What Exactly is Corporate Finance?
22 May 2019
You’ve likely heard the term corporate finance before in the news. Here is corporate finance explained in terms you can understand.
Have you heard the term corporate finance on the news, read it on the paper, or had it dropped in conversation?
If you don’t know what people are talking about when they discuss corporate finance, that is going to change today. Although it might seem like a difficult term to grasp, there are ways to simplify it.
Read on to get the corporate finance overview.
What is Corporate Financing?
If you’ve heard the term, but you don’t work in the field, you may not know what corporate financing means. In a nutshell, corporate financing is an area of finance that deals with investment decisions, capital structuring, and finance of course.
The primary concern of individuals working in the field is to maximize the value of shareholders via short and long-term financial planning. They create and implement the strategies they set in order to see results.
In the corporate finance world, there are different finance departments that specialize in overseeing the financial activities of a company and make investment decisions accordingly.
The decisions range from proposing a new investment to how they will pay for the investment. They must also decide if they’re going to pay for the investment using debt, equity, or a combination of both.
Finance departments must also make decisions on whether or not the shareholders receive dividends for their investments.
Corporate Finance Activities
Now that you have a general knowledge of what corporate finance is, let’s discuss the 3 most important activities of corporate finance.
Corporate finance experts need to have extensive knowledge in investments and capital budgeting, capital financing, and dividends and return of capital.
Investments and Capital Budgeting
Investments and capital budgeting is the corporate finance activity that plans where the company will place its long-term capital assets. The purpose of this activity is to obtain the highest risk-adjusted returns.
The idea of behind this activity is to perform extensive financial analysis to decide whether or not an investment is worth pursuing. With the help of financial tools, companies can estimate cash flows and capital expenditures and decide if they should include them in the capital budget.
Capital Financing
After a company has decided to go through with an investment, they must make a decision on how they will finance the project. As we briefly mentioned, capital financing makes the decision on how a company will pay for the investment.
Some companies choose to either finance it via debt or equity, although, it’s more common for companies to choose both.
Dividends & Return of Capital
Thus corporate finance activity deals with how to distribute the earnings of an investment.
Corporate managers make the decision on whether or not the return capital should go back into the company for operational requirements, future investments, or a payout to the shareholders. Shareholders often receive the earnings as share buybacks or dividends.
Understanding Corporate Finance: The Bottom Line
Now that you know what corporate finance is, you can feel more confident talking about it in conversation. Remember, there are three main activities to corporate finance dividends and return capital, capital financing, and capital budgeting.
Want to learn how to choose the best mutual funds? Click here for more.
