corporate finance

Topics: Finance, Corporate finance, Investment Pages: 5 (1950 words) Published: October 2, 2013
The word Corporate Finance can be defined in terms that may vary considerably across the world. Corporate Finance is one of the three areas of the discipline of finance and can be defined broadly as a field of finance dealing with acquisition and allocation of a corporation's funds or resources, with the goal of maximizing shareholder wealth i.e. stock value. This division of a company is basically concerned with the financial operation of the company from company’s point of view. Every decision made in a business has financial implications, and any decision that involves the use of money is a corporate financial decision. It may include financial decisions that business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize corporate value while managing the firm's financial risks. Although it is in principle different from managerial finance which studies the financial decisions of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms. The essence of business is to raise money from investors to fund projects that will return more money to the investors. All businesses have to invest their resources wisely, find the right kind and mix of financing to fund these investments, and return cash to the owners if there are not enough good investments. In most businesses, corporate finance focuses on raising money and funds for various projects or ventures. Funds are acquired from both internal and external sources at the lowest possible cost and may be obtained through two basic ways equity and debt. Equity investors get ownership in the company but do not have a guaranteed return. Issuing stock is the most obvious way to raise funds using equity. Retained earnings (when the company uses its own earning to finance projects) are also an equity investment. With retained earnings, the company takes money that could have been returned to shareholders and uses it to fund capital projects. Effectively, it is using the shareholders money to fund these projects, increasing the value of their equity holdings. Debt financing is borrowing; investors get a promise of fixed future payments, but do not have any ownership. Borrowing can be done through a financial intermediary, such as a bank, or directly by issuing bonds. For investment banks and similar corporations, corporate finance focuses on the analysis of corporate acquisitions and other decisions. For stable operations to be led, corporate finance must balance the needs of employees, customers, and suppliers against the interests of the shareholders. Thus, the terms corporate finance may be associated with dealings in which capital is raised in order to create, develop, grow or acquire businesses. Resource allocation is the investment of funds; these investments fall into the categories of current assets (such as cash and inventory) and fixed assets (such as real estate and machinery). The discipline can be divided into long-term and short-term decisions and techniques. Capital investment decisions are long-term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders. On the other hand, short term decisions deal with the short-term balance of current assets and current liabilities; the focus here is on managing cash, inventories, and short-term borrowing and lending (such as the terms on credit extended to customers). All of corporate finance is built on three principles that are; the investment principle, the financing principle, and the dividend principle. The investment principle determines where businesses invest their resources, the financing principle governs the mix of funding used to fund these investments, and the dividend principle answers the question of how much earnings should...

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