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WHAT IS CORPORATE FINANCE (CF)?
Corporate finance is the subfield of finance that deals with how corporations address funding sources, capital structuring, accounting and investment decisions.
Corporate finance is often concerned with maximizing shareholder value through long- and short-term financial planning and the implementation of various strategies. Corporate finance activities range from capital investment to tax considerations.
Corporate finance is concerned with how businesses fund their operations in order to maximize profits and minimize costs.
It deals with the day-to-day operations of a business' cash flows as well as with long-term financing goals (e.g., issuing bonds).
In addition to capital investments, corporate finance is concerned with monitoring cash flows, accounting, preparing financial statements, and taxation.
Understanding Corporate Finance
Corporate finance departments are charged with governing and overseeing their firms' financial activities and capital investment decisions. Such decisions include whether to pursue a proposed investment and whether to pay for the investment with equity, debt, or both. They also include whether shareholders should receive dividends, and if so, at what dividend yield. Additionally, the finance department manages current assets, current liabilities, and inventory control.
Corporate Finance Tasks
Corporate finance tasks include making capital investments and deploying a company's long-term capital. The capital investment decision process is primarily concerned with capital budgeting. Through capital budgeting, a company identifies capital expenditures, estimates future cash flows from proposed capital projects, compares planned investments with potential proceeds, and decides which projects to include in its capital budget.
Making capital investments is perhaps the most important corporate finance task that can have serious business implications. Poor capital budgeting (e.g., excessive investing or under-funded investments) can compromise a company's financial position, either because of increased financing costs or inadequate operating capacity.
IMPORTANT: Corporate financing includes the activities involved with a corporation's financing, investment, and capital budgeting decisions.
Corporate finance is also responsible for sourcing capital in the form of debt or equity. A company may borrow from commercial banks and other financial intermediaries or may issue debt securities in the capital markets through investment banks. A company may also choose to sell stocks to equity investors, especially when it needs large amounts of capital for business expansions.
Capital financing is a balancing act in terms of deciding on the relative amounts or weights between debt and equity. Having too much debt may increase default risk, and relying heavily on equity can dilute earnings and value for early investors. In the end, capital financing must provide the capital needed to implement capital investments.
Corporate finance is also tasked with short-term financial management, where the goal is to ensure that there is enough liquidity to carry out continuing operations. Short-term financial management concerns current assets and current liabilities or working capital and operating cash flows. A company must be able to meet all its current liability obligations when due. This involves having enough current liquid assets to avoid disrupting a company's operations. Short-term financial management may also involve getting additional credit lines or issuing commercial papers as liquidity backups.
OUR EQUITY INSTRUMENTS SOLUTIONS
Project finance is the funding (financing) of long-term infrastructure, industrial projects, and public services using a non-recourse or limited recourse financial structure. The debt and equity used to finance the project are paid back from the cash flow generated by the project.
Project financing is a loan structure that relies primarily on the project's cash flow for repayment, with the project's assets, rights, and interests held as secondary collateral. Project finance is especially attractive to the private sector because companies can fund major projects off-balance sheet (OBS).
Equity financing is the process of raising capital through the sale of shares.
Companies raise money because they might have a short-term need to pay bills, or they might have a long-term goal and require funds to invest in their growth. By selling shares, a company is effectively selling ownership in their company in return for cash.
Mergers and Acquisitions
Mergers and acquisitions (M&A) is a general term that describes the consolidation of companies or assets through various types of financial transactions, including mergers, acquisitions, consolidations, tender offers, purchase of assets, and management acquisitions.
The term M&A also refers to the desks at financial institutions that deal in such activity.
A strategic alliance is an arrangement between two companies to undertake a mutually beneficial project while each retains its independence.
The agreement is less complex and less binding than a joint venture, in which two businesses pool resources to create a separate business entity.
A strategic joint venture is a business agreement between two companies who make the active decision to work together, with a collective aim of achieving a specific set of goals and increase their respective bottom lines.
Through this arrangement, the companies effectively complement one another’s strengths, while compensating for one another’s weaknesses. Both companies share in the returns of the joint venture, while equally absorbing the potential risks involved.
Capital markets are where savings and investments are channeled between suppliers—people or institutions with capital to lend or invest—and those in need. Suppliers typically include banks and investors while those who seek capital are businesses, governments, and individuals.
Capital markets are composed of primary and secondary markets. The most common capital markets are the stock market and the bond market.
The Multilateral Investment Guarantee Agency is an international institution that promotes investment in developing countries by offering political and economic risk insurance.
By promoting foreign direct investment into developing countries, the agency aims to support economic growth, reduce poverty, and improve people’s lives.