Corporate finance


Corporate finance is an area of finance that deals with sources of funding, the capital structure of corporations, the actions that managers take to increase the value of the firm to the shareholders, and the tools and analysis used to allocate financial resources.

This " capital budgeting " is the planning of value-adding, long-term corporate financial projects relating to investments funded through and affecting the firm's capital structure. The terms corporate finance and corporate financier are also associated with investment banking. Economic, financial and business history of the Netherlands. Hertz in , although it has only recently become common: Sam Savage, Stanford University.

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In international trade, usance is the allowable period of time, permitted by custom, between the date of the bill and its payment. The usance of a bill varies between countries, often ranging from.

Here, a scenario comprises a particular outcome for economy-wide, "global" factors demand for the product , exchange rates , commodity prices , etc As an example, the analyst may specify various revenue growth scenarios e. Note that for scenario based analysis, the various combinations of inputs must be internally consistent see discussion at Financial modeling , whereas for the sensitivity approach these need not be so.

An application of this methodology is to determine an " unbiased " NPV, where management determines a subjective probability for each scenario — the NPV for the project is then the probability-weighted average of the various scenarios; see First Chicago Method. See also rNPV , where cash flows, as opposed to scenarios, are probability-weighted. A further advancement which "overcomes the limitations of sensitivity and scenario analyses by examining the effects of all possible combinations of variables and their realizations" [41] is to construct stochastic [42] or probabilistic financial models — as opposed to the traditional static and deterministic models as above.

This method was introduced to finance by David B. Hertz in , although it has only recently become common: Here, the cash flow components that are heavily impacted by uncertainty are simulated, mathematically reflecting their "random characteristics".

In contrast to the scenario approach above, the simulation produces several thousand random but possible outcomes, or trials, "covering all conceivable real world contingencies in proportion to their likelihood;" [43] see Monte Carlo Simulation versus "What If" Scenarios.

The output is then a histogram of project NPV, and the average NPV of the potential investment — as well as its volatility and other sensitivities — is then observed.

This histogram provides information not visible from the static DCF: Continuing the above example: These distributions would then be "sampled" repeatedly — incorporating this correlation — so as to generate several thousand random but possible scenarios, with corresponding valuations, which are then used to generate the NPV histogram.

The resultant statistics average NPV and standard deviation of NPV will be a more accurate mirror of the project's "randomness" than the variance observed under the scenario based approach. These are often used as estimates of the underlying " spot price " and volatility for the real option valuation as above; see Real options valuation Valuation inputs.

A more robust Monte Carlo model would include the possible occurrence of risk events e. Dividend policy is concerned with financial policies regarding the payment of a cash dividend in the present or paying an increased dividend at a later stage.

Whether to issue dividends, [44] and what amount, is determined mainly on the basis of the company's unappropriated profit excess cash and influenced by the company's long-term earning power. When cash surplus exists and is not needed by the firm, then management is expected to pay out some or all of those surplus earnings in the form of cash dividends or to repurchase the company's stock through a share buyback program.

If there are no NPV positive opportunities, i. This is the general case, however there are exceptions. For example, shareholders of a " growth stock ", expect that the company will, almost by definition, retain most of the excess cash surplus so as to fund future projects internally to help increase the value of the firm. Management must also choose the form of the dividend distribution, as stated, generally as cash dividends or via a share buyback.

Various factors may be taken into consideration: Alternatively, some companies will pay "dividends" from stock rather than in cash; see Corporate action.

Financial theory suggests that the dividend policy should be set based upon the type of company and what management determines is the best use of those dividend resources for the firm to its shareholders. As a general rule, shareholders of growth companies would prefer managers to retain earnings and pay no dividends use excess cash to reinvest into the company's operations , whereas shareholders of value or secondary stocks would prefer the management of these companies to payout surplus earnings in the form of cash dividends when a positive return cannot be earned through the reinvestment of undistributed earnings.

A share buyback program may be accepted when the value of the stock is greater than the returns to be realized from the reinvestment of undistributed profits. In all instances, the appropriate dividend policy is usually directed by that which maximizes long-term shareholder value. Managing the corporation's working capital position to sustain ongoing business operations is referred to as working capital management. In general this is as follows: As above, the goal of Corporate Finance is the maximization of firm value.

In the context of long term, capital budgeting, firm value is enhanced through appropriately selecting and funding NPV positive investments. These investments, in turn, have implications in terms of cash flow and cost of capital. The goal of Working Capital i. In so doing, firm value is enhanced when, and if, the return on capital exceeds the cost of capital; See Economic value added EVA. Managing short term finance and long term finance is one task of a modern CFO.

Working capital is the amount of funds which are necessary to an organization to continue its ongoing business operations, until the firm is reimbursed through payments for the goods or services it has delivered to its customers.

As a result, capital resource allocations relating to working capital are always current, i. In addition to time horizon , working capital management differs from capital budgeting in terms of discounting and profitability considerations; they are also "reversible" to some extent. Considerations as to Risk appetite and return targets remain identical, although some constraints — such as those imposed by loan covenants — may be more relevant here.

