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Encyclopedia > Corporate finance
Corporate finance

Image File history File links Download high resolution version (1031x740, 688 KB)Midtown Manhattan looking North from the Empire State Building, 2005. ...


Working capital management

Cash conversion cycle
Return on capital
Economic value added
Just In Time
Economic order quantity
Discounts and allowances
Factoring (finance) Corporate finance is a specific area of finance dealing with the financial decisions corporations make and the tools as well as analysis used to make these decisions. ... Cash conversion cycle or CCC, also known as the asset conversion cycle, net operating cycle, working capital cycle or just cash cycle, is used in the financial analysis of a business. ... Return on capital, also known as Return On Invested Capital (ROIC) is defined as NOPLAT / Invested Capital usually expressed as a percentage. ... Economic Value Added (EVA) is an estimate of true economic profit after making corrective adjustments to GAAP accounting, including deducting the opportunity cost of equity capital. ... Just In Time (JIT) is an inventory strategy implemented to improve the return on investment of a business by reducing in-process inventory and its associated costs. ... Economic Order Quantity (also known as the Wilson EOQ Model or simply the EOQ Model) is a model that defines the optimal quantity to order that minimizes total variable costs required to order and hold inventory. ... Discounts and allowances are modifications to the basic price. ... This article is about finance. ...


Capital budgeting

Capital investment decisions
The investment decision
The financing decision
Capital investment decisions The process of determining which potential long-term projects are worth undertaking, by comparing their expected discounted cash flows with their internal rates of return. ... Domestic credit to private sector in 2005 Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. ... Domestic credit to private sector in 2005 Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. ... Domestic credit to private sector in 2005 Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. ... Domestic credit to private sector in 2005 Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. ...


Sections

Managerial finance
Financial accounting
Management accounting
Mergers and acquisitions
Balance sheet analysis
Business plan
Corporate action Managerial Finance is that branch of finance that provide tools for a companys financial managers. ... Financial accountancy (or financial accounting) is the branch of accountancy concerned with the preparation of financial statements for decision makers, such as stockholders, suppliers, banks, government agencies, owners, and other stakeholders. ... Management accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis in making informed business decisions that would allow them to be better equipped in their management and control functions. ... Acquisition redirects here. ... This article needs additional references or sources for verification. ... This is a summary article that covers many topics related to business plans - their content, how they are used, legal issues, and spoofs of business plans, among others. ... A corporate action is an event taken by a public company that has a direct financial impact on of its shareholders. ...


Finance series

Financial market
Financial market participants
Corporate finance
Personal finance
Public finance
Banks and Banking
Financial regulation Finance studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects. ... This article does not cite any references or sources. ... There are two basic financial market participant catagories, Investor vs. ... Personal finance is the application of the principles of finance to the monetary decisions of an individual or family unit. ... This article does not cite any references or sources. ... For other uses, see Bank (disambiguation). ... Financial supervision is government supervision of financial institutions by regulators. ...


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Domestic credit to private sector in 2005
Domestic credit to private sector in 2005

Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize corporate value while reducing the firm's financial risks. Although it is in principle different from managerial finance which studies the financial decisions of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms. Image File history File links Size of this preview: 800 × 351 pixelsFull resolution (1425 × 625 pixel, file size: 58 KB, MIME type: image/png)This bubble map shows the global distribution of credit available to private sector in 2005 as a percentage of the top market (USA - $24,263,947... Image File history File links Size of this preview: 800 × 351 pixelsFull resolution (1425 × 625 pixel, file size: 58 KB, MIME type: image/png)This bubble map shows the global distribution of credit available to private sector in 2005 as a percentage of the top market (USA - $24,263,947... Finance studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects. ... For other uses, see Corporation (disambiguation). ... Maximization is an economics theory, that refers to individuals or societies gaining the maximum amount out of the resources they have available to them. ... In finance, valuation is the process of estimating the market value of a financial asset or liability. ... This article is about the concept of risk. ... Managerial Finance is that branch of finance that provide tools for a companys financial managers. ...


The discipline can be divided into long-term and short-term decisions and techniques. Capital investment decisions are long-term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders. On the other hand, the short term decisions can be grouped under the heading "Working capital management". This subject deals with the short-term balance of current assets and current liabilities; the focus here is on managing cash, inventories, and short-term borrowing and lending (such as the terms on credit extended to customers). // Definition Investment or investing is a term with several closely-related meanings in finance and economics. ... At the start of a business, owners put some funding into the business to finance assets. ... For other uses, see Debt (disambiguation). ... A dividend is the distribution of profits to a companys shareholders. ... A shareholder or stockholder is an individual or company (including a corporation), that legally owns one or more shares of stock in a joint stock company. ... Corporate finance is a specific area of finance dealing with the financial decisions corporations make and the tools as well as analysis used to make these decisions. ... In business and accounting an asset is anything owned, whether in possession or by right to take possession, by a person or a group acting together, e. ... In the most general sense, a liability is anything that is a hinderance, or puts one at a disadvantage. ... Inventory is a list of goods and materials, or those goods and materials themselves, held available in stock by a business. ...


