The field of corporate finance deals with corporations’ financial decisions and the analysis and tools required for making such decisions. The principal aim of corporate finance is enhancing the corporate value and at the same time reducing the financial risks of the company. In addition to this, corporate finance also deals in getting the maximum returns on the company’s invested capital. The major concepts of corporate finance are applied to finance problems encountered by all types of firms.
The discipline of corporate finance can be split into the short term and the long-term decisions. The capital investments are the long term decisions relating to the projects and the methods required to finance them. On the other hand, working capital management is considered a short-term decision that deals with the short-term current liabilities and asset balance. The main focus here rests on inventory management, cash and, lending and borrowing on a short-term basis.
Corporate finance is also associated with the field of investment banking. Here, the investment banker’s role is the evaluation of the various projects coming to the bank and making proper investment decisions regarding them.
The Capital Structure:
A proper finance structure is required for achieving the set goals of corporate finance. Therefore, the management has to design a proper structure that has an optimal mix of the different finance options available.
Generally, the sources of finance will comprise a mix of equity as well as debt. If a project is financed through debt, it results in causing a liability to the concerned company. Hence, in such cases, the cash flow has various implications regardless of the project’s success. The financing done by equity carries a lower risk regarding the commitments of the flow of cash, but the result of this is the dilution of the earnings and the ownership. The cost involved in equity finance is also higher in the case of debt finance. Hence, it is understood that the finance done through equity offsets the reduction in the risk of cash flow. The management has to have a mix of both the options hence.
The Decisions of Capital Investments:
The decisions of capital investments are the long-term corporate finance decisions that are related to the capital structure and the fixed assets. These decisions are based on several inter-related criteria. The management of corporate finance attempts to maximize the firm’s value by making investments in projects with a positive yield. The finance options for such projects have to be done properly.