The short term goals of working capital are therefore not approached on the same basis as long term profitability, and working capital management applies different criteria in allocating resources: Guided by the above criteria, management will use a combination of policies and techniques for the management of working capital. Use of the term "corporate finance" varies considerably across the world.

In the United States it is used, as above, to describe activities, analytical methods and techniques that deal with many aspects of a company's finances and capital. In the United Kingdom and Commonwealth countries, the terms "corporate finance" and "corporate financier" tend to be associated with investment banking — i. Risk management [42] [51] is the process of measuring risk and then developing and implementing strategies to manage " hedge " that risk.

Financial risk management , typically, is focused on the impact on corporate value due to adverse changes in commodity prices , interest rates , foreign exchange rates and stock prices market risk.

It will also play an important role in short term cash- and treasury management ; see above. It is common for large corporations to have risk management teams; often these overlap with the internal audit function. While it is impractical for small firms to have a formal risk management function, many still apply risk management informally. See also Enterprise risk management. The discipline typically focuses on risks that can be hedged using traded financial instruments , typically derivatives ; see Cash flow hedge , Foreign exchange hedge , Financial engineering.

Because company specific, " over the counter " OTC contracts tend to be costly to create and monitor, derivatives that trade on well-established financial markets or exchanges are often preferred.

These standard derivative instruments include options , futures contracts , forward contracts , and swaps ; the "second generation" exotic derivatives usually trade OTC. Note that hedging-related transactions will attract their own accounting treatment: This area is related to corporate finance in two ways.

Firstly, firm exposure to business and market risk is a direct result of previous capital financial investments. Secondly, both disciplines share the goal of enhancing, or preserving, firm value. There is a fundamental debate [52] relating to "Risk Management" and shareholder value. Per the Modigliani and Miller framework , hedging is irrelevant since diversified shareholders are assumed to not care about firm-specific risks, whereas, on the other hand hedging is seen to create value in that it reduces the probability of financial distress.

A further question, is the shareholder's desire to optimize risk versus taking exposure to pure risk a risk event that only has a negative side, such as loss of life or limb. The debate links the value of risk management in a market to the cost of bankruptcy in that market. From Wikipedia, the free encyclopedia. Corporate finance Working capital Cash conversion cycle Return on capital Economic value added Just-in-time Economic order quantity Discounts and allowances Factoring Sections Managerial finance Financial accounting Management accounting Mergers and acquisitions Balance sheet analysis Business plan Corporate action Societal components Financial law Financial market Financial market participants Corporate finance Personal finance Peer-to-peer lending Public finance Banks and banking Financial regulation Clawback v t e.

Bankruptcy and Financial distress. Business valuation , stock valuation , and fundamental analysis. Real options analysis and decision tree. Sensitivity analysis , Scenario planning , and Monte Carlo methods in finance. Introduction to Financial Technology. The Declaration of Dependence: Dividends in the Twenty-First Century. A History of the Global Stock Market: From Ancient Rome to Silicon Valley. As Mark Smith notes, "the first joint-stock companies had actually been created in England in the sixteenth century.

These early joint-stock firms, however, possessed only temporary charters from the government, in some cases for one voyage only. One example was the Muscovy Company , chartered in England in for trade with Russia; another, chartered the same year, was a company with the intriguing title Guinea Adventurers. The Dutch East India Company was the first joint-stock company to have a permanent charter.

Accounting by the First Public Company: The Pursuit of Supremacy. The World's First Stock Exchange: Translated from the Dutch by Lynne Richards. The Little Crash in '62 , in Business Adventures: Economics , Financial Markets: Futures , Volume 68, April , p. Juta and Company Ltd. Investment Decisions and Capital Budgeting , Prof.

Fabozzi 4 February The Financing Decision of the Corporation , Prof. Chance; Capital Structure , Prof. Intermediate Accounting 12th ed. Optimal Balance of Financial Instruments: Aswath Damodaran; Equity Valuation , Prof. Harvey's Hypertextual Finance Glossary or investopedia. A Framework for Risk Management.

Wharton School Publishing , Shim; Stephen Hartman 1 November Schaum's quick guide to business formulas: Retrieved 12 November Calculating value during uncertainty. However, in the s, the amount spent went up exponentially. Even with this increase, the money spent in the election cycle dropped almost by half. The money spent from the s to the present has not been given to just one party, but to both major parties in Washington, Democrats and Republicans. In the three election cycles from to , Democrats were given more money than Republicans.

In the late s, that changed with more money being given to Republicans than Democrats and election cycles. Still, Democrats were the runner-up, and were given the highest amount of money in the same election cycle: From Wikipedia, the free encyclopedia.

John Hancock Financial Services, Inc. Securian Financial Group, Inc. The Wall Street Journal. Retrieved 16 November Tim Pawlenty to head bank lobbying group".

Archived from the original on Center for Responsive Politics. Retrieved 20 June Retrieved from " https: Views Read Edit View history. This page was last edited on 16 November , at