Corporate Finance

Posted by Burki on September 26th, 2010

Corporate finance dealing with financial decisions, Business enterprises makes different tools used to make these decisions. Primary goal of corporate finance is to manage the firm?s financial risks and maximize corporate value.Corporate finance is dividing into two long-term and short term decisions and techniques:

• Capital investment decisions

Long term Capital investment decisions include fixed assets and capital structure.

These types of decision are inter-related.

(i) Corporate management investing in projects to yield a positive net present value (NPV) to maximize the value of the firm.

(ii) These projects must also be financed appropriately.

(iii) If investing in project opportunities not exists, maximizing shareholder value by divining cash dividend to shareholders. Capital investment decisions thus comprise an investment decision, a financing decision, and a dividend decision.

• The investment decision:

Management must allocate limited resources for projects in a process known as capital budgeting. Making this investment, management decision requires to estimating the value of each project, which is a function of the size, timing and anticipate of future cash flows.

• Project valuation

By using discounted cash flow valuation, each project's value will be estimated, and the opportunity with the highest positive net present value (NPV) will be selected. This requires estimating the size and timing of all of the incremental cash flows resulting from the project.

In combination with Net Present Value, there are several other procedures used as minor selection criteria in corporate finance.

• The Financing decision:

Corporate finance goal require financing the investment appropriately. Financing sources are the combination of debt and equity financing. A project which financing through debt it will in a liability that must be serviced results. Thus entail cash flow implications independent of the project's degree of success, financing the project through debt is more risky. On other hand in respect to cash flow equity financing is less risky with respect to cash flow commitments, but results in right of ownership, control and earnings.

• The dividend decision

When there are free cash with the company then management take decision whether to issue dividends, and what amount, is calculated mainly on the basis of the company's inappropriate profit and its profit prospects for the coming year. If there are no NPV positive opportunities, then management must return free cash to investors. Dividend can be distribute in cash dividend or by share buyback, management consider many factors may be taken into consideration like tax on dividend, retain earning etc. beside these some companies will pay dividends from stock rather in cash.

• Working capital management

Working capital management involve in managing the relationship between a firm short term assets and long term liabilities. As you know that the goal of Corporate Finance is the maximization of firm value. Firm value is improved through correctly selecting the project with positive NPV investment. working capital management ensure that the firm is able to operate and has sufficient cash flow for long term debt, and also meet the short term debt and operational expenses. Firm value improve when return on capital is exceeds then cost of capital.