Introduction
Corporate Finance is a branch of finance that deals with the financial activities of corporations,
focusing on maximizing shareholder value through long-term and short-term financial planning.
It involves decisions related to capital investment, financing, dividend policies, and risk
management. The ultimate aim is to ensure that the company grows sustainably while balancing
risk and profitability.
Objectives of Corporate Finance
1. To maximize shareholder wealth.
2. To identify profitable investment opportunities.
3. To determine the optimal capital structure (debt vs. equity).
4. To manage working capital efficiently.
5. To ensure long-term financial stability of the business.
Key Areas of Corporate Finance
1. Capital Budgeting (Investment Decisions):
o Evaluating projects through Net Present Value (NPV), Internal Rate of Return
(IRR), and Payback Period.
o Example: Deciding whether to invest in a new factory or upgrade machinery.
2. Capital Structure (Financing Decisions):
o Determining the mix of debt and equity to fund business operations.
o A company with high debt may face financial risk, but debt can also lower taxes
due to interest deductibility.
3. Working Capital Management (Liquidity Decisions):
o Managing current assets and liabilities to ensure liquidity.
o Example: Balancing inventory, receivables, and payables.
4. Dividend Policy Decisions:
o Deciding whether to distribute profits to shareholders or reinvest in the business.
5. Risk Management:
o Using financial derivatives (options, futures, swaps) to hedge risks such as
interest rate fluctuations or foreign exchange volatility.
Importance of Corporate Finance
Provides funds for expansion and innovation.
Ensures efficient allocation of resources.
Helps in risk assessment and mitigation.
Maintains investor confidence.
Contributes to long-term business sustainability.
Techniques and Tools Used
1. Financial Ratios: Debt-to-equity ratio, ROI, ROE, liquidity ratios.
2. Valuation Models: Discounted Cash Flow (DCF), Price-to-Earnings ratio.
3. Risk Analysis: Sensitivity analysis, scenario analysis.
4. Cost of Capital: Weighted Average Cost of Capital (WACC).
