Concept of Corporate Finance
Corporate Finance is the study of a business's money-related decisions, which are essentially all of a business's decisions. Corporate finance applies to all businesses, not just corporations.
Corporate finance is the area of finance dealing with the sources of funding and the capital structure of corporations and the actions that managers take to increase the value of the firm to the shareholders, as well as the tools and analysis used to allocate financial resources.
The primary goal of corporate finance is to figure out how to maximize a company's value by making good decisions about investment, financing, and dividends.
In other words, how should businesses allocate scarce resources to minimize expenses and maximize revenues?
How should companies acquire these resources – through stock or bonds, owner capital or bank loans?
Finally, what should a company do with its profits? How much should it reinvest into the company, and how much should it pay out to the business's owners?
What is Corporate Finance?
The function in a company which manages policy and strategy for (and the implementation of) capital structure, budgeting, acquisition and investment, financial modeling and planning, funding, dividends and taxation is called Corporate Finance.
Corporate Finance is a specific area of finance dealing with the financial decisions corporations make and the tools as well as analyses used to make these decisions.
The discipline as a whole may be divided among long-term and short-term decisions and techniques with the primary goal being the enhancing of corporate value by ensuring that return on capital exceeds cost of capital, without taking excessive financial risks.
Functions of Corporate Finance
01. Planning and analyzing the financial performance of a business
02. Raising of Capital or Financing: raising capital to support company operations and investments
03. Budgeting of Capital: selecting those projects based on risk and expected return that are the best use of a company's resources
04. Corporate Governance: developing a company governance structure to encourage ethical behavior and actions that serve the best interests of its stockholders
05. Financial Management: management of company cash flow and balancing the ratio of debt and equity financing to maximize company value
06. Risk Management: management of risk exposure to maintain optimum risk-return trade-off that maximizes shareholder value
07. Payout Decision: All the above functions are interrelated and interdependent. For example, in order to materialize a project a company needs to raise capital. So, budgeting of capital and financing are interdependent.
Corporate governance is the system by which corporations are directed and controlled.
Corporate governance is the set of process, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled.
Corporate Governance is a relationship among stakeholders that is used to determine and control the strategic direction and performance of organizations
Why is Corporate Governance Important?
1. Good corporate governance supports effective decision making
2. relationships among the many stakeholders involved
3. the goals for which the corporation is governed.
4. corporate governance is to ensure the accountability
5. to reduce or eliminate the principal-agent problem.
6. Economic efficiency
7. Strong emphasis shareholders' welfare.
The Corporate Governance Function
• Hires and promotes qualified, honest people, and structures employees’ financial incentives to motivate them to maximize firm value
• In practice the incentives of stockholders, managers, and other stakeholders often conflict.
Corporate Social Responsibility (CSR)
Corporate social responsibility (CSR, also called corporate conscience, corporate citizenship, social performance, or sustainable responsible business) is a form of Corporate self-regulation integrated into a business model.
CSR policy functions as a built-in, self-regulating mechanism whereby business monitors and ensures its active compliance with the spirit of the law, ethical standards, and international norms.