The terms Corporate finance and Corporate financier are also associated with investment banking. The typical role of an investment banker is to evaluate investment projects for a bank to make investment decisions. Investment banks help companies and governments (or their agencies) raise money by issuing and selling securities in the capital markets (both equity and debt). ... An investment banker works for an investment bank. ...

Contents

Capital investment decisions

Capital investment decisions[1] are long-term corporate finance decisions relating to fixed assets and capital structure. Decisions are based on several inter-related criteria. Corporate management seeks to maximize the value of the firm by investing in projects which yield a positive net present value when valued using an appropriate discount rate. These projects must also be financed appropriately. If no such opportunities exist, maximizing shareholder value dictates that management return excess cash to shareholders. Capital investment decisions thus comprise an investment decision, a financing decision, and a dividend decision. Fixed asset is an accountancy term for assets and property which cannot easily be converted into cash. ... Gearing ratios redirects here. ... It has been suggested that this article or section be merged with Discounted cash flow. ...


The investment decision

Main article: Capital budgeting

Management must allocate limited resources between competing opportunities ("projects") in a process known as capital budgeting. Making this capital allocation decision requires estimating the value of each opportunity or project: a function of the size, timing and predictability of future cash flows. The process of determining which potential long-term projects are worth undertaking, by comparing their expected discounted cash flows with their internal rates of return. ... The process of determining which potential long-term projects are worth undertaking, by comparing their expected discounted cash flows with their internal rates of return. ...


Project valuation

Further information: stock valuation and fundamental analysis

In general, each project's value will be estimated using a discounted cash flow (DCF) valuation, and the opportunity with the highest value, as measured by the resultant net present value (NPV) will be selected (see Fisher separation theorem; John Burr Williams: Theory). This requires estimating the size and timing of all of the incremental cash flows resulting from the project. These future cash flows are then discounted to determine their present value (see Time value of money). These present values are then summed, and this sum net of the initial investment outlay is the NPV. There are several methods used to value companies and their stocks. ... Fundamental analysis of a business involves analyzing its income statement, financial statements and health, its management and competitive advantages, and its competitors and markets. ... In finance, the discounted cash flow (or DCF) approach describes a method to value a project, company, or financial asset using the concepts of the time value of money. ... It has been suggested that this article or section be merged with Discounted cash flow. ... The Fisher separation theorem in economics asserts that the objective of a firm will be the maximization of its present value, regardless of the preferences of its owners. ... John Burr Willams (1899 - 1989) was a founder and developer of the fundamentalist theory of asset valuation [1], and was one of the first economists to view stock prices as determined by “intrinsic value”. He is best known for his 1938 text The Theory of Investment Value, based on his... In finance, discounting is the process of finding the current value of an amount of cash at some future date, and along with compounding cash from the basis of time value of money calculations. ... The present value of a single or multiple future payments (known as cash flows) is the nominal amounts of money to change hands at some future date, discounted to account for the time value of money, and other factors such as investment risk. ... The time value of money is the premise that an investor prefers to receive a payment of a fixed amount of money today, rather than an equal amount in the future, all else being equal. ... It has been suggested that this article or section be merged with Discounted cash flow. ...


The NPV is greatly influenced by the discount rate. Thus selecting the proper discount rate—the project "hurdle rate"—is critical to making the right decision. The hurdle rate is the minimum acceptable return on an investment—i.e. the project appropriate discount rate. The hurdle rate should reflect the riskiness of the investment, typically measured by volatility of cash flows, and must take into account the financing mix. Managers use models such as the CAPM or the APT to estimate a discount rate appropriate for a particular project, and use the weighted average cost of capital (WACC) to reflect the financing mix selected. (A common error in choosing a discount rate for a project is to apply a WACC that applies to the entire firm. Such an approach may not be appropriate where the risk of a particular project differs markedly from that of the firm's existing portfolio of assets.) It has been suggested that this article or section be merged with Discounted cash flow. ... The discount rate is a financial concept based on the future cash flow in lieu of the present value of the cash flow. ... In finance, the return on investment (ROI) or just return is a calculation used to determine whether a proposed investment is wise, and how well it will repay the investor. ... An estimation of the CAPM and the Security Market Line (purple) for the Dow Jones Industrial Average over the last 3 years for monthly data. ... Volatility most frequently refers to the standard deviation of the change in value of a financial instrument with a specific time horizon. ... An estimation of the CAPM and the Security Market Line (purple) for the Dow Jones Industrial Average over the last 3 years for monthly data. ... Arbitrage pricing theory (APT), in Finance, is a general theory of asset pricing, that has become influential in the pricing of shares. ... The weighted average cost of capital (WACC) is used in finance to measure a firms cost of capital. ...


