Finance is an integral part of modern economic life & occupies an important place in all economic activities. Economic growth virtually rests to a considerable extent on the availability of adequate & timely finance. It is finance, which brings together various segments of an organization & transforms them into an integral whole so as to function smoothly & move in the direction of achieving the organizational goals.
Corporate finance: Corporate finance is the process of strategizing, formulating, and managing the capital structure of a company. It seeks to enhance organizational value, and profitability and stakeholders' worth through optimal decisions about investments, finances, and dividends. It concentrates on capital investments designed to fulfill a business's financial needs to achieve an optimal capital structure.
Corporate Finance is the area of business management, devoted to a judicious use of capital & a careful selection of sources of capital, in order to enable a spending unit to move in the direction of reaching its goal.
Corporate Finance decisions
Corporate Finance decisions of the company are aimed at the maximization of the wealth of stakeholders. These are :
- Investment Decision
- Financing Decision
- Dividend Decision
The growth of the firm rests on the degree of efficacy & quality of financial decisions taken from time to time.
Investment Decision: Investment decision deals with the importance of investing in suitable options by assessing the risk and return. The investment decision is again classified into long term and short term investment decisions
Long Term Investment Decision: This decision is concerned with the allocation of capital. It has to show how the funds can be invested in assets that would yield benefits in the future. This is a risky decision to be taken by managers as they have to forecast the anticipated profit which is based on several uncertainties. Thus, this decision is based on risk & uncertainty.
Investment proposals are evaluated with their expected return & risk to determine whether the investment is feasible or not. This whole exercise is called ‘Capital Budgeting’. This requires the computation of the present values of future cash flows by discounting them by the current market rate of return, The gross present value is then compared with the initial Net Investment to ascertain the Net Present Value (NPV). Positive NPV led 2 acceptance of investment proposals whereas negative led to rejection
Short Term Decision: Such decisions are mainly concerned with the management of working capital. The process involves the difficult task of determining the optimum level of investment in various current assets such as cash, receivable inventories, etc. These assets are financed partly in the long term and partly in the short term. Working capital is the excess of current assets or current liabilities. Thus the portion of gross working capital finance through current liability fluctuates frequently as the circulating asset inflated or deflated with oscillations in the current business operation.
Overinvestment in current assets improves liquidity and solvency but at the same time, it pulls down profitability. On the contrary under-investment in current assets may improve profitability but create the problem of illiquidity thus a trade-off between liquidity and profitability necessitates the maintenance of proper balance between the two stream situations therefore proper short-term investment decision-making requires to follow moderate working capital management policy resulting in a normal duration of operating cycle
Financing Decision: These are decisions, which are concerned with raising or procuring funds to meet the project cost. Financing decisions are needed for arranging the capital funds for the cleared project.
Financing decision involves formulation and designing of capital structure. The process entails deciding about the form or pattern or capital structure and also fixing the related proportion between various types of funds from different sources proposed to be inducted in the capital structure. Financing decisions are crucial as they need fixing of proper depth equity ratio so as to attempt an optimum capital structure which may minimize the overall cost of capital and maximize the earning of the company. Thus raising the market value of the firms.
Dividend Decision: The objective of wealth maximization & of maintaining market values of the company’s shares at a high level can only be achieved by formulating & pursuing an appropriate dividend & retention policy. This decision is concerned with the divisible profits of the company. How much cash dividend should be paid to the shareholder? How much profit is to be flown back by capitalization? Maintenance of a stable dividend rate over the period, are one of the major issues connected with this decision.
A liberal retention policy increases reserves & surplus raising the book value of shares & opening way for giving frequent Bonus shares to stockholders. This also provides funds from internal sources for the growth & expansion of the company leading to higher profitability. At the same time management can not ignore the expectations of the majority of the existing shareholders for receiving a regular stream of earnings by way of cash dividend.
This brings out the need for following a stable dividend policy which gives proper weight to both, the dividend payment as well as retention of earnings in business.
Corporate Finance's Key Role in Business Success
- Provides tools for informed decision-making to guide strategic moves.
- Focuses on maximizing organization value and shareholder wealth through efficient resource allocation and management.
- Ensures capital is allocated to high-return projects for optimized growth and profitability
- Effective risk management through advanced techniques
- Provides company stability against market uncertainties.
- Manages liquidity and solvency to ensure operational stability and long-term sustainability.
The Future of Corporate Finance: Emerging Trends: With the rapid technological advancement regulatory changes and changes in investor expectations the corporate finance field has rapidly transformed some trends shaping the future of corporate finance include:
Digital transformation: the invention of artificial intelligence and data analytics techniques revolutionized the corporate finance field by providing improved financial forecasting accuracy, automated daily task, and more informed data-driven decisions
Risk Management in a Volatile World: As the global market becomes more open and within the reach of everyone risk management has also become crucial Corporate finance focus on improved risk management strategies to protect companies from unforeseen disruptions.
Sustainability and ESG (environmental social and governance) investing: Countries are concentrating on SDG goals and investors are also focusing on sustainable business practices so corporate finance has also adopted the integration of ESG factors into the financial planning and reporting
