An Overview of Corporate Finance

Eve Shelly^*
*Correspondence: Eve Shelly, Department of Finance and Accounting, University of Sfax, Tunisia, Email:

Perspective

Corporate finance is the branch of finance that deals with funding sources, corporate capital structures, management measures to maximise the firm's value to shareholders, and the tools and analysis used to allocate financial resources. Corporate finance's main purpose is to maximise or increase shareholder value. Corporate finance, on the other hand, is divided into two sub-disciplines [1]. Capital budgeting is concerned with determining which value-adding initiatives should receive investment funding, as well as whether that investment should be financed with equity or debt capital. Working capital management is the management of a company's monetary funds that deal with the company's short-term operating balance of current assets and current liabilities; the emphasis is on cash, inventories, and short-term borrowing and lending (such as the terms on credit extended to customers) [2]. Investment banking is also known by the phrases corporate finance and corporate financier. An investment bank's typical duty is to assess a company's financial needs and raise the proper form of capital to meet those needs. As a result, the terms "corporate finance" and "corporate financier" may refer to transactions in which capital is raised to start, expand, grow, or buy a corporation. Recent legal and regulatory changes in the United States are anticipated to change the composition of the group of arrangers and financiers prepared to arrange and finance certain highly leveraged deals.

Although it differs from managerial finance in that it addresses the financial management of all enterprises rather than just corporations, the primary concepts in corporate finance may be applied to the financial difficulties of any type of firm. The financial function of the accounting profession overlaps with financial management. Financial accounting, on the other hand, is concerned with the reporting of historical financial data, whereas financial management is concerned with the deployment of capital resources in order to maximise a company's value to its owners. From the 15^th century, corporate finance for the pre-industrial world began to emerge in the Italian city-states and the low lands of Europe. The Dutch East India Firm (abbreviated "VOC" in Dutch) was the first publicly traded company to pay dividends on a regular basis. The VOC was also the first joint-stock firm to have a fixed capital stock, according to records. During the 17^th century, the Dutch Republic built public markets for investment instruments [3]. The basic purpose of financial management is to maximise or maintain the value of the company's stock. Managers must be able to balance capital funding between investments in "projects" that boost the firm's long-term profitability and sustainability, as well as distributing excess cash to shareholders in the form of dividends, in order to maximise shareholder value. Managers of growing businesses will spend the majority of their capital resources and excess cash on investments and initiatives so that they can continue to develop their operations in the future.

When corporations attain maturity levels in their industry (i.e., when they generate around average or lower returns on invested capital), their managers will pay dividends to shareholders with excess cash. Managers must do an analysis to determine the best use of the company's capital resources and cash surplus for initiatives, dividend pay-outs to shareholders, and debt repayment to creditors. As a result, deciding between investment projects will be based on a number of interconnected criteria. Corporate management aims to increase the firm's worth by investing in initiatives that have a positive net present value when assessed using an appropriate discount rate that takes risk into account. These projects must also be adequately funded. If the company is unable to grow and has excess cash surplus, financial theory indicates that management should return part or all of the surplus cash to shareholders. The planning of value-adding, long-term corporate financial initiatives linked to investments funded by and affecting the firm's capital structure is referred to as "capital budgeting." Management must decide how to divide the company's limited resources among competing opportunities. Capital budgeting also involves determining which projects should receive investment money in order to grow the firm's value, as well as whether the investment should be financed with equity or debt capital. Investments should be made on the basis of adding value to the company's future [4].

Projects that boost a company's worth might involve a wide range of different forms of investments, such as expansion programmes or mergers and acquisitions, among others. When a company's growth or expansion is impossible and it has an excess cash surplus, management is required to pay out some or all of the surplus earnings as cash dividends or to repurchase the company's stock through a share buyback programme. To achieve corporate finance objectives, all corporate investment must be properly financed. The sources of finance are, in general, capital created by the company and capital obtained from outside funders through the issuance of new debt and stock (and hybrid- or convertible securities). However, because both the hurdle rate and cash flows (and hence the firm's riskiness) would be modified, the financing mix will have an impact on the firm's valuation, and a careful judgement is required here. WACC, WACC, WACC, WACC, WACC, WACC, WACC, Finally, there is a lot of theoretical discussion about what other factors management might examine in this situation. Borrowed cash (debt capital or credit) can be used by businesses to fund ongoing operations or future growth. Debt can take several forms, including bank loans, notes payable and publicly traded bonds. Bonds compel companies to make recurring interest payments (interest charges) on borrowed capital until the debt reaches its maturity date, at which point the company must repay the debt in full. Sinking fund provisions, in which the corporation pays annual instalments of the borrowed debt above and above standard interest rates, can also, be used to make debt payments [5].

References

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