Corporate finance is that aspect of finance that handles all activities of funding related to production and management to acquire a business.
It involves the capital structures of any organization, which has a direct impact on the directors to take responsibility for implementing and promoting the worth of the firm to shareholders. It also includes the investment and scrutiny utilized to assign budgetary assets.
The capital structure of a company refers to a specific combination of debt and equity. Which a company uses to find its general operations and growth. Debts could be in the form of short-term debts and bond issues, while equity is in the form of share ownership in a company.
The responsibilities of the directors include promoting the firm among other things. In summary, it is to ensure the ongoing practices of the company’s policy,
Roles of corporate finance
With corporate finance, every organization’s objective is to render services and market products that will benefit its clients. In return, generates finance used to fund businesses. Its primary motive is to increase the organization’s value and profit.
Just like every other individual, organizations need money in other to implement investments that will in return generate revenue. Corporate finance seeks to address the issues of funding, capital structuring, and investment decisions.
Some departments assume this task, and the chief financial officer has the following financial task to perform. Fundamentally, they have the knowledge base for managing financial funding.
- Their primary role is to supervise and control the firm’s financial operations.
2. They come up with suitable decisions on whether to carry on with a Recommended investment proposal
3. Either they can decide to fund the investment through equity or debt or they can use both.
4. They decide how to pay dividends to shareholders and the profit it yields.
5. This department also sees to the management of current assets and liabilities as well as the control of inventory.
6. They engage in the task of making a capital investment, which is concerned with capital budgetary, expenditure, and cash flow.
Aside from the task listed above, the corporate finance department adherently focuses on increasing the significance of the organization by implementing the three main activities.
These activities include: Capital investment, Capital financing, and Capital return. These three activities become necessary for both organizations and shareholders, as it is a way of boasting the firm’s source of funding.
Three main activities of corporate finance
Capital investment/budgeting
With capital investment, Management makes decisions based on what type of project or acquisition will be more beneficial to the organization.
Hence, with the knowledge of financial management and funding, they can come up with the idea of creating a long-term plan. A decision that helps with the investment of the company’s assets.
When embarking on capital investment, they have the duty of embarking on careful research of a company and other available opportunities. (This could be capital budgeting).
During the cause of research, financiers usually bore the task of composing the fundamental capital income, expenditure, and financial metrics. Thus, they could use the results of the findings to project the revenue and cash flow of the company.
Capital Financing/structure
Having decided to carry out a particular investment by the company, and then it is time to finance the project. In this capital financing, they make use of debt and equity or either of them.
Now there are two methods available for the company to raise debt. First, they may decide to borrow from a commercial bank. Secondly, they may choose to issue debt securities like bonds, and they could do this through investment banks.
In the aspect of financing investment with equity, the organization can decide to sell its public stock and make do with the proceeds.
When financing a deal, financers would always strive to view the organization’s weighted average cost of capital (WACC) which comprises the cost of stock and the cost of debt.
This could help them strive to decrease it as much as possible when concluding the appropriate ratio of equity to debt. The experts in the department could frequently combine equity and debt to produce the best possible capital financing.
Other capital return and dividend
Corporate financers also engage in other practices such as giving their investors a return on their surplus earnings. However, only the experts in the department can determine this decision.
The managers also opt to reserve these profits in other to reinvest back in the stock market or can decide to invest back into their own company.
When the managers opt to give a return to the investors, they can either use a dividend or share repurchase program among other several methods available. When using dividends they remit payments (some quantity of shares) to their investors regularly.
They pay the dividend depending on the management’s decision, either monthly or annually, as they will not want to dissatisfy their investors.
Then using the method of the share repurchase program, companies assign some money to purchase back their shares over a predetermined time. This method of repurchase could help decrease the overall available shares thereby increasing every other person’s ownership of the organization.
The importance of corporate finance
Just like every other subfield of finance, corporate finance has its importance which relatively adds to its worth within the financial sphere.
Corporate finance is primarily important in large companies where there is a need for data insight to help support decision-making. Those decisions made could be in areas such as how to raise shares and dividends for shareholders
Corporate finance also makes decisions concerning the Company’s assets, liabilities, and the need for capital investments.
We can still summarize below the four areas that compound how important corporate finance could be to any organization.
1. Corporate financers must make concrete decisions on how to handle a particular investment proposal. How much is required and how to raise or source for the fund, they have to determine if the actual investment will bring in benefit and how much is the expected use.
2. When raising funds that need investment, it is essential to note that the financers decide on both long-term and short-term investment implications. For this reason, they need to raise enough capital through the selling of shares, and debentures or can take a loan.
3. The corporate finance departments are in charge of making decisions in buying other companies that may be under liquidity. They also make necessary negotiations.
4. Hence, they are the ones managing the fund; they try to avoid every risk, that the company may try to encounter
