What is Corporate Finance

Corporate Finance explained in short

It is the part of financing that deals with funding and financing of assets of a corporation through the capital structure. The main aim of corporate financing is to increase the value of an institution to the shareholders. It is done with the help of short-term and long-term financial planning and the discharge of various strategies such as research, analysis and other tools used to allocate the finance. Capital investment, financing, and investment banking have a strong relationship with corporate financing.

Capital Structure

• Equity Capital: Corporate can sell shares off their firm to raise capital for finance. The owner can also purchase the ordinary shares or common stock of the company as risk capital. The equity capital is obtained by calculating the current market value of all the assets owned by the firm and subtracting the value of liabilities from it. The end value obtained is used in the investment. It is listed on the balance sheet of the company as the owner’s or stockholder’s equity.
   
• Debt Capital: it is the fund borrowed by the firm and has to pay for it later within a stipulated time. It is also known as credit. Debt capital can be issued through bank loans, bonds issued by the public, notes payable. Lenders require a payment of interest from the companies; these companies can get sums by leveraging a small amount of money. The interest rate levied by the investors is known as the cost of debt capital.
   
• Preferred Stock: it is considered as a hybrid asset as it has both the features of equity and debt. It has a higher claim on the assets and earnings than a common stock. The dividend owed to a preferred stock must be paid before that of a common shareholder. It carries no voting rights. The rating for this is generally low because they do not possess the same assurance as for the investment payments of bonds.

Capital Investment

The corporate finance department of a firm deploys the long-term capital. The capital investment is done with the expectation of future income and profits, which would recover the investment expenditure through earnings generated by the business over the years. The main focus of corporate financing is to make decisions regarding the key corporate finance procedure, capital budgeting. It is the most crucial factor of finance and the company’s economic condition depends on this. Over-investment or underinvestment can increase a company’s financial cost or make inadequate capacity planning. The budgeting determines the company’s expenditure, cash flow for future projects, helps in comparing planned investments for future proceeds.

Trends in Corporate Finance

• Zero-Based Budgeting: The budgeting has a zero base. Every activity within the organization is monitored and the funding required for these activities are critically analyzed to determine the future costs. This budget is built according to the requirement of the company, additional and unnecessary expenditures are eliminated from it.
   
• Use of new technologies: a number of firms are opting for revolutionary technologies such as predictive analytics and internet of things, cloud technology, and artificial intelligence. The colossal amount of data generated by the contemporary industries is almost impossible to analyze manually. A large number of firms are setting aside funds to invest in technologies that would simplify the big data and make budgeting easier for the corporate financiers.