Basics of Corporate Finance (2024)

Definition and Introduction:

Corporate finance is a branch of finance which deals with the financial activities of a corporation starting from selection of the sources of fund to the capital structure of the corporation. The primary objective of corporate finance is maximizing shareholder value by means of both long and short-term planning and implementing different strategies. Corporate finance is essential for any business whether big or small. In short, corporate finance helps a company in finding sources of funds, expansion of business, planning the future course of actions, managing finance and assuring healthy profitability and economic viability. The core of the corporate financial theory is the goal of maximizing the corporation’s value as well as minimizing the risk.

Basic Principles of Corporate Finance:

The investment, financing and dividend principles are the three basic principles of corporate finance.

Investment Principle:

The most efficient allocation of the business’s resources is the basic concept of the investment principle. The investment decisions should result in revenue opportunities as well as save fund for future. This principle also involves the working capital decisions like the allotment of credit days to the customers etc. Corporate finance also ascertains the feasibility of the investment or project by calculating the return on the investment decision and making a comparison of it with the cost of capital.

Financing Principle:

Businesses are financed mostly with debt or equity or both. The financing principle ascertains whether the debt-equity mix is right or not. The corporate-financier has to study conditions in which the optimal financing mix minimizes the cost of capital and evaluate the effects on the value of the company because of a change in capital structure. After the optimal financing mix has been defined, the decision has to be made whether to take it on a long-term or short-term basis. Then other factors like taxes, decisions regarding the structure of financing, the risk-return trade-off, i.e. the riskier the asset, the higher the expected return, etc. are considered.

Dividend principle:

A business reaches a certain phase in its lifecycle in which it grows and the cash flows generated exceeds the expected cost of capital. Then the business finds it necessary to ascertain the means of paying back the owners with it. So here decision has to be taken whether the excess cash should be paid to the owners/investors or should be kept in the business. A public limited company has both the options, either paying off dividends or buying back shares.

Basic Concepts of Corporate Finance:

Corporate finance has a very wide area of discussion. It includes various concepts and fundamentals. Among those, a few basic concepts are briefly discussed here.

Capital Budgeting:

The planning procedure of expenditures on such fixed assets, which will generate cash flows more than one year, is called capital budgeting. Here, “capital” means long-term assets and “budget” is a detailed plan of the projected cash flows (both in and out) over the specified future period.

The basic approaches used during project selection are discussed below:

Net Present Value (NPV):

Under this method, all cash inflows and outflows are discounted at the cost of capital of the project and then those cash flows are added. If NPV gives a positive value, the project will be accepted.

NPV = Σ [CFt/ (1 + k) t]

Where CFt =expected cash flow at time, t,

CFT = expected cash flow at time t,

k = the project’s cost of capital.

Internal Rate of Return (IRR):

IRR is the discount rate which makes the value of NPV of a project zero.

NPV = Σ[CFt/(1 + IRR)t];

IRR = expected rate of return on a project. The NPV and IRR methods have the same accepting or rejecting criteria.

Payback period:

Payback period is the number of years in which the original or initial investment will be recovered. Cumulative net cash flows will be zero in payback period. The payback period should be as short as possible. A company should set a standard payback period and should reject the project when payback is greater than the standard.

Time Value of Money:

A certain unit of money today is worth more than the same unit of money tomorrow.

If a person has 10 Taka today, s/he can earn interest on it and has more than 10 Taka next year. For example, Taka 100 of today’s money invested for one year and earning 5% interest will be worth Taka 105 after one year.

Annuity

An Annuity is a series of regularly made equal payments or structured payments, such as paid monthly or yearly.

Perpetuity

A perpetuity is an equal amount of annuity having an infinite number of cash flows. In other words, it is a never-ending annuity.

Cost of Capital:

A necessary factor of production is capital which has a cost. The providers of capital want a return on their investment. A company must clearly ensure that shareholders or the lenders of the fund such as financial institutions, banks, receive the return that they want. The cost of capital is the rate of return used when analyzing capital projects. The project will be acceptable when it returns greater than the cost of the project.