In conjunction with NPV, there are several other measures used as (secondary) selection criteria in corporate finance. These are visible from the DCF and include payback period, IRR, Modified IRR, equivalent annuity, capital efficiency, and ROI; see list of valuation topics. It has been suggested that this article or section be merged with Discounted cash flow. ... Decision making is the cognitive process of selecting a course of action from among multiple alternatives. ... Payback period in business and economics refers to the period of time required for the return on an investment to repay the sum of the original investment. ... The internal rate of return (IRR) is a capital budgeting method used by firms to decide whether they should make long-term investments. ... Modified Internal Rate of Return (MIRR) is a financial measure used to determine the attractiveness of an investment. ... Equivalent Annual Cost (EAC) is the cost per year of owning an asset over its entire lifespan. ... In finance, the return on investment (ROI) or just return is a calculation used to determine whether a proposed investment is wise, and how well it will repay the investor. ... Topics in finance include: // Finance an overview Arbitrage Capital (economics) Capital asset pricing model Cash flow Cash flow matching Debt Default Consumer debt Debt consolidation Debt settlement Credit counseling Bankruptcy Debt diet Debt-snowball method Discounted cash flow Financial capital Funding Financial modeling Entrepreneur Entrepreneurship Fixed income analysis Gap financing...


Valuing flexibility

In many cases, for example R&D projects, a project may open (or close) paths of action to the company, but this reality will not typically be captured in a strict NPV approach. Management will therefore (sometimes) employ tools which place an explicit value on these options. So, whereas in a DCF valuation the most likely or average or scenario specific cash flows are discounted, here the “flexibile and staged nature” of the investment is modelled, and hence "all" potential payoffs are considered. The difference between the two valuations is the "option value" inherent in the project. In corporate finance, real options analysis applies put option and call option valuation techniques to capital budgeting decisions. ... In operations research, specifically in decision analysis, a decision tree is a decision support tool that uses a graph or model of decisions and their possible consequences, including chance event outcomes, resource costs, and utility. ... The phrase research and development (also R and D or R&D) has a special commercial significance apart from its conventional coupling of research and technological development. ... In probability theory the expected value (or mathematical expectation) of a random variable is the sum of the probability of each possible outcome of the experiment multiplied by its payoff (value). Thus, it represents the average amount one expects as the outcome of the random trial when identical odds are... Scenario planning or Scenario thinking is a strategic planning method that some organizations use to make flexible long-term plans. ... A mathematical model is an abstract model that uses mathematical language to describe the behaviour of a system. ... In finance, moneyness is a measure of the degree to which a derivative security is likely to have positive monetary value at its expiration. ...


The two most common tools are Decision Tree Analysis (DTA) and Real options analysis: In operations research, specifically in decision analysis, a decision tree is a decision support tool that uses a graph or model of decisions and their possible consequences, including chance event outcomes, resource costs, and utility. ... In corporate finance, real options analysis applies put option and call option valuation techniques to capital budgeting decisions. ...

  • The DTA approach attempts to capture flexibility by incorporating likely events and consequent management decisions into the valuation. In the decision tree, each management decision in response to an "event" generates a "branch" or "path" which the company could follow. (For example, management will only proceed with stage 2 of the project given that stage 1 was successful; stage 3, in turn, depends on stage 2. In a DCF model, on the other hand, there is no "branching" - each scenario must be modelled separately.) The highest value path (probability weighted) is regarded as representative of project value
  • The real options approach is used when the value of a project is contingent on the value of some other asset or underlying variable. (For example, the viability of a mining project is contingent on the price of gold; if the price is too low, management will abandon the mining rights, if sufficiently high, management will develop the ore body. Again, a DCF valuation would capture only one of these outcomes.) Here, using financial option theory as a framework, the decision to be taken is identified as corresponding to either a call option or a put option - valuation is then via the Binomial model or, less often for this purpose, via Black Scholes; see Contingent claim valuation. The "true" value of the project is then the NPV of the "most likely" scenario plus the option value.

