Corporate finance is the field of finance dealing with financial decisions that business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize corporate value by minimizing corporate risks.
The fundamentals of corporate finance deal with two aspects of corporate finance:
Short term decisions and methods
Long term decisions and methods
Capital investment decisions are regarded as long term decisions that deal with which project to invest in, whether it is possible to fund the investment with debt or equity, as well as the time when dividend should be paid to the shareholders. The capital investment decisions are associated with capital structure and fixed assets in the long term. These decisions can be categorized into the following types:
1. Investment Decision. The procedure of allocation of resources carried out by the management is termed as capital budgeting.
2. Project valuation. It makes use of such as Discounted Cash Flow Method, Internal Rate of Return, Equivalent annuity and many others.
3. Valuation of flexibility deals with: Real Options Analysis and Decision Tree Analysis.
4. Financing Decision involves Balance Sheet Analysis, Trade-Off Theory etc.
5. Dividend Decision. Basically, dividend is distributed in two forms: share buyback and cash dividends
Contrarily, the short-term decisions may be consolidated under Working Capital Management. This domain addresses the short-term equilibrium between current liabilities and current assets. Here the stress is on management of stocks and inventories, cash, as well as borrowing and loaning on the short-term basis, for example the terms and conditions on which loan is provided to the clients.
The process of Working Capital Management can be categorized into the following types:
Short term financing
Financial Risk Management is vital for...