Corporate finance ultimately deals with any monetary decision that a company makes in the course of normal business operations. The purpose of this management tool is to ensure the maximization of financial returns and increased shareholder wealth. Different aspects of corporate finance include capital budgeting, capital structure, investment analysis and ad hoc projects. Companies will have a department or a few staff members responsible for these activities. These individuals often use information from the accounting department to assess business operations.
Capital budgets are the financial plan for major projects or equipment acquisitions. This process often uses time-value-of-money concepts to assess the future financial returns in current amounts. For example, a corporate finance officer will estimate future cash flows and discount them back to current monetary value using the company’s cost of capital. The officer can then compare the total value of cash earned against the cash paid for the project. Higher cash inflows discounted to current value that are higher than the cash outflows typically represent worthy projects.
A company's capital structure represents the mix of external financing that it uses to pay for projects and other investments. The two most common type of external financing include debt and equity. Debt financing represents loans or cash infusions from lenders, such as banks and credit unions. Equity financing includes any cash placed into the company from investors, whether they are individuals or private equity firms. The interest rate for each of these financing types represents the company’s cost of capital — the money paid in interest for using these funds.
Investment analysis often includes reviews on stocks, bonds or similar items. Corporate finance officers attempt to mitigate or eliminate a company’s risk associated with these investments. Specific formulas — such as the capital asset pricing model — allow the officer to review both individual stocks and groups of stock. Bonds might not need such in-depth analysis; corporate finance officers might use bond ratings for this process. A company’s dividend policy also might fall under this department’s review and analysis procedures.
Ad hoc projects in corporate finance often provide support analysis for major decisions. Accountants can prepare financial data on certain projects or issues, and the corporate finance team can provide analysis for the information. Essentially, any financial reviews that are requested by the upper management might fall under this department’s umbrella. For example, working capital assessments or inventory management might be ad hoc tasks. The type of company or industry can dictate these activities.
