Meaning of Corporate Finance | 2 Decisions that are the Basis of Corporate Finance
Table of Contents
Meaning of Corporate Finance
Finance
The term finance is related to money and money management. It is related to inflow and outflow of money. The success of any business organization depends upon the efficiency with which it is able to generate and use funds.
Henry Ford rightly said, “Money is an arm or leg – use it or lose it.” This statement clearly brings out the significance of finance for the success of a business.
Meaning of Corporate Finance
Corporate finance deals with the raising and using of finance by a corporation. It deals with financing the activities of the corporation, capital structuring, and making investment decisions.
Definition of Corporate Finance
Henry Hoagland expresses the view that ‘‘corporate finance deals primarily with the acquisition and use of capital by a business corporation.’’
The term corporate finance also includes financial planning, the study of capital market, money market, and share market. It also covers capital formation and foreign capital. Even financial organizations and banks play a vital role in corporate financing.
2 Decisions that are the Basis of Corporate Finance
1) Financing Decision
The business firm has access to the capital market to fulfill its financial needs. The firm has multiple choices of sources of financing. The firm can choose whether it wants to raise equity capital or debt capital. A firm can even opt for a bank loan, public deposits, debentures, etc. to raise funds. The finance manager ensures that the firm is well capitalized i.e. they have right amount of capital and that the firm has the right combination of debt and equity.
2) Investment Decision
Once the business firm has gained access to capital, the finance manager has to take a decision regarding the use of the funds in systematic manner so that it will bring maximum return for its owners. For this, the firm has to take into consideration the cost of capital. Once they know the cost of capital, firm can deploy or use the funds in such a way that returns are more than cost of capital.
Finding investments and deploying them successfully in the business is known as investing decision. It is also called as ‘capital budgeting’.
Capital market is a market for long term debt instruments and equity shares. In this market, equity and debt instruments are issued and traded.
Cost of capital is minimum return expected by it’s investors.
