Corporate finance is an area of the finance that focuses on monetary decisions that make the companies and the tools and analysis used to make those decisions. The main objective of corporate finance is to maximize the value of shareholders. Although, in principle, it is a different field of the financial management, which studies the financial decisions of all companies, yet the main concepts of study in corporate finance are applicable to the financial problems of any kind of company.
The discipline of this finance subject can be divided into technical decisions and long term and short term. Decisions of the capital investment are long-term choices on which projects should receive funding, if an investment fund with equity or debt, and whether to pay the dividends to the shareholders. Moreover, short-term decisions are focused on short-term balance of the assets and liabilities. The goal here is about the management of cash the stocks, and short-term financing.
The term is often associated with Corp Finance often the investment banking. The typical role of an investment banker to assess the financial needs of a company and raise the kind of appropriate capital to meet those needs themselves. Thus, corporate finance may be associated with transactions in which capital was raised to create, develop, grow and acquire businesses.
SOME IMPORTANT CONCEPTS IN CORPORATE FINANCE
Consider that there are always several investment options. The opportunity cost is the rate of return on the best alternative investment available. It is the highest yield that will be earned if the funds are invested in a particular project is not obtained. It can also be seen as the loss that we’re willing to take, not the choice that represents the best alternative use of the money.
The dilemma between risk and profit
The investors expect the return with chances of least risk. But here there is always a risk. So, there is surely profit, but the factor of risk is always counted in the corporate finance.
The value of money
The time value of money is yet another important concept of CF. It refers to the value of money with the passage of time. The owner of a financial resource will have to pay something for that resource dispensed with.
Long-term investment should be financed with long-term funds, and likewise be financed short-term investments with short-term funds. In other words, investments should be put on the project with adequate funding.
Leverage through the use of debt
The proper use of funds acquired by debt serves to increase the profits of a company or investor. For example, an investor receives the previously borrowed funds 15%, and brings to a business that pays 20% in theory, not only increases their own profits with the proper use of other resources, but also increases the level of risk investment, itself an exercise in financial simulation or financial projections.
The prudent investor diversifies his total investment, distributing his resources between several different investments. The effect to diversify is to distribute the risk and reduce the overall risk.
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