CORPORATE FINANCE

Introduction
In the era of start-ups and entrepreneurship, it is important to understand the
concept of corporate financing. Corporate financing deals with the capital
structure of a firm or corporation. The management of the corporation involved
in corporate finance has to deal with various activities from funding to making
suggestions and taking actions that would increase the value of the company.
Capital restructuring, making investment decisions, accounting, and dealing
with the funding of sources are some of the key aspects of corporate financing.

A financial system is a chain of financial institutions such as banks, stock

exchanges, and insurance companies existing on a firm, national or global level.
Investors, lenders, and borrowers are essential components of a financial
system. These institutions exchange funds amongst themselves for financing
various projects. Financial systems are extremely essential in corporate
financing as they are the institutions that provide funds for financing various
financial projects. A financial system is a robust system containing various rules
and practices that helps in determining which project needs to be financed.

MEANING
Corporate finance is the subfield of finance that deals with how corporations
address funding sources, capital structuring, accounting, and investment
decisions. Corporate finance is often concerned with maximizing shareholder
value through long- and short-term financial planning and the implementation
of various strategies. Corporate finance activities range from capital investment
to tax considerations.

Corporate finance plays a major role in the functioning of a corporation or firm

as they focus on the growth of a corporation by enhancing the overall value and
business of the corporation. The management dealing with corporate finance
takes crucial decisions in the aspects of capital allocation, investment, and
organizing budgets. The management also looks into the amount of capital
needed for acquiring assets. Depending upon the type of asset acquisition,
management looks into whether to do financing by issuing the equity or through
debt. Many times, the management follows both issuing equities as well as debt
to maintain a safe balance because too much debt can increase the risk factor
while diluting the equity of the corporation to a large extent can hinder the
process of growth or increase the valuation of the corporation.

Elements of corporate finance

Capital budgeting
Capital budgeting is a process that assesses the viability of an investment
proposal for determining the potentially profitable corporate financing projects.
In order to determine capital budgeting, a bunch of financial analysts conduct a
comparative analysis of the present and estimated future value of an
investment proposal. After conducting a comparative analysis, the most viable
investment proposal is chosen.

Capital structure
Capital structuring is a method by which a financial entity employs the method
of structuring corporate finance. The capital structure includes equity or debt as
a method for corporate financing. From an investor’s point of view, they want
an optimum mix of debt and equity because it produces a balanced
combination.

Working capital
Working capital is associated with the capital required on a daily basis for
business conduct. An adequate cash flow is maintained by an efficient financial
management company which ensures liquidity in the organization.

Dividend distribution
Companies which are publicly listed are accountable to their shareholders and in
order to serve them well, they give out dividends from time to time. Dividends
are generated from the surplus profit of an organization. An organization can
either distribute the surplus profit amongst its shareholders or it can reinvest
the same amount to look for growth in business operations.
Importance of corporate finance
 Corporate financing manages financial activities by obtaining funds
from the right sources.
 Corporate financing manages financial activities to maximize the return
on investment.
 Corporate financing balances risk and profitability by properly
structuring and budgeting the capital.
 Corporate financing is essential in determining future cash flow.
 Corporate financing strategizes to have an optimum mix of debt and
equity in capital structuring.

Scope of Corporate Finance

 Understanding the financial requirements of your business:-

One of the most relevant scopes of corporate finance is studying the financial needs of
a business. It is crucial for companies to know about their financial position and how
they can raise capital. Corporate finance helps the firms decide whether they should
raise funds in the form of debt or equity. It includes a lot of comparative market
research and in-depth analysis that assists in creating capital raising strategies.

 Investment activities:-

Knowledge of corporate finance is also necessary to plan business investment

strategies. A firm needs to assess its prior investment patterns and the returns
generated over time. It helps them predict where the firm should invest the larger
portion of its capital to keep the risk low. You must know how to select the suitable
classes of assets, feasible revenue model, estimate the profits of an asset, find out its
intrinsic value, and consider several other factors.
 Optimum utilisation of resources:-

Both over and underutilisation of sources of a company’s resources can cause damage.
Corporate finance helps firms decide how much money they should invest in various
resources. For instance, how much should a company pay its employees, how much to
spend on raw material, etc.

 Aids in decision making:-

Majority of the crucial decisions taken in a business-like starting a new project or a

vertical, are driven by the firm’s financial situation. Corporate finance aids the
decision-making process by figuring out the amount of capital needed in a new
venture. Corporate finance also helps firms decide whether they should expand or
diversify their business. It is only feasible if the firm is financially sound.

 Managing contingent situations:-

If there is one thing that we have realised in the past two years is, life is unpredictable.
Contingencies in the market can arise at any time. One of the significant examples of
contingencies that disrupted the corporate sector is the pandemic where firms had to
face losses and cut down their employees’ salaries. Therefore, an important aspect of
corporate finance involves managing your finances for unforeseen situations and risks
in the business sector.

 Beneficial for stakeholders:-

One of the most vital objectives of corporate finance is to protect the stakeholders’
interests. The shareholders invest in shares to earn dividends and increase their returns.
Corporate finance facilitates wise financial decisions by the company management,
leading to high profits for the shareholders. This, in return, makes the corporate entity
trustworthy, thereby encouraging more people to start investing in the company.
Types of corporate financing
Equity Financing:-

It is also called ownership finance, where investors invest their money and get a
certain percentage of ownership in the company. The following are the different
methods of equity financing. The company does not have to repay the money to
its investors in equity financing.

Angel Investing:-

Angel investors are usually high net worth individuals who invest individually or
as a group in startups. They typically offer early age funding to firms and get
royalties or equity of the company in return. Angel investors are also called seed
investors. They are not concerned with the management of the company’s daily
affairs.

IPO:-

Initial Public Offering (IPO) is the process in which a listed company offers its
shares to the public for the first time. The companies usually fix the price of their
shares through the book-building process. They raise money from the public and
allot equity or preference shares.

Venture Capital:-

VCs or Venture Capitalists is generally a fund managed by a professional

investment team experienced in managing a portfolio of different asset classes.
This type of financing is similar to angel investing. Once the angel investment has
happened in the seed stage and the company is attracting further funding rounds,
this is where venture capitalists come in since this is the likely route for startups
to extend funding rounds and get a share of the profit in the subsequent rounds.

Equity Crowdfunding:-

This method of equity financing involves raising capital from various high net
worth investors or investment platforms. The investors get percentage ownership
in the company based on their investment.

Debt Financing:-
When a firm borrows money from external sources, it is called debt financing.
The company has to return the funds raised from various institutions with interest
in debt financing. The following are the most popular types of debt financing:

Bank Loans:-

Companies borrow money from banks, usually for long periods like 5-10 years.
Bank overdraft is another popular mode of debt financing.

Debentures:-

When a company borrows money from the public, it issues debentures bonds.

Merchant Loans:-

Apart from banks, firms also take commercial loans from non-banking financial
institutions.

Conclusion
Corporate financing is one of the most important aspects of developing an
economy. Corporate financing deals with all the major issues of a corporation
such as seeking funds, making investment decisions, capital structuring of the
company, etc.

A financial system is a well-established institution wherein different parts of the

financial system work in collaboration with each other to fund an
entrepreneurial venture, help borrowers and lenders, etc. A financial system is a
well-organized chain of institutions that exchange funds amongst themselves
depending upon the requirements of each segment of the institution. These
systems work in unison to create a chain of financial networks which proves to
be beneficial in developing an economy.