In probability theory, an event is a set of outcomes (a subset of the sample space) to which a probability is assigned. ... Decision making is the cognitive process of selecting a course of action from among multiple alternatives. ... In operations research, specifically in decision analysis, a decision tree is a decision support tool that uses a graph or model of decisions and their possible consequences, including chance event outcomes, resource costs, and utility. ... Probability is the likelihood that something is the case or will happen. ... A real option is the right, but not the obligation, to undertake some business decision, typically the option to make a capital investment. ... Topics in finance include: // Finance an overview Arbitrage Capital (economics) Capital asset pricing model Cash flow Cash flow matching Debt Default Consumer debt Debt consolidation Debt settlement Credit counseling Bankruptcy Debt diet Debt-snowball method Discounted cash flow Financial capital Funding Financial modeling Entrepreneur Entrepreneurship Fixed income analysis Gap financing... In general, the economic value of something is how much a product or service is worth to someone relative to other things (often measured in money). ... In finance, an underlying is an investment from which a derivative security is derived. ... Economic geology is concerned with earth materials that can be utilized for economic and/or industrial purposes. ... This article is about mineral extractions. ... GOLD refers to one of the following: GOLD (IEEE) is an IEEE program designed to garner more student members at the university level (Graduates of the Last Decade). ... Mineral rights, mining rights, oil rights or drilling rights, are the rights to remove minerals, oil, or sometimes water, that may be contained in and under some land. ... Underground hard rock mining refers to various underground mining techniques used to excavate hard minerals such as those containing metals like gold, copper, zinc, nickel and lead or gems such as diamonds. ... For other uses, see Ore (disambiguation). ... This article is about options traded in financial markets. ... This article does not cite any references or sources. ... A put option (sometimes simply called a put) is a financial contract between two parties, the buyer and the writer of the option. ... In finance, the binomial options model provides a generalisable numerical method for the valuation of options. ... The Black-Scholes model, often simply called Black-Scholes, is a model of the varying price over time of financial instruments, and in particular stocks. ... Topics in finance include: // Finance an overview Arbitrage Capital (economics) Capital asset pricing model Cash flow Cash flow matching Debt Default Consumer debt Debt consolidation Debt settlement Credit counseling Bankruptcy Debt diet Debt-snowball method Discounted cash flow Financial capital Funding Financial modeling Entrepreneur Entrepreneurship Fixed income analysis Gap financing...

Quantifying uncertainty

Further information: Monte Carlo methods in finance

Given the uncertainty inherent in project forecasting and valuation, analysts will wish to assess the sensitivity of project NPV to the various inputs to the DCF model. In a typical sensitivity analysis the analyst will vary one key factor, while ceteris paribus holding constant all other inputs. The sensitivity of NPV to a change in that factor is then observed (calculated as Δ NPV / Δ factor). For example, the analyst will set annual revenue growth rates at 5% for "Worst Case", 10% for "Likely Case" and 25% for "Best Case" - and produce three corresponding NPVs. In the field of financial mathematics, many problems, for instance the problem of finding the arbitrage-free value of a particular derivative, boil down to the computation of a particular integral. ... “Uncertain” redirects here. ... It has been suggested that What-if analysis be merged into this article or section. ... Ceteris paribus is a Latin phrase, literally translated as with other things [being] the same, and usually rendered in English as all other things being equal. ... For the tax agency in Ireland of the same name, see Revenue Commissioners. ... See economic growth Growth rate (group theory) Population growth rate This is a disambiguation page — a navigational aid which lists other pages that might otherwise share the same title. ...


Using a related technique, analysts may also run scenario based forecasts so as to observe the value of the project under various outcomes. Under this technique, a scenario comprises a particular outcome for economy-wide, "global" factors (exchange rates, commodity prices) as well as for company-specific factors (revenue growth rates, unit costs). Here, extending the example above, key inputs in addition to growth are also adjusted, and NPV is calculated for the various scenarios. Analysts then plot these results to produce a "value-surface" (or even a "value-space"), where NPV is a function of several variables. Another application of this methodology is to determine an "unbiased NPV", where management determines a (subjective) probability for each scenario and the NPV for the project is then the probability-weighted average of the various scenarios. Note that for scenario based analysis, the various combinations of inputs must be internally consistent, whereas for the sensitivity approach these need not be so. Scenario planning or Scenario thinking is a strategic planning method that some organizations use to make flexible long-term plans. ... This article does not cite any references or sources. ... Average-Cost Method Under the average-cost method, it is assumed that the cost of inventory is based on the average cost of the goods available for sale during the period. ... An open surface with X-, Y-, and Z-contours shown. ... Around 300 BC, the Greek mathematician Euclid laid down the rules of what has now come to be called Euclidean geometry, which is the study of the relationships between angles and distances in space. ... In statistics, given a set of data, X = { x1, x2, ..., xn} and corresponding weights, W = { w1, w2, ..., wn} the weighted mean is calculated as Note that if all the weights are equal, the weighted mean is the same as the arithmetic mean. ...


