Corporate Finance

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What is 'Corporate Finance'

Corporate finance is a concentration of financial management concerned with all of the financial activities related to running a corporation. Corporate finance is primarily concerned with maximizing shareholder value through long-term and short-term financial planning. Everything from capital investment decisions to investment banking falls under the domain of corporate finance.

BREAKING DOWN 'Corporate Finance'

Corporate finance involves financial management, financial analysis, accounting and investment banking. It can refer to a department or business unit, sometimes structured internally and sometimes outsourced, that prepares all of a company's financial numbers and then makes business recommendations based on those numbers.

One of the most important financial activities that a corporate finance department is involved with are capital investment decisions. It first decides if a proposed investment should be made. If the investment decision is accepted, corporate finance professionals then decide how the company should pay for it – with equity, debt or combination of both. The department also makes reinvestment decisions, deciding to either offer dividends or plow profits back into the company for growth. Short-term items include the management of current assets and current liabilities, inventory control, investments and other short-term financial issues. Long-term items include new capital purchases and investments.

Underlying Principles and Activities of Corporate Finance

The leading principle of corporate finance is the implementation of financial controls. In business, agency problems can arise where the owners or leaders of a company prioritize personal interests over the interests of the company itself. To protect companies against financial pitfalls like this, corporate finance works to separate ownership from financial management.

Further, corporate finance aids a company's leadership team with the evaluation and analysis of a company's financial statements. Based on the analysis, corporate finance professionals make a recommendation that furthers the company's initiatives.

For example, a public corporation is assessing expansion options through the construction of a new manufacturing plant. The options are to finance it internally with cash or externally with corporate debt. After preparing the company's financial statements, the chief financial officer (CFO) looks at the balance sheet and notices that it does not have adequate cash on hand to both fund the plant and cover its working capital requirements. Instead, the CFO runs an analysis and finds that the best course of action is to issue a corporate bond of $1 million at a 5% interest rate and cover the monthly interest payments until sufficient cash is generated by the plant to pay down the principal. This decision-making process is corporate finance in action.

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