What is Corporate Finance?
– Business involves decisions which have financial consequences and any decision that involves the use of money is said to be a corporate finance decision.
– Corporate finance is one of the most important part of the finance domain as whether the organization is big or small they raise and deploy capital in order to survive and grow.
– These are the various roles that corporate finance plays, which are very interesting and challenging, one of the main roles is that of being a finance adviser.
– This can comprise helping to manage investments or even suggesting a mergers and acquisitions (M&A) strategy.
Corporate Finance Principles
This principle revolves around the simple concept that businesses have resources which need to be allocated in the most efficient way.
The job here for the corporate financier is to make sure that the business has right amount of capital and the right mix of debt, equity and other financial instruments.
So the basic discussion here is that if the excess cash should be left in the business or given away to the investors/owners.
Understanding the concepts
Capital budgeting is the process of planning expenditures on assets (fixed assets) whose cash flows are expected to extend beyond one year. Managers study projects and decide which ones to include in the capital budget.
*The “capital” refers to long-term assets.
*The “budget” is a plan which details projected cash inflows and outflows during future period.
Time value of money
If you have a dollar today, you can earn interest on it and have more than a dollar next year. For example, $100 of today’s money invested for one year and earning 8% interest will be worth $108 after one year.