Corporate finance is a segment of finance that involves the framework and processes of how corporations deal with capital structuring, funding sources, and various investment decisions. It primarily deals with the maximization of shareholder value based on long and short-term financial planning and the execution of different corporate strategies. Some of the activities associated with corporate financing include, but are not limited to, structuring and investment banking. To get a better understanding of what all this means, you can visit https://myfin.us.
Corporate finance departments
Corporate finance departments are often charged with regulating and overseeing their institutions’ financial engagements and investment decisions. The decision made in these departments includes whether or not to follow up on a proposed investment plan and how to pay for it, be it with debt, equity, or in some cases, both.
Aspects to keep in mind when it comes to corporate finance:
- One should understand that corporate finance is usually linked to a company’s decision to go through capital investments or other investment-related avenues.
- Corporate finance also deals with the management of short-term financial undertakings that may affect the day-to-day running of a company.
- Aside from capital investments, a firm’s corporate finance department is also responsible for dealing with its sources of capital.
- Corporate finance departments also deal with whether or not a firm’s shareholders ought to receive dividends. Furthermore, the department is also charged with managing the firm’s current liabilities, current assets, and inventory regulation.
Key activities that regulate corporate financing
Capital budgeting and investments
In most cases, capital budgeting and investments are about where a corporation intends to place its long-term capital assets. This is done to facilitate the generation of the maximum risk-adjusted returns. The process usually involves deciding whether or not a firm should pursue a particular investment opportunity. The final decision is arrived at through a comprehensive financial analysis of the company.
As a result, with various financial accounting tools, a company can identify its capital expenditures, project cash flow returns from proposed capital projects, evaluate planned investments and their projected income, and conclude which tasks ought to be included in the overall capital budget.
Another tool used in corporate financing for estimating the economic effects of a particular investment avenue is financial modeling. Firm analysts usually use the IRR or Internal Rate of Return and NPV or Net Present Value to conduct project comparisons to help them pick the right one.
Capital Financing
This essential corporate finance activity involves a firm’s decision-making process when establishing how to finance the capital investments mentioned earlier adequately. In most cases, this can be done using the firm’s debt or equity, and in some cases, a mix of both. When it comes to long-term funding for substantial capital investments or expenditures, a company can secure funding via the issuance of various debt securities in the market via investment banks or the selling of company stocks.
When it comes to balancing debt and equity, the entire process is quite delicate. It, therefore, requires careful management since having a huge debt will more than likely increase the risk of the company defaulting when the time comes to repay it. On the other hand, relying too much on equity may also dilute a firm’s earnings and the equity value for its initial investors.
As a result, the duty of optimizing the company’s capital structure by reducing WACC or Weighted Average Cost Capital lies with the professionals working in the corporate finance department. They have to lower the WACC as much as possible to keep the corporations they work for viable and afloat.
Return on capital and shareholder dividends
When it comes to returns on capital and shareholder dividends, the corporate managers usually decide whether to keep their firm’s excess earnings for future investments and other operational cost requirements or distribute the profits to shareholders via share buybacks and dividends.
Whenever a firm decides not to distribute its earnings back to shareholders, the corporate finance department typically uses the resources to fund some other business expansion. Most financial experts agree that these kinds of funding can be quite beneficial to a company since it doesn’t incur any extra debts or dilute the value of equity through more shares.
All this boils down to is that if a firm’s managers feel they can net a rate of return on a particular capital investment that is greater than the cost of capital, they should go for it. In case they decide not to do so, the corporate finance department should distribute any excess money to shareholders in the form of share buybacks and dividends.
To conclude
As one can see from the information provided above, planning is an essential component of corporate finance. This is because the professionals working in this department have to determine how much finance their corporations need, come up with external sources for funding, and establish how much revenue can generate more capital. Remember, if a company finances are adequately planned for, then operating the business will become relatively easy.
