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.
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The Three Important Activities that Govern Corporate Finance
#1 Investments & Capital Budgeting
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Once the U.S. economic recovery started in 2009, other parts of the world started to struggle in their own ways.
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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.
#2 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.
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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.
#3 Dividends and Return of Capital
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?
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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.
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What are the Career Paths in Corporate Finance?
The best place to start is by exploring our Career Map and discovering the various jobs and positions that exist in corporate finance.
Additional Corporate Finance Resources
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