Corporate Finance

From Canonica AI

Overview

Corporate finance is the area of finance that deals with sources of funding, the capital structure of corporations, the actions that managers take to increase the value of the firm to the shareholders, and the tools and analysis used to allocate financial resources. The primary goal of corporate finance is to maximize or increase shareholder value.

Capital Structure

In corporate finance, a company's capital structure is the total mix of financing methods it uses to raise funds. This typically includes the mix of long-term debt, specific short-term debt, common equity, and preferred equity. The firm's ratio of debt to total financing, the amount of equity used to finance the firm's assets, is referred to as the firm's leverage. The firm's capital structure is the composition or 'structure' of its liabilities.

A photograph of a corporate building, symbolizing the structure of a corporation.
A photograph of a corporate building, symbolizing the structure of a corporation.

Capital Budgeting

Capital budgeting, also known as investment appraisal, is the planning process used to determine whether an organization's long term investments such as new machinery, replacement of machinery, new plants, new products, and research development projects are worth the funding of cash through the firm's capitalization structure (debt, equity or retained earnings). It is the process of allocating resources for major capital, or investment, expenditures.

Working Capital Management

Working capital management is the management of the company's monetary funds that deal with the short-term operating balance of current assets and current liabilities; the focus here is on managing cash, inventories, and short-term borrowing and lending (such as the terms on credit extended to customers).

Financial Risk Management

Financial risk management is the practice of creating economic value in a firm by using financial instruments to manage exposure to risk, particularly credit risk and market risk. Other types include Foreign exchange, Shape, Volatility, Sector, Liquidity, Inflation risks, etc. It focuses on when and how to hedge using financial instruments; in this sense it overlaps with financial engineering.

Mergers and Acquisitions

Mergers and acquisitions (M&A) are transactions in which the ownership of companies, other business organizations, or their operating units are transferred or consolidated with other entities. As an aspect of strategic management, M&A can allow enterprises to grow or downsize, and change the nature of their business or competitive position.

Dividend Policy

Dividend policy is concerned with financial policies regarding paying cash dividend in the present or paying an increased dividend at a later stage. Whether to issue dividends, and what amount, is determined mainly on the basis of the company's unappropriated profit (excess cash) and influenced by the company's long-term earning power.

See Also