Corporate Finance &
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Corporate finance is the process of dealing with the capital structure of a corporation. This includes the company’s funding and any processes that are put into place to increase the value of the company. If the return on capital exceeds the cost of capital, then the value of the business is raised.

Corporate finance is involved with the process of maximising shareholder value. This is done through short and long-term financial planning. That means that it is often used to deal with the day-to-day operations of a business’s cash flow and planning for the future with long-term goals.

Types of Corporate Finance

Equity Financing

This involves the money a company raises from retained earnings or through equity issuance. It takes the form of common stock or preferred stock. An enterprise can sell its shares through the stock exchange or over-the-counter exchanges. Trading too much equity reduces divided shares and dilutes shareholders’ voting rights.

Debt Financing

This term refers to obtaining finance through loans from financial institutions or issuing bonds. Debt financing attracts regular interest payments, and the principal amount is payable at the end of the loan tenure. Companies should be wary of too much debt as it induces the risk of bankruptcy and default in case of loan non-repayment.

Sections of Corporate Finance

There are four activities that make up corporate finance. They are as follows

1. Capital Budgeting & Investments

Investing and capital budgeting is the planning of where a company should make long term capital investments. This is to generate the highest returns that have been risk-adjusted.

A capital budgeting project concentrates on deciding whether to pursue any particular investment opportunity. It is achieved through extensive financial analysis.

2. Capital Financing

Capital financing includes decisions on how to finance capital investments. These capital investments can be achieved through using debt or equity financing, or both.

Long-term funding for capital investments or major capital expenditures is vital for businesses. The capital can be raised by selling stocks, or getting a bank loan. This is done through investment banks in the relevant market. Large publicly traded companies or governments might also issue bonds to raise capital.

3. Dividends and Return of Capital

This requires corporate managers to make a decision on whether to retain a business’s excess earnings or distribute the earnings or cash to shareholders. If it is retained it can be used for future investments or any other business need. If it is distributed to shareholders it can be done by paying through the form of dividends or share buybacks.

Retained earnings that aren’t distributed back to shareholders can be used to fund a business’ expansion efforts. This is often the best way to use these funds as it doesn’t incur any additional debt.

4. Short-Term Liquidity

Short term finance management is also a part of corporate financing. The goal here is to make sure that a business has a high enough amount of liquidity to carry out their operations. This form of short-term financial management works around a business’s current liabilities, assets, operating cash flows, and working or current capital.

When a company’s liability obligations are due, they must be able to meet them. This means that they have to have enough current liquid assets to avoid disruptions to the company main operations.

Examples of Corporate Finance

To help a business analyze the risk and value that is associated with investment options, they can use financial modeling. This is the process of figuring out the financial performance of a project. It works by taking all relevant factors such as growth and risk into account, then figuring out the impact.

An IPO is when a company initially offers their stock to the public market. It helps to raise capital through what’s known as equity financing. This means that the business’s stock can be sold off and bought at the current market share price, and can be publicly traded on a stock exchange.

A business can take a loan from the bank to meet their business needs. This is known as debt financing. They first have to analyze the cost of the loan and what their capacity is for repayment. While business debt from bank loans can be considered good debt, taking on too much can financially cripple a company.

Most businesses will have a number of debts and repayments currently in play. But as the market changes, a company can renegotiate their financing options for their loans. This means that they can refinance a loan with a lower interest rate, which will reduce your debt payments, therefore saving money, opening up cash flow, and improving your financial position.

Mergers and acquisitions involving private companies are a classic form of corporate finance activity. By merging two smaller corporations, you can combine the wealth and resources to create a much bigger company. If done properly, this will inevitably lead to higher profits and put the company in a strong capital position. Higher profits in a consolidation can also come from economies of scale. Summary

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