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Corporate Finance 1

Corporate finance deals with how corporations raise and deploy capital. It involves three key decisions: (1) the financing decision of determining the right sources and mix of capital, such as equity vs. debt, to fund operations; (2) the investment decision of allocating funds to projects that yield returns above the cost of capital; and (3) the dividend decision of determining whether excess cash flows should be paid to shareholders as dividends or retained for reinvestment. Corporate finance professionals ensure corporations have adequate and low-cost financing and invest funds productively to generate returns for shareholders.

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135 views2 pages

Corporate Finance 1

Corporate finance deals with how corporations raise and deploy capital. It involves three key decisions: (1) the financing decision of determining the right sources and mix of capital, such as equity vs. debt, to fund operations; (2) the investment decision of allocating funds to projects that yield returns above the cost of capital; and (3) the dividend decision of determining whether excess cash flows should be paid to shareholders as dividends or retained for reinvestment. Corporate finance professionals ensure corporations have adequate and low-cost financing and invest funds productively to generate returns for shareholders.

Uploaded by

WinDroidEr
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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1.

Definition of Corporate Finance

Corporate finance is one of the most important subjects in the financial domain. It is deep
rooted in our daily lives. All of us work in big or small corporations. These corporations raise
capital and then deploy this capital for productive purposes. The financial calculations that
go behind raising and successfully deploying capital is what forms the basis of corporate
finance.
2. Liaison between Firms and Capital Markets

The corporate finance domain is like a liaison between the firm and the capital markets. The
purpose of the financial manager and other professionals in the corporate finance domain is
twofold. Firstly, they need to ensure that the firm has adequate finances and that they are
using the right sources of funds that have the minimum costs. Secondly, they have to ensure
that the firm is putting the funds so raised to good use and generating maximum return for its
owners. And lastly, the Dividend Decision.
These three decisions are the basis of corporate finance and have been listed in greater
detail below:
a. Financing Decision:

As stated above the firm now has access to capital markets to fulfill its financing needs.
However, the firm faces multiple choices when it comes to financing. The firm can firstly
choose whether it wants to raise equity capital or debt capital. Even within the equity and
debt capital the firm faces multiple choices. They can opt for a bank loan, corporate loans,
public fixed deposits, debentures and amongst a wide variety of options to raise funds. With
financial innovation and securitization, the range of instruments that the firm can use to raise
capital has become very large. The job of a financial manager therefore is to ensure that the
firm is well capitalized i.e. they have the right amount of capital and that the firm has the
right capital structure i.e. they have the right mix of debt and equity and other financial
instruments.
b. Investment Decision:

Once the firm has gained access to capital, the financial manager faces the next big decision.
This decision is to deploy the funds in a manner that it yields the maximum returns for its
shareholders. For this decision, the firm must be aware of its cost of capital. Once they know
their cost of capital, they can deploy their funds in a way that the returns that accrue are more
than the cost of capital which the company has to pay. Finding such investments and
deploying the funds successfully is the investing decision. It is also known as capital
budgeting and is an integral part of corporate finance.
c. Dividend Decision:
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.

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