As the name suggest, Corporate Finance is the Association of two words Corporate and Finance. Here Corporate means Incorporation/companies/Business and Finance is Investment or money. Thus, The Objectives to Know and apply corporate finance is to increase the value of your Incorporation/Business through Strategy Planning and Executing Management Resources While evaluating your Risk and Profit. Thus, Corporate Finance is that area of finance which deals with providing money for your business and the sources where you get money for your business.
Corporate finance is also called Business Finance. The Base of Corporate Finance is Investment, Finance and Dividend.
SOURCES of CORPORATE FINANCE
The Source of Corporate Finance is divided into two parts
- OWNED CAPITAL
- BORROWED CAPITAL
OWNED CAPITAL: —Owned Capital are those capital which are raised with the help of owners.
OWNED CAPITAL is further divided into two parts
- Retained Earning
SHARES is further Sub-divided into two parts
- Equity Shares: Equity Shares are Ordinary Shares who do not have Preference rights for Dividend (Profit). They do not get money (not priority) if the company is bankrupt. They have voting rights to select Board of Directors.
- Preference Shares: As the name suggest, it has Preference rights for Dividend (Profit). There Dividends are fixed, so it is not Risky. However, They cannot vote
RETAINED EARNING: Retained Earnings is the Net Income or Remaining Income after it has paid out the dividends or Profits to the Shareholders
BORROWED CAPITAL: This is the Capital which is raised from Outside the company.
It is Divided into
- Public Deposit: Here Public deposit their money to companies for short duration of 6 to 36 months. The companies provide Interest to the Public (Basically Interest is higher than Bank Interest) Only Public companies can ask for Public Deposits Not Private companies.
- ADR/GDR: It is a depository receipt where Indian companies can raise capital from foreign countries
o ADR: It means American Depository Receipt and is traded on US Stock Exchanges
o GDR: It means Global Depository Receipt and is traded on European Stock Exchanges.
- Debenture: Generally, Companies used Debentures when they have to borrow money at a fixed rate of interest. The companies issue a Debenture certificate to acknowledge that you have invested in our companies
- Bonds: Bonds are investment securities where the Investor gives money to the company for a set period of time and the companies will pay Interest to the Investor on time.
- Financial Institution: Financial Institutions like Banks, Credit Unions, Brokerage Firms, Insurance companies provide Finance.
- Trade Credit: When the Credit is given by the Manufacturer to the Businessman. For E.g.: A Businessman takes good or products on credit for 3-4 months from the Manufacturer, it also comes under Borrowed Capital.
Importance of Corporate Finance
Note: All the 10 points discussed requires FINANCE and thus, Corporate Finance play’s major role on all process
- It helps in Business related decision making. For e.g.: It decides that company which invest money in any project will yield profit or not. It also decides where the money will flow for investment? What time it takes to complete the project (Feasibility Study) etc.
- Corporate Finance helps in Raising capital for running projects. It provides reliable information from where the company can borrow/take loan and also inspires the market player to invest in this project.
- It makes arrangements for smooth functioning (internal & external) of a business firm. For e.g.: Timely payment of employee, Loan should be cleared timely, Available of Raw materials on-site on time etc.
- If a company started a project in a new area or it relocates, then before moving the company Corporate Finance works on several aspects like how much money will be spending on new equipment? How much money will it take to cover the Risk factor etc.
- Corporate finance does the Market Survey and after analyzing or seeing the demand, it suggests on launching the new product. Sometimes, it suggests on upgrading their old products through new vendors. It also encourages their employee to do market survey and provides feedback to the companies.
- Coordination is one of the important parts in any companies and the Finance controls the activities in department like Production, Marketing, Distribution etc. The proper financial planning (Corporate Finance) is required for smooth coordination of activities between departments.
- In Companies, The Risk are not calculated. For Eg: The Recent pandemic Covid has derail the growth of the company. So, to cover all the risk, finance is required and is arranged by Corporate Finance.
- The Machines is one of the Primary assets of any organization. So, Every Machine has to replace on time-to-time basis for smooth operation of the organization and is taken care by Corporate Finance.
- The company has to pay loans, interest to the creditors and dividends to the shareholders from their profit.
- Company has to pay taxes and fees. For e.g.: All companies pay Income tax and GST to the Government. To register new companies, they also have to pay fees
Activities in Corporate Finance
The Major activities involved in whole corporate finance are as follows:
- Investment & Capital Budgeting
- Capital Financing
- Dividends & Return of Capital
Investment & Capital Budgeting:
- It helps in Planning of the company’s asset or capital to decide whether they should invest in any opportunity /project or not with the help of financial analysis.
- It uses Financial accounting tools to identify capital expenditures, estimate cash flows from proposed capital projects, comparison between planned investment and projected income which helps in deciding the projects for capital budgeting (It means after various study and comparison, it helps in concluding that which projects require capital budgeting).
- It also uses Financial Modelling techniques to read company’s historical performance, its assumption about future, preparation of balance sheet, cash flow statement etc. It also uses IRR (Internal Rate of Return) with NPV (Net Present Value) to compare projects and choose the best one.
- It is the basic/central/core activities in corporate finance
- It includes decision of how to best finance the capital investment through owned capital (Equity) , borrowed capital (Debt) or mix of both.
- Here we have to closely watch the Owned and Borrowed capital, as too much borrowed capital will risk in repayment of debt while depending heavily on Owned Capital (Equity) will weaken earnings and hamper the interest of Investors.
- Here Corporate Finance professionals helps to improve company’s capital structure ( Equity+ Debt=Common Stock, Preferred Stock, Short term debt, Long-term debt) on lowering its Weighted Average cost of capital (WACC).
- WACC is the overall cost of the working capital (current assets – (minus) current liabilities) for all funding sources in company
Dividends and Returns of Capital
- Here Corporate Finance Professional decide to distribute the earnings to Shareholders or to keep the profit for future investment and operational requirement.
Career Path in Corporate Finance
Some of the designation after studying Corporate Finance
- Equity Research
- Investor Relations
- Investment Banking
- Corporate Development
- Portfolio Management
- Commercial Banking
- Transaction Advisory
- Private Equity
- Portfolio Management
And MANY MORE
You can find these position at Investment Bank, Institutions, Corporations and Public Accounting Firms.
Thus, Corporate Finance plays an important role in Capital raising from various sources, Judging the Project to invest money or not, Feasibility Study using various Financial Techniques, Solving issues external and internal and giving profits to their investors.