An overview of the corporate finance industry
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What is Corporate Finance?
Corporate finance deals with the capital structure of a corporation, including its funding and the actions that management takes to increase the value of the company. Corporate finance also includes the tools and analysis utilized to prioritize and distribute financial resources.
The ultimate purpose of corporate finance is to maximize the value of a business through planning and implementation of resources while balancing risk and profitability.
The Three Important Activities that Govern Corporate Finance
Investments and capital budgeting
Investing and capital budgeting includes planning where to place the company’s long-term capital assets in order to generate the highest risk-adjusted returns. This mainly consists of deciding whether or not to pursue an investment opportunity, and is accomplished through extensive financial analysis.
By using financial accounting tools, a company identifies capital expenditures, estimates cash flows from proposed capital projects, compares planned investments with projected income, and decides which projects to include in the capital budget.
Financial modeling is used to estimate the economic impact of an investment opportunity and compare alternative projects. An analyst will often use the internal rate of return (IRR) in conjunction with net present value (NPV) to compare projects and pick the optimal one.
Capital financing
This core activity includes decisions on how to optimally finance the capital investments (discussed above) through the business’ equity, debt, or a mix of both. Long-term funding for major capital expenditures or investments may be obtained from selling company stocks or issuing debt securities in the market through investment banks.
Balancing the two sources of funding (equity and debt) should be closely managed because having too much debt may increase the risk of default in repayment, while depending too heavily on equity may dilute earnings and value for original investors.
Ultimately, it’s the job of corporate finance professionals to optimize the company’s capital structure by lowering its weighted average cost of capital (WACC) as much as possible.
Dividends and return of capital
This activity requires corporate managers to decide whether to retain a business’s excess earnings for future investments and operational requirements or to distribute the earnings to shareholders in the form of dividends or share buybacks.
Retained earnings that are not distributed back to shareholders may be used to fund a business’ expansion. This can often be the best source of funds, as it does not incur additional debts nor dilute the value of equity by issuing more shares.
At the end of the day, if corporate managers believe they can earn a rate of return on a capital investment that’s greater than the company’s cost of capital, they should pursue it. Otherwise, they should return excess capital to shareholders via dividends or share buybacks.
How Important is a Company’s Capital Structure in Corporate Finance?
A company’s capital structure is crucial to maximizing the value of the business. Its structure can be a combination of long-term and short-term debt and/or common and preferred equity. The ratio between a firm’s liability and its equity is often the basis for determining how well balanced or risky the company’s capital financing is.
A company that is heavily funded by debt is considered to have a more aggressive capital structure and, therefore, potentially holds more risk for stakeholders. However, taking this risk is often the primary reason for a company’s growth and success.
Additional Resources
Free Corporate Finance Fundamentals Course
Free Financial Modeling Guide
Corporate Finance Courses
What is Valuation?
See all FP&A resources
FAQs
Corporate finance is a subfield of finance that deals with how corporations address funding sources, capital structuring, accounting, and investment decisions. Corporate finance is also often concerned with maximizing shareholder value through long- and short-term financial planning and implementing various strategies.
What is an overview of corporate financing? ›
Corporate finance is a branch of finance that focuses on how corporations approach capital structuring, funding sources, investments, and accounting decisions. Its primary goal is to maximize shareholder value while striking a balance between risk and profitability.
What are the five basic functions of corporate finance? ›
Since then, he's been involved in financing and capital raising, capital budgeting, financial management, corporate governance and risk management. These are the five fundamentals you need to start your own corporate finance career.
What are the three main areas of corporate finance? ›
Corporate finance is split into three sub-sections: capital budgeting, capital structure, and working capital management. Capital budgeting operates over the long term.
What is the main objective of corporate finance? ›
the capital of corporations and the actions that managers take to increase the value of the firm to the shareholders, as well as the tools and analysis used to allocate financial resources. The primary goal of corporate finance is to maximize or increase shareholder.
Is corporate finance hard to learn? ›
Finance degrees are generally considered to be challenging. In a program like this, students gain exposure to new concepts, from financial lingo to mathematical problems, so there can be a learning curve.
What is the typical corporate finance structure? ›
Its structure can be a combination of long-term and short-term debt and/or common and preferred equity. The ratio between a firm's liability and its equity is often the basis for determining how well balanced or risky the company's capital financing is.
Is FP&A corporate finance? ›
Corporate Finance Career Path #1: Financial Planning & Analysis (FP&A) FP&A stands for “Financial Planning & Analysis,” and some companies also refer to it as Management Accounting.
Is corporate finance the same as investment banking? ›
Corporate finance and investment banking are very different in terms of their aims and purpose. Investment banking helps businesses raise capital in a variety of ways, such as mergers and acquisitions, as well as selling securities, while corporate finance helps organizations acquire funding and manage their assets.
Is M&A corporate finance? ›
Types of corporate finance activity. Mergers and acquisitions (M&A), and demergers involving private companies. Mergers, demergers and takeovers of public companies, including public-to-private deals. Management buy-outs, buy-ins or similar of companies, divisions or subsidiaries – typically backed by private equity.
Corporate finance mostly tries to increase the capital of the firm where as finance deals with profits and every day operations. Track the investments. Build strategies to maximize the capital.
Why should I do corporate finance? ›
A few of the perks of working in corporate finance are that you get the chance to develop good teamwork skills, since finance professionals generally work in teams. You also get to travel and meet people, and the pay is pretty good. A financial analyst can make $44,000 to $72,000 a year.
Which method of corporate finance is used the most? ›
The most common methods of capital raising are through equity or debt financing. Equity financing involves issuing shares of ownership in the company to investors in exchange for capital.
What is the modern approach to corporate finance? ›
This modern approach offers a broader outlook on a company's financial planning. Unlike the traditional approach, modern financial management considers the procurement and effective utilisation of funds. It takes into consideration the internal parties and problems that affect an organisation.
What is the highest position in finance? ›
The highest position in a finance company is often the chief executive officer (CEO) or managing director. These executives are responsible for the overall management and strategic direction of the company, including its financial operations.
What does a corporate finance manager do? ›
Corporate Finance Managers identify and secure merger acquisitions, manage and invest large corporate funds, and buy and sell other financial products such as stocks and bonds, company equity, and investment capital. They undertake all strategic financial planning and report to company stakeholders.
What is an example of corporate financing? ›
Examples of Corporate Finance Activities
Refinancing and renegotiating all debts and payments: As the market changes, corporations may strategically negotiate to update the terms of loans or other payment agreements. Dividend distribution: Dividend distribution depends on the policy set by the management.
What is project financing overview? ›
Project finance refers to the funding of long-term projects, such as public infrastructure or services, industrial projects, and others through a specific financial structure. Finances can consist of a mix of debt and equity. The cash flows from the project enable servicing of the debt and repayment of debt and equity.
Why study corporate finance? ›
A career in corporate finance offers the opportunity to be at the centre of how a business operates; it is the way in which companies finance creation, growth and the acquisition or disposal of business.
What is the main goal of corporate finance quizlet? ›
Corporate finance focuses on financial decisions that corporations need to make to run the firm.