Weighted Average Cost of Capital (WACC) is one of the common methods of calculating the cost of capitalwhich is the weighted average of the costs of debt, preferred stock, and equity or common stock. It is also known as the marginal cost of capital (MCC).

Working Capital Management:

Working capital management includes the relationship between the short-term assets and short-term liabilities of a company. The motive of working capital management is ensuring a company’s continued operation by enabling it to pay short-term debt and future operational expenses. Working capital management consists of managing cash, inventories, accounts receivables, and payables.

Measures of Leverage:

A company has a certain amount of fixed costs which is known as leverage.

These fixed costs include fixed operating expenses like equipment or building leases; fixed financing costs like interest paid on debt. Greater the leverage, greater will be the volatility of the company’s operating earnings after tax and net income after tax.

Corporate finance is a vast area of finance. Here, the basic principles and only a few basic concepts are discussed briefly. Business people should have a clear understanding of the basics of Corporate Finance before accepting any business project and to maximize the business’s value as well as minimizing the risk.

Basics of Corporate Finance (2024)

FAQs

What are the basics of corporate finance? ›

The main areas of corporate finance are capital budgeting (e.g., for investing in company projects), capital financing (deciding how to fund projects/operations), and working capital management (managing assets and liabilities to operate efficiently).

What are the three basic questions of corporate finance? ›

Ans. Three main questions in corporate finance are capital budgeting, capital structure, and working capital management.

Is corporate finance a lot of math? ›

Math skills

The majority of it is quite simple, but it's still math, so corporate finance is particularly ideal for those who are numerically inclined. Specifically, you need to excel at a few fields of math: Arithmetic: You'll constantly use addition, subtraction, multiplication, and division.

What are the three 3 principles of corporate finance? ›

All of corporate finance is built on three principles, which we will call, rather unimaginatively, the investment principle, the financing principle, and the dividend principle.

Is it hard to learn corporate finance? ›

While finance requires some mathematics training and some knowledge and skills in accounting and economics, it's not necessarily more difficult than any other field of study, particularly for people with an aptitude for math.

How do I prepare for corporate finance? ›

You should be well versed with accounting terms, concepts, and glossary. Decision-making, keen financial intellect, analytical skills, and risk mitigation are some of the scales that corporate finance professionals should have in plenty.

How do you answer why finance questions? ›

Tips to answer "Why do you want to pursue a career in finance?"
  1. Showcase your passion. ...
  2. Highlight your analytical skills. ...
  3. Discuss the impact. ...
  4. Emphasize the challenge. ...
  5. Show your understanding of the industry. ...
  6. Link it to your skills. ...
  7. Highlight the potential for continuous learning. ...
  8. Discuss the potential for growth.
Jul 6, 2023

How do you ace a finance interview? ›

Six expert tips for your next finance interview
  1. Get to the point. ...
  2. Know your finances. ...
  3. Make yourself the added value. ...
  4. Talk confidently about the industry. ...
  5. Engage with the interviewer. ...
  6. Keep learning.

Is M&A part of corporate finance? ›

While both corporate finance and corporate development deal with M&A, the latter emphasises the strategic rationale behind acquisitions and how they align with the company's long-term vision.

Is corporate finance harder than accounting? ›

Generally speaking, people consider accounting majors to be more difficult to study and pass than finance majors. And there are a few different reasons for this. The content of accounting majors is, on average, much more technical than for finance majors, and this can make it more difficult.

Can I do finance if I'm bad at math? ›

It's normal to have these thoughts and it's good to ask these kind of questions before you get into it. Believe it or not, mastery of advanced math skills is not necessary to have a career in finance. With today's technology, all math-related tasks can be done by computers and calculators.

Is corporate finance high paying? ›

Corporate Finance Salary. $69,500 is the 25th percentile. Salaries below this are outliers. $179,000 is the 90th percentile.

What is a good example of finance? ›

Examples include buying and selling products (or assets), issuing stocks, initiating loans, and maintaining accounts. When a company sells shares and makes debt repayments, it is engaging in financial activities.

What is the difference between commercial finance and corporate finance? ›

Corporate finance often involves large-scale financial transactions, such as mergers and acquisitions, while commercial finance caters to businesses of varying sizes, including small and medium-sized enterprises.

