1.

What is the primary objective of corporate finance, and why is it essential for
businesses?
A: Corporate finance is a branch of finance that focuses on how corporations approach
capital structuring, funding sources, investments, and accounting decisions.1 Its primary
goal is to maximize shareholder value while striking a balance between risk and profitability.
Corporate finance is crucial because it enables corporations to manage their financial risks
—by, for example, hedging against stock market or interest rate fluctuations. Enterprises can
also control their exposure to currency risk. In the long run, corporate finance provides the
necessary tools to enable businesses to make sound financial decisions for growth and
success.
2. What is the primary goal of corporate finance, and how does it differ from the goals of
other financial disciplines?
A: While the primary goal of corporate finance is to maximize shareholder wealth, other
financial disciplines may have different objectives. For example, personal finance might
focus on achieving individual financial goals such as retirement planning or debt
management, while public finance may prioritize the allocation of resources for the welfare
of society as a whole. Corporate finance often takes a long-term perspective, focusing on
strategies that can sustainably increase shareholder value over time. In contrast, other
financial disciplines may have shorter-term objectives or different time horizons.
3. What are the main sources of capital for corporations, and how do they differ in terms of
risk and cost?
A: Equity capital represents ownership in the company and is obtained by issuing shares of
stock to investors. Equity investors become shareholders and have a claim on the
company's profits and assets. Debt capital is raised by issuing bonds, loans, or other debt
instruments to investors. Debt holders lend money to the company and receive fixed or
variable interest payments, as well as repayment of the principal amount at maturity. Debt
financing involves contractual obligations to repay the borrowed funds, making it a less risky
form of financing for investors compared to equity. Corporations can also raise capital
internally by retaining a portion of their earnings instead of distributing them to shareholders
as dividends. Retained earnings represent funds that the company can reinvest in its
operations or use to finance growth opportunities. Retained earnings are considered a low-
cost source of capital since there are no direct expenses associated with raising funds
externally. However, using retained earnings may limit the company's ability to pursue
external investment opportunities and can impact shareholder expectations regarding
dividend payments and capital appreciation.

4. Briefly explain five main areas in Corporate Finance.

a. Corporate finance
Corporate finance deals with the financial decisions made by corporations to
maximize shareholder value. This includes capital investment decisions (capital
budgeting), financing decisions (capital structure), and dividend decisions.
b. Investments
 Investments focus on the allocation of resources among different financial assets
to achieve specific financial goals. This includes analyzing securities such as
stocks, bonds, and derivatives to make informed investment decisions.
Investment professionals assess risk-return trade-offs, portfolio diversification,
and asset valuation to optimize investment portfolios and generate returns for
investors.
c. Financial institutions
Financial institutions play a crucial role in the economy by facilitating the flow of
funds between savers and borrowers. This area of finance encompasses various
institutions such as banks, insurance companies, investment banks, and asset
management firms. Financial institutions provide a wide range of financial
services, including lending, investment banking, insurance, wealth management,
and trading activities.
d. International finance
International finance deals with financial transactions and investments that cross
national borders. It includes managing currency exchange risk, international
trade finance, foreign direct investment, and multinational corporate finance.
International finance professionals analyze global economic trends, political
factors, and regulatory environments to navigate the complexities of operating in
multiple countries.
e. Fintech
Fintech (financial technology) is a rapidly growing area that leverages technology
to innovate and improve financial services. Fintech encompasses a wide range of
activities, including digital banking, online lending, payment processing, block
chain technology, robot-advisors, and peer-to-peer lending. Fintech companies
disrupt traditional financial institutions by offering more efficient, accessible, and
user-friendly financial products and services through technological innovation.