What is Corporate Finance?
Corporate finance as the terminology explains by itself is defined as “Process of dealing regard the financial or money related planning at organizational or firm level and also regard taking decisions based upon financial matters of an organization”. In other words it represents the world of financial planning and decision making in an organization. As in case of any financial committee or organization the primary objective is to maximise the returns and also shareholder value.
Corporate finance are classified broadly into two categories Long term and short term goals. The short term goals of corporate finance includes managing short term balance of current assets and current liabilities, managing cash, inventories, mortgages etc, wherein long term corporate finance includes more of capital investments, managing finance through equity or debts or in form of shares and debentures.
Now let us move into an important aspect of the chapter known as different forms of long and short term tools for corporate finance. The first tool is a long term tool known as “Capital Investment decisions”. They relate to a part of finance known as Fixed assets and capital structure. The capital investment decisions are based on investment, financing and dividend decision with an objective of maximization of Net value of firm by yielding positive net present value on invested projects and at a reduced risk. The other main objectives are financing the projects accordingly and also regard maximization of shareholder value and to return excess cash to shareholders in case no investing opportunities exists. When taking into consideration regard any investment in a project, organizations look into the investments also known as capital budgeting which requires corporate board to pool in limited resources on the projects and allocation of capital, estimating net value of the project etc.
After discussion on the know-how related with the various tools operated in an organization, it’s time now to look on the pros and cons associated with Corporate financing.
The pro related with corporate finance is as discussed below:
- Protection from legal liability: Once a new business is formed or incorporated, there are only limited amount of legal liability subjected on the new company as in eyes of law, they are considered as separate entity.
- Ability to Attract Investors. Corporate financiers or advisors can act as a separate entity and thereby can issue reasonable stock at cheapest price available and thereby invest capital shared from investors thereby bolstering the business venture.
- Power Structure.Also known as delegating work, this refers in general allocation of duties and responsibilities to directors, officers, and shareholders within an organizational framework.
- Stock and Stock option for Employees: This is a unique feature found in large profit making organizations wherein employee’s are given right to buy and inherit a portion of stock at a built in price.
It’s time to ponder regard the cons of corporate finance which are based on time and cost of incorporating business generally considered expensive and time consuming as a number of documents need to be prepared and also hefty fees to be paid to filing agents/agency. Formalities regard corporate incorporation needs to be carried out mandatorily which includes holding regular meetings of directors, keeping records of corporate activity, and maintaining the corporation’s ongoing financial independence etc. Last but not the least it also includes Taxation of organization and has to pay tax based on profits earned by organization.