A further advancement is to construct stochastic or probabilistic financial models - as opposed to the traditional static and deterministic models as above. For this purpose, the most common method is to use Monte Carlo simulation to analyze the project’s NPV (introduced to finance by David B. Hertz in 1964). Here, the cash flow components that are (heavily) impacted by uncertainty are simulated, mathematically reflecting their "random characteristics". The simulation produces several thousand trials (in contrast to the scenario approach above) and outputs a histogram of project NPV. The average NPV of the potential investment - as well as its volatility and other sensitivities - is then observed. (Typically, an add-in such as Crystal Ball is used to run simulations in spreadsheet based DCF models.) Stochastic, from the Greek stochos or goal, means of, relating to, or characterized by conjecture; conjectural; random. ... The word probability derives from the Latin probare (to prove, or to test). ... The term deterministic may refer to: the more general notion of determinism from philosophy, see determinism a type of algorithm as discussed in computer science, see deterministic algorithm scientific determinism as used by Karl Popper and Stephen Hawking deterministic system in mathematics deterministic system in philosophy deterministic finite state machine... Monte Carlo methods are algorithms for solving various kinds of computational problems by using random numbers (or more often pseudo-random numbers), as opposed to deterministic algorithms. ... For the histogram used in digital image processing, see Color histogram. ... Volatility most frequently refers to the standard deviation of the change in value of a financial instrument with a specific time horizon. ... A plugin (plug-in, addin, add-in, addon or add-on) is a computer program that interacts with a main (or host) application (a web browser or an email program, for example) to provide a certain, usually very specific, function on demand. Sometimes, a plugin is used to separate the... Screenshot of a spreadsheet under OpenOffice A spreadsheet is a rectangular table (or grid) of information, often financial information. ...


Here, continuing the above example, instead of assigning three discrete values to revenue growth, the analyst would assign an appropriate probability distribution (commonly triangular or beta). This distribution - and that of the other sources of uncertainty - would then be "sampled" repeatedly so as to generate the several thousand realistic (but random) scenarios, and the output is a realistic, representative set of valuations. The resultant statistics (average NPV and standard deviation of NPV) will be a more accurate mirror of the project's "randomness" than the variance observed under the traditional scenario based approach. A probability distribution describes the values and probabilities that a random event can take place. ... In probability theory and statistics, the triangular distribution is a continuous probability distribution with lower limit a, mode c and upper limit b. ... In probability theory and statistics, the beta distribution is a continuous probability distribution with the probability density function (pdf) defined on the interval [0, 1]: where α and β are parameters that must be greater than zero and B is the beta function. ... Averages redirects here. ... In probability and statistics, the standard deviation of a probability distribution, random variable, or population or multiset of values is a measure of the spread of its values. ...


The financing decision

Main article: Capital structure

Achieving the goals of corporate finance requires that any corporate investment be financed appropriately. As above, since both hurdle rate and cash flows (and hence the riskiness of the firm) will be affected, the financing mix can impact the valuation. Management must therefore identify the "optimal mix" of financing—the capital structure that results in maximum value. (See Balance sheet, WACC, Fisher separation theorem; but, see also the Modigliani-Miller theorem.) Gearing ratios redirects here. ... This article needs additional references or sources for verification. ... The weighted average cost of capital (WACC) is used in finance to measure a firms cost of capital. ... The Fisher separation theorem in economics asserts that the objective of a firm will be the maximization of its present value, regardless of the preferences of its owners. ... The Modigliani-Miller theorem (of Franco Modigliani, Merton Miller) forms the basis for modern thinking on capital structure. ...


The sources of financing will, generically, comprise some combination of debt and equity. Financing a project through debt results in a liability that must be serviced—and hence there are cash flow implications regardless of the project's success. Equity financing is less risky in the sense of cash flow commitments, but results in a dilution of ownership and earnings. The cost of equity is also typically higher than the cost of debt (see CAPM and WACC), and so equity financing may result in an increased hurdle rate which may offset any reduction in cash flow risk. For alternative meanings, see bond (a disambiguation page). ... Equity investment generally refers to the buying and holding of shares of stock on a stock market by individuals and funds in anticipation of income from dividends and capital gain as the value of the stock rises. ... In the most general sense, a liability is anything that is a hindrance, or puts individuals at a disadvantage. ... An estimation of the CAPM and the Security Market Line (purple) for the Dow Jones Industrial Average over the last 3 years for monthly data. ... The weighted average cost of capital (WACC) is used in finance to measure a firms cost of capital. ...


Management must also attempt to match the financing mix to the asset being financed as closely as possible, in terms of both timing and cash flows. This article is about the business definition. ...


