Scope, Types & Definition of Corporate Finance

Corporate finance is a branch of finance that focuses on how businesses handle funding, capital accounting, structuring, and investment decisions. Corporate finance is frequently focused on optimising shareholder value through short- and long-term financial planning and strategy implementation. Corporate financial activities include anything from capital investment to tax planning. Corporate finance departments were indeed responsible for managing and overseeing the financial activity and capital investment choices of their companies. These decisions are whether to pursue a planned investment and whether to fund it with equity, debt, or a combination of the two. They even include whether or not dividends should be paid to shareholders, and if so, at what rate. The financial department is also responsible for managing current assets, inventory control and current liabilities.

Types of Corporate Finance

The numerous means of raising capital for a business are referred to as corporate finance types. The following are the two primary types that can help the company raise funds:

• Short Term- Corporate Finance

• Long Term- Corporate Finance

Short-term: Short-term finance refers to a loan given to a corporation for a period of a few months (or a total of one year). The following items are included in a short-term corporate finance loan:

• Financial lease: The financial entity owns the asset until the lease is paid off under this sort of corporate finance. Companies may also have operational control over assets unless full payment is received on time.

• Trade Credit: Trade credit is commonly used in B2B transactions. It is a contract in which customers can acquire any of the things on offer while paying the supplier at a later date.

• Accrual accounts: In this sort of corporate finance, the accrual technique of accounting is used. It records the sale when the invoice is created, as once the money is received.

Corporate finance on a long-term basis- Long-term corporate financing refers to a financial loan or aid that is spread out over a year or longer. The following items are included in a long-term corporate finance loan:

• Debentures: these are a sort of bond, a financial instrument used by large organisations and governments to borrow money at a set rate. Owing to the unavailability of collateral support, the only way to get the principal and interest is to rely on the institution that issued the bonds’ reputation.

• Bank Loan: It is the most prevalent type of funding, and practically every other business uses it to fund its expansion. Depending on their demands, they can choose between medium and long-term financing solutions.

• Floatation: The process of transforming a private business into a public one by issuing public shares. This method of corporate financing assures that funds are obtained from outside sources rather than relying on earnings and new initiatives to grow the company.

Scope of Corporate Finance

The numerous objectives and responsibilities within the corporate financing sector are referred to as the scope of corporate finance. The primary goals are to maximise the company’s long-term growth and wealth development, as outlined below:

Capital budgeting is used to keep costs under control while only allocating funds to the most profitable initiatives.

i) By consolidating the same processes, market analysis can stay up with swiftly shifting trends.

ii)Making decisions on raising cash from the capital market through the most reliable and efficient sources only after conducting extensive market research.In the event of mergers, acquisitions, or takeovers, take on advising roles

iii)Using corporate finance fundamentals to analyse various investment possibilities in order to redeem an ideal mix of the most economical financing instruments.Making decisions to diversify and expand in response to the company’s growth.

Activities of Corporate Finance

The three main activities of Corporate Finance are discussed below:

Investments and Capital Budgeting

Investing and capital budgeting involve deciding where to place the company’s long-term capital assets in order to maximise risk-adjusted returns. This primarily entails deciding whether or not to pursue a certain investment opportunity, which is performed through thorough financial analysis.

A company can determine capital expenditures, forecast cash flows from suggested capital projects, evaluate planned investments to predicted income, and choose which projects to be included in its capital budget by employing financial accounting techniques.

Financial modelling is a technique for estimating the economic consequences of a potential investment and comparing different projects. When comparing projects and selecting the best one, an analyst will frequently utilise the Internal Rate of Return (IRR) in conjunction with Net Present Value (NPV).

Capital Financing

This basic function entails deciding how to best finance the capital investments (described above) using the company’s equity, debt, or a combination of the two. Selling firm stock or issuing debt instruments in the market via investment banks can provide long-term funding for substantial capital expenditures or investments.

Balancing the two sources of finance (equity and debt) should be carefully handled because too much debt can increase the danger of repayment default, while too much equity can dilute earnings and value for initial investors.

Corporate finance specialists must ultimately optimise the company’s capital structure by decreasing its Weighted Average Cost of Capital (WACC) to the lowest level achievable.

Dividends and Return of Capital

This action necessitates corporate executives deciding whether to keep a company’s excess earnings for future investments and operations, or to distribute them to shareholders in the form of share buybacks or dividends.

Retained earnings that aren’t given to shareholders can be used to help a company grow. This is generally the best source of capital because it does not require more debt or diminish the value of equity by offering extra shares.

Finally, if business executives believe they can achieve a higher rate of return on a capital investment than the company’s cost of capital, they should go for it. Otherwise, they should pay dividends or purchase back shares to return extra cash to owners.

Corporate Finance Companies

The finance sector is notorious for long working hours, finance experts are always on the hunt for the best corporate finance organisations to work for. This is not always the case, however, for all corporate finance firms. Some of the most prestigious corporate finance firms where professionals wish to work include:

Edward Jones

Without Edward Jones, the field of investing would be incomplete. The privately held corporation serves nearly seven million investors and operates more offices than any other in the United States. It employs almost 43,000 people at its headquarters in Missouri.

Veterans United Home Loans 

Veterans United Home Loans, ranked third on People Magazine’s list of 50 Companies that Care, assists thousands of military families in acquiring homes and is regarded as a leader in the VA loan market. Fortune Magazine ranked it 27th on its list of the “Best Companies to Work For” in 2017.

Pinnacle Financial Partners 

It is a financial advisory firm based in New York City. In the year 2000, the banking and credit services company was founded. Pinnacle Financial Partners was ranked 16th on American Banker’s 2018 list of the “Best Banks to Work For in the US,” with headquarters in Tennessee and a workforce of over 2,000 workers.

Prime Lending

The banking and credit services company was founded in 1986, and it offers a variety of home loans as well as assistance with the mortgage application process. Marketrac named Prime Lending one of the “Top 10 Purchase Lenders in the Nation” from 2012 to 2017.

Conclusion

Corporate finance is concerned with obtaining funds from the appropriate sources in order to manage day-to-day and long-term financial activities. It plans how a company will use and manage capital in order to maximise value. For managing risk and profitability, proper capital budgeting and structures are critical.

Through capital budgeting tools, a company’s management estimates anticipated cash flows from investment. They identify the most cost-effective funding sources or the optimal debt-to-equity ratio in the capital structure. Working capital requirements are taken into consideration for short-term needs. As a result, we may argue that these tactics secure the organization’s long-term viability. Furthermore, it improves financial statement statistics. As a result, it will maximise value, or more particularly, stock price maximisation.