What is Corporate Finance?



The Traditional Accounting Balance Sheet



The Financial View of the Firm



First Principles & The Big Picture



Corporate Finance is “Common Sense”

•There is nothing earth shattering about any of the first principles that govern corporate finance. After all, arguing that making a business investment that yields 9%, while cost of financing the investment is 10%, which is better than finance costs at 11%.
•Finance managers should recognize if the cost of financing an investment is greater than the return on the investment, then the firm should not make the investment.
•Then firm can then consider what next to do with the free cash flow. Choose another investment option that is more advantageous for the firm, or return the excess capital back to shareholders.

Corporate Finance is Focused

Corporate finance focuses on maximizing the value of a firm. As a result of the this singular objective finance managers can:

•Choose the “correct” investment strategy given various investment decision rules.
•Determine the “correct” mix of debt and equity financing for a specific business
•Examine the “correct” amount of cash that should be returned to shareholders and the “correct” amount of cash to reserve in retained earnings. 


The Focus Changes Across the Life Cycle



Corporate Finance is Universal

•Every business, small or large, public or private, US or emerging market, has to make investment, financing and dividend decisions.
•While the constraints and challenges that firms face can vary dramatically across firms, the first principles do not change.

- A publicly traded firm has greater access to capital markets and a more diversified investor base, may have a much lower cost of debt and equity than a private business, but both should look for the financing mix that minimizes their cost of capital

- A firm in an emerging market may face the greater uncertainty when assessing new investments than a firm in a developed market. Both firms should invest only if they believe they can generate higher returns on their investments than they face their respective, and very different hurdles.











Last modified: Tuesday, August 14, 2018, 8:36 AM