What is the difference between investment banking and corporate finance? ›

Corporate finance and investment banking are very different in terms of their aims and purpose. Investment banking helps businesses raise capital in a variety of ways, such as mergers and acquisitions, as well as selling securities, while corporate finance helps organizations acquire funding and manage their assets.

What are the five basic functions of corporate finance? ›

Corporate financial functions are essential to the successful operation of any company. Five primary functions are crucial to a company's success: financing, capital budgeting, financial management, corporate governance, and risk management.

What is the first rule for corporate finance? ›

Rule #1: Money today is worth more than money tomorrow

The fundamental rule of corporate finance is that the timing of cash flows is of paramount importance. Also, we want the timing of the cash flows to be as soon as possible. The sooner we get the cash, the better it is for our company.

What is a corporate finance class about? ›

Corporate finance course curriculum

More advanced corporate finance courses allow learners to develop a deep understanding of financial analysis techniques, including ratio analysis, cash flow analysis, and financial modeling.

Top Articles
What are the three golden rules of accounting?
Free Credit Report FAQs - freecreditreport.com
Ray Romano Made a Movie for Sports Parents Everywhere
Scooter Tramps And Beer
East Bay Horizon
Erste Schritte für deine Flipboard Magazine — Ein Blogger-Guide -
Lynaritaa Boobs
Dtm Urban Dictionary
80 For Brady Showtimes Near Cinemark At Harlingen
Costco Fuel Price Today Near Me
Phil Maloof Net Worth
Carsavers Rental
Madden 23 Playbooks Database
Magma Lozenge Location
Anchor Martha MacCallum Talks Her 20-Year Journey With FOX News and How She Stays Grounded (EXCLUSIVE)
What retirement account is tax-free?
Katmoie
211475039
Craigslist Furniture By Owner Dallas
Buncensored Leak
Dominion Post Obituaries Morgantown
Tyrone's Unblocked Games Basketball
Pair sentenced for May 2023 murder of Roger Driesel
Eddie Murphy Cast Of Elemental
That Is No Sword X Kakushi By Nez_R
Aunt Nettes Menu
Age Gabriela Moura's Evolution from Childhood Dreams to TikTok Fame - Essential Tribune
Visit Lake Oswego! - Lake Oswego Chamber Of Commerce
Quattrocento, Italienische Kunst des 15. Jahrhunderts
Marissa.munoz17
A-Z List of Common Medical Abbreviations, Acronyms & Definitions
Guardians Of The Galaxy Holiday Special Putlocker
Shirley Arica Unlock
Boostmaster Lin Yupoo
Was Man über Sprints In Scrum-Projekten Wissen Sollte | Quandes
Cashtapp Atm Near Me
Doublelist Aiken Sc
Myapps Tesla Ultipro Sign In
Craigslist Philly Free Stuff
Sayuri Pilkey
Now 81, Wayne Newton Will Soon Mark 65 Years as Mr. Las Vegas
Strange World Showtimes Near Harkins Theatres Christown 14
Investeerder Parry bijt bij Vitesse van zich af: 'Mensen willen mij beschadigen'
Busted Magazine Columbus Ohio
The Little Mermaid (2023) | Rotten Tomatoes
100.2华氏度是多少摄氏度
Georgiatags.us/Mvdkiosk
Eureka Mt Craigslist
9372034886
Mri Prospect Connect
Sam Smith Lpsg
Arlene Grayson And Brittany Murphy
Latest Posts
Article information

Author: Corie Satterfield

Last Updated:

Views: 6104

Rating: 4.1 / 5 (62 voted)

Reviews: 93% of readers found this page helpful

Author information

Name: Corie Satterfield

Birthday: 1992-08-19

Address: 850 Benjamin Bridge, Dickinsonchester, CO 68572-0542

Phone: +26813599986666

Job: Sales Manager

Hobby: Table tennis, Soapmaking, Flower arranging, amateur radio, Rock climbing, scrapbook, Horseback riding

Introduction: My name is Corie Satterfield, I am a fancy, perfect, spotless, quaint, fantastic, funny, lucky person who loves writing and wants to share my knowledge and understanding with you.