Copyright (c) 2007 Thomas Husnik
The field of corporate finance deals with the decisions of finance taken by corporations along with the analysis and the tools required for taking such decisions. The principle aim of corporate finance is enhancing the corporate value and at the same time reducing the financial risks of the company. In addition to this, corporate finance also deals in getting the maximum returns on the invested capital of the company. The major concepts of corporate finance are applied to the problems of finance encountered by all type of firms.
The discipline of corporate finance can be split into the short term and the long term techniques of decisions. The investments of capital are the long term decisions relating to the projects and the methods required to finance them. On the other hand, the capital management for working is considered as a short term decision that deals with the short term current liabilities and asset balance. The main focus here rests on the management of inventories, cash and, the lending and borrowing on a short term basis.
Corporate finance is also associated with the field of investment banking. Here, the role of the investment banker is the evaluation of the various projects coming to the bank and making proper investment decisions regarding them.
The Capital Structure:
A proper finance structure is required for achieving the set goals of corporate finance. The management has to therefore design a proper structure that has an optimal mix of the different finance options that are available.
Generally, the sources of finance will comprise of a mix of equity as well as debt. If a project is financed through debt, it results in causing a liability to the concerned company. Hence in such cases, the flow of cash has various implications regardless of the success of the project. The financing done by equity carries a lower risk regarding the commitments of the flow of cash, but the result of this is the dilution of the earnings and the ownership. The cost involved in equity finance is also higher in the case of debt finance. Hence, it is understood that the finance done through equity, offsets the reduction in the risk of cash flow. The management has to hence have a mix of both the options.
The Decisions of Capital Investments:
The decisions of capital investments are the long term decisions of corporate finance that are related to the capital structure and the fixed assets. These decisions are based of several criteria that are inter-related. The management of corporate finance attempts to maximize the firm’s value by making investments in the projects that have a positive yield. The finance options for such projects have to be done in a proper manner.