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 corporate value and, at the same time, reducing the company’s financial risks. In addition to this, corporate finance also deals with getting the maximum returns on the company’s invested capital. The major concepts of corporate finance are applied to finance problems encountered by all firms.
The discipline of corporate finance can be split into short-term and long-term decisions. Capital investments are long-term decisions relating to projects and the methods required to finance them. On the other hand, working capital management is considered a short-term decision that deals with short-term current liabilities and asset balance. The main focus here rests on inventory management, cash, lending, and borrowing on a short-term basis.
Corporate finance is also associated with investment banking. In this field, the investment banker evaluates the various projects coming to the bank and makes proper investment decisions.
The Capital Structure:
A proper finance structure is required to achieve corporate finance’s set goals; therefore, management must design an appropriate system with an optimal mix of the different finance options available.
Generally, the sources of finance will comprise a mix of equity and 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 cash flow, but the result 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 equity finance offsets the cash flow risk reduction flow risk. Therefore, management has to have a mix of both options.
The Decisions of Capital Investments:
Capital investments are long-term corporate finance decisions related to the capital structure and fixed assets. These decisions are based on several interrelated criteria. Corporate finance management attempts to maximize the firm’s value by investing in projects with a positive yield. The finance options for such projects have to be done properly.
