Dr. Zulfiqar Hasan

What is Corporate Finance?

The financial activities related to running a corporation is called Corporate Finance. Corporate finance is the division of finance that deals with how corporations deal with funding sources, capital structuring and investment decisions.

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.

Market Capitalization or Market Value of a corporation

A company's worth, or its total value, is called its market capitalization, or "market cap", and it is represented by the company's stock price multiplied by the number of shares outstanding.

The market value of a corporation is the value of the firm based on the price that shareholders are willing to pay for stock in the company on public markets.

Example 01: A fictional public limited company has 100,000 shares outstanding. If each share is currently trading at $13, what will be the market capitalization of the company?

Market Capitalization = Number of shares x Market Price per share

= 100,000 x $13
= $1,300,000.

Functions of Corporate Finance

  • Planning and analyzing the financial performance of a corporation
  • Raising of Capital or Financing: Raising capital to support company operations and investments
  • Capital Budgeting: Selecting those projects based on risk and expected return that are the best use of a company's resources
  • Corporate Governance: Developing a company governance structure to encourage ethical behavior and actions that serve the best interests of its stockholders
  • Financial Management: Management of company cash flow and balancing the ratio of debt and equity financing to maximize company value
  • Risk Management: Management of risk exposure to maintain optimum risk-return trade-off that maximizes shareholder value
  • 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 Social Responsibilities: Corporate social responsibility (CSR) is the company's efforts to improve society in some way
  • Taxations: A portion of the income of a corporation has to be paid to the government to meet up public expenditures
  • Maintaining the Reserve and Provisions: To diversify the operational risk, the corporation has to maintain a portion of its earnings for futures financial needs.

Corporate Governance

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.