusetts Institute of Technology (Sloan)
  • Columbia University (NY)
  • New York University (Stern)
  • University of Chicago (Booth)
  • University of Pennsylvania (Wharton)

Conclusion

Corporate finance departments are responsible for controlling and managing any company’s financial activity and capital investment choices. These decisions help choose whether to pursue a planned investment and fund it with equity, debt, or both. They also include whether dividends should be paid to shareholders and, if so, at what dividend yield. In a simpler term, corporate finance assists a company in discovering financing sources, increasing operations, developing future strategies, managing money, and guaranteeing healthy profitability and economic sustainability. After determining the appropriate finance, organization must pursue it on a long-term or short-term basis. The finance helps to collect various source of capital, develop its operations, plan for the future, manage its finances, and ensure healthy profitability and economic sustainability.

 

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