One of the main theories of how firms make their financing decisions is the Pecking Order Theory, which suggests that firms avoid external financing while they have internal financing available and avoid new equity financing while they can engage in new debt financing at reasonably low interest rates. Another major theory is the Trade-Off Theory in which firms are assumed to trade-off the Tax Benefits of debt with the Bankruptcy Costs of debt when making their decisions. An emerging area in finance theory is Right-financing whereby investment banks and corporations can enhance investment return and company value over time by determining the right investment objectives, policy framework, institutional structure, source of financing (debt or equity) and expenditure framework within a given economy and under given market conditions. One last theory about this decision is the Market timing hypothesis which states that firms look for the cheaper type of financing regardless of their current levels of internal resources, debt and equity. The Pecking Order Theory was developed by Stewart C. Myers in 1984. ... In the theory of capital structure, External financing is the phrase used to describe funds that firms obtain from outside of the firm. ... Internal Financing Funds produced from a business operations, as opposed to external financing, such as the issuance of debt or equity. ... An interest rate is the rental price of money. ... The Trade-Off Theory of Capital Structure is a theory in the realm of Financial Economics about the corporate finance choices of corporations. ... In the context of corporate finance, the Tax Benefits of Debt or Tax Advantage of Debt refers to the fact that from a tax perspective it is cheaper for firms and investors to finance with debt than with equity. ... Within the theory of corporate finance, Bankruptcy Costs of Debt are the increased costs of financing with debt instead of equity that result from a higher probability of bankruptcy. ... The concept of right-financing was coined by English Political Economist Dr. Peter Middlebrook to highlight the importance of adopting the appropriate policy, institutional and financial support mechanisms to maximize sustainable returns on both public and private investments over time. ... The Market Timing Hypothesis is a theory about how firms and corporations in the economy decide whether to finance their investment with equity or with debt instruments. ...


The dividend decision

Main article: The Dividend Decision
 The dividend is calculated mainly on the basis of the company's unappropriated profit and its business prospects for the coming year. If there are no NPV positive opportunities, i.e. where returns exceed the hurdle rate, then management must return excess cash to investors. These free cash flows comprise cash remaining after all business expenses have been met. 

This is the general case, however there are exceptions. For example, investors in a "Growth stock", expect that the company will, almost by definition, retain earnings so as to fund growth internally. In other cases, even though an opportunity is currently NPV negative, management may consider “investment flexibility” / potential payoffs and decide to retain cash flows; see above and Real options. The Dividend Decision, in Corporate finance, is a decision made by the directors of a company. ... This article or section does not cite any references or sources. ... In finance, the return on investment (ROI) or just return is a calculation used to determine whether a proposed investment is wise, and how well it will repay the investor. ... Equity investment generally refers to the buying and holding of shares of stock on a stock market by individuals and funds in anticipation of income from dividends and capital gain as the value of the stock rises. ... This article does not cite any references or sources. ... Growth Stocks in finance, are stocks that appreciate in value and yield a high return on equity (ROE). ... Domestic credit to private sector in 2005 Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. ... A real option is the right, but not the obligation, to undertake some business decision, typically the option to make a capital investment. ...


Management must also decide on the form of the distribution, generally as cash dividends or via a share buyback. There are various considerations: where shareholders pay tax on dividends, companies may elect to retain earnings, or to perform a stock buyback, in both cases increasing the value of shares outstanding; some companies will pay "dividends" from stock rather than in cash. (See Corporate action.) Today it is generally accepted that dividend policy is value neutral (see Modigliani-Miller theorem). It has been suggested that ex-dividend date be merged into this article or section. ... A treasury stock or reacquired stock is stock which is bought back by the issuing company, reducing the amount of outstanding stock on the open market (open market including insiders holdings). ... Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        A dividend tax is an income tax on dividend payments to... A treasury stock or reacquired stock is stock which is bought back by the issuing company, reducing the amount of outstanding stock on the open market (open market including insiders holdings). ... A corporate action is an event taken by a public company that has a direct financial impact on of its shareholders. ... The Modigliani-Miller theorem (of Franco Modigliani, Merton Miller) forms the basis for modern thinking on capital structure. ...


Working capital management

Main article: Working capital

Decisions relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship between a firm's short-term assets and its short-term liabilities. The goal of Working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses. Domestic credit to private sector in 2005 Working capital (also known as net working capital) is a financial metric which represents the amount of day-by-day operating liquidity available to a business. ... Domestic credit to private sector in 2005 Working capital (also known as net working capital) is a financial metric which represents the amount of day-by-day operating liquidity available to a business. ... This article is about the business definition. ... In accounting, current liabilities are considered liabilities of the business that are due within the fiscal year. ... Operations management is an area of business that is concerned with the production of goods and services, and involves the responsibility of ensuring that business operations are efficient and effective. ...


Decision criteria

Working capital is the amount of capital which is readily available to an organization. That is, working capital is the difference between resources in cash or readily convertible into cash (Current Assets) and cash requirements (Current Liabilities). So the decisions relating to working capital are always current decisions, i.e., short term decisions.


