CAREER EDGE

Basics of
Corporate Finance
What they teach you in
B-School
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MEANING
Corporate finance is a subfield that deals with all
aspects of a corporation's financial operations, from the
choice of its funding sources to its capital structure.
Corporate finance's primary goal is to maximise
shareholder value through long-term and short-term
planning and various tactics.
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Basic Principles of
Corporate Finance

Financing Dividend
Principle Principle

Investment Principle
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Investment Principle
This notion applies to choices made with working capital,
such as granting clients credit days, among other
things. By evaluating the return on the investment
decision and comparing it to the cost of capital,
corporate finance also determines whether the
investment or project is feasible.
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Financing Principle
The financing principle ascertains whether the debt-
equity mix is correct or not. Adopting the ideal financing
mix on a long-term or short-term basis must be made
after the optimal financing mix has been identified. Then,
additional elements are considered, including taxes,
choices regarding the financing structure, the risk-
return trade-off, which states that the riskier an asset
is, the higher the projected return, etc.
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Dividend principle
A business grows to a point in its lifecycle where the
cash flows generated exceed the expected cost of
capital. The company must then figure out how to repay
the owners with it. As a result, a decision must be made
as to whether the excess cash should be distributed to
the owners/investors or retained in the business. A
public limited company can choose between paying
dividends and buying back shares.
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Basic Concepts of
Corporate Finance
Corporate finance has an extensive area of discussion.
It includes various concepts and fundamentals. Among
those, a few basic ideas are briefly discussed here.
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Capital Budgeting
A business uses capital budgeting to assess potential
big projects or investments. Examples of projects that
might require capital budgeting before they are
approved or denied include the construction of a new
factory or a significant investment in an outside
enterprise.
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Cost of Capital
The cost of capital is the return a business must
obtain to cover the expense of a capital project,
such as buying new machinery or building a new
structure.

According to the company's preferred or existing

capital structure, the cost of capital includes the
costs of both equity and debt.
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Working Capital
Management
The relationship between a company's short-term
assets and short-term liabilities is part of working
capital management.

The goal of working capital management is to

ensure that a business can continue to operate by
giving it the ability to pay off short-term debt and
upcoming operating costs. The four areas of
working capital management are cash, inventories,
accounts receivable, and payable.
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Measures of Leverage
A company has a certain amount of fixed costs,
known as leverage.

These fixed costs include fixed operating expenses

like equipment or building leases; fixed financing
costs like interest paid on debt. The greater the
leverage, the greater the volatility of the company’s
operating earnings after tax and net income after
tax.
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