The short term decisions of the firm are similar to those of long term in terms of risk and return, but they differ in many other ways like time factor, discounting consideration, liquidity etc. So these decisions are not taken on the same basis as long term decisions. These decisions have different criteria like cash flow and profitability.

  • The most important critreon for making shor term decisons is cash flows. And the best measure of cash flow is net operating cycle or cash conversion cycle. It represents the time difference between cash payment for raw materials and cash collection for sales. Another aspect of cash conversion cycle is gross operating cycle which is same as net operating cycle except the fact that it does not take into account the creditors deferral period. Cash conversion cycle indicates the firm's ability to convert its resources into cash. Because this number effectively corresponds to the time that the firm's cash is tied up in operations and unavailable for other activities, management generally aims at a low net count.
  • In this context, the most useful measure of profitability is Return on capital (ROC). The result is shown as a percentage, determined by dividing relevant income for the 12 months by capital employed; Return on equity (ROE) shows this result for the firm's shareholders. Firm value is enhanced when, and if, the return on capital, which results from working capital management, exceeds the cost of capital, which results from capital investment decisions as above. ROC measures are therefore useful as a management tool, in that they link short-term policy with long-term decision making. See Economic value added (EVA).

Return on capital, also known as Return On Invested Capital (ROIC) is defined as NOPLAT / Invested Capital usually expressed as a percentage. ... Return on Equity (ROE, Return on average common equity) measures the rate of return on the ownership interest (shareholders equity) of the common stock owners. ... The cost of capital for a firm is a weighted sum of the cost of equity and the cost of debt (see the financing decision). ... Economic Value Added (EVA) is an estimate of true economic profit after making corrective adjustments to GAAP accounting, including deducting the opportunity cost of equity capital. ...

Management of working capital

Guided by the above criteria, management will use a combination of policies and techniques for the management of working capital. These policies aim at managing the current assets (generally cash and cash equivalents, inventories and debtors) and the short term financing, such that cash flows and returns are acceptable. This article is about the business definition. ... For other uses, see Cash (disambiguation). ... Cash and cash equivalents are the most liquid asset found within the asset portion of a companys balance sheet. ... Inventory is a list of goods and materials, or those goods and materials themselves, held available in stock by a business. ... In economics a debtor (or a borrower) owes money to a creditor. ...

  • Cash management. Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs.
  • Inventory management. Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials - and minimizes reordering costs - and hence increases cash flow; see Supply chain management; Just In Time (JIT); Economic order quantity (EOQ); Economic production quantity (EPQ).
  • Debtors management. Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa); see Discounts and allowances.
  • Short term financing. Identify the appropriate source of financing, given the cash conversion cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring".

In United States banking, cash management, or treasury management is a marketing term for certain services offered primarily to larger business customers. ... Supply chain management (SCM) is the process of planning, implementing, and controlling the operations of the supply chain as efficiently as possible. ... Just In Time (JIT) is an inventory strategy implemented to improve the return on investment of a business by reducing in-process inventory and its associated costs. ... Economic Order Quantity (also known as the Wilson EOQ Model or simply the EOQ Model) is a model that defines the optimal quantity to order that minimizes total variable costs required to order and hold inventory. ... Economic Production Quantity model (also known as the EPQ model) is an extension of the Economic Order Quantity model. ... Credit as a financial term, used in such terms as credit card, refers to the granting of a loan and the creation of debt. ... This page includes English translations of several Latin phrases and abbreviations such as . ... Discounts and allowances are modifications to the basic price. ... For other uses, see Loan (disambiguation). ... This article is about the financial term. ...

Financial risk management

Risk management is the process of measuring risk and then developing and implementing strategies to manage that risk. Financial risk management focuses on risks that can be managed ("hedged") using traded financial instruments (typically changes in commodity prices, interest rates, foreign exchange rates and stock prices). Financial risk management will also play an important role in cash management. Financial risk management is the practice of creating economic value in a firm by using financial instruments to manage exposure to risk, particularly credit and market risk. ... For non-business risks, see risk or the disambiguation page risk analysis. ... For the Parker Brothers board game, see Risk (game) For other uses, see Risk (disambiguation). ... Financial risk management is the practice of creating economic value in a firm by using financial instruments to manage exposure to risk, particularly credit and market risk. ... In finance, a hedge is an investment that is taken out specifically to reduce or cancel out the risk in another investment. ... Financial instruments package financial capital in readily tradeable forms - they do not exist outside the context of the financial markets. ... This article does not cite any references or sources. ... An interest rate is the price a borrower pays for the use of money he does not own, and the return a lender receives for deferring his consumption, by lending to the borrower. ... In finance, the exchange rate (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specifies how much one currency is worth in terms of the other. ... For other uses, see Stock (disambiguation). ... For other uses, see Cash (disambiguation). ...


This area is related to corporate finance in two ways. Firstly, firm exposure to business risk is a direct result of previous Investment and Financing decisions. Secondly, both disciplines share the goal of creating, or enhancing, firm value. All large corporations have risk management teams, and small firms practice informal, if not formal, risk management. In general, the economic value of something is how much a product or service is worth to someone relative to other things (often measured in money). ...


Derivatives are the instruments most commonly used in Financial risk management. Because unique derivative contracts tend to be costly to create and monitor, the most cost-effective financial risk management methods usually involve derivatives that trade on well-established financial markets. These standard derivative instruments include options, futures contracts, forward contracts, and swaps. Derivatives traders at the Chicago Board of Trade. ... A contract is a legally binding exchange of promises or agreement between parties that the law will enforce. ... In finance, financial markets facilitate: The raising of capital (in the capital markets); The transfer of risk (in the derivatives markets); and International trade (in the currency markets). ... This article is about options traded in financial markets. ... In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. ... A forward contract is an agreement between two parties to buy or sell an asset (which can be of any kind) at a pre-agreed future point in time. ... For the Thoroughbred horse racing champion, see: Swaps (horse). ...

See: Financial engineering; Financial risk; Default (finance); Credit risk; Interest rate risk; Liquidity risk; Market risk; Operational risk; Volatility risk; Settlement risk.

Financial engineering is the application of science-based mathematical and statistical models to make a better decision about managing financial risks, investing, borrowing, lending, and saving. ... In essence financial risk is any risk associated with money. ... In finance, default occurs when a debtor has not met its legal obligations according to the debt contract, e. ... Credit risk is the risk of loss due to a debtors non-payment of a loan or other line of credit (either the principal or interest (coupon) or both). ... Interest rate risk is the risk that the relative value of an interest-bearing asset, such as a loan or a bond, will worsen due to an interest rate increase. ... Liquidity risk arises from situations in which a party interested in trading an asset cannot do it because nobody in the market wants to trade that asset. ... Market risk is the risk that the value of an investment will decrease due to moves in market factors. ... According to §644 of International Convergence of Capital Measurement and Capital Standards, known as Basel II, operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. ... Volatility risk in financial markets is the likelihood of fluctuations in the exchange rate of currencies. ... Settlement risk, also known as the Herstatt risk is the risk that a counterparty does not deliver security or its value in cash as per agreement when the security was traded after other counterparty or counterparties have delivered security or cash value as per the trade agreement. ...

Relationship with other areas in finance

Investment banking

Use of the term “corporate finance” varies considerably across the world. In the United States it is used, as above, to describe activities, decisions and techniques that deal with many aspects of a company’s finances and capital. In the United Kingdom and Commonwealth countries, the terms “corporate finance” and “corporate financier” tend to be associated with investment banking - i.e. with transactions in which capital is raised for the corporation.[2] The Commonwealth of Nations as of 2007 Headquarters Marlborough House, London, UK Official languages English Membership 53 sovereign states Leaders  -  Queen Elizabeth II  -  Secretary-General Kamalesh Sharma Appointed 24 November 2007 Establishment  -  Balfour Declaration 18 November 1926   -  Statute of Westminster 11 December 1931   -  London Declaration 28 April 1949  Area  -  Total... Investment banks help companies and governments (or their agencies) raise money by issuing and selling securities in the capital markets (both equity and debt). ...


Personal and public finance

Corporate finance utilizes tools from almost all areas of finance. Some of the tools developed by and for corporations have broad application to entities other than corporations, for example, to partnerships, sole proprietorships, not-for-profit organizations, governments, mutual funds, and personal wealth management. But in other cases their application is very limited outside of the corporate finance arena. Because corporations deal in quantities of money much greater than individuals, the analysis has developed into a discipline of its own. It can be differentiated from personal finance and public finance. Personal finance is the application of the principles of finance to the monetary decisions of an individual or family unit. ... This article does not cite any references or sources. ...


Related Professional Qualifications

Qualifications related to the field include:

Master of Science in Finance MSF is typically a one-year, non-thesis graduate program designed to prepare graduates for careers in financial analysis, investment management and corporate finance. ... Chartered Financial Analyst (CFA) is a professional designation offered by the CFA Institute (formerly known as AIMR) to financial analysts who complete a series of three examinations and work for at least four years in the investment decision making process. ... Certified International Investment Analyst (CIIA) is a designation offered by the Association of Certified International Investment Analysts (ACIIA) to professional financial analysts; candidates may be financial analysts, portfolio managers and or investment advisors. ... The Association of Corporate Treasurers (or ACT for short) was founded in 1979. ... CMA Certified and Chartered Market Analyst ™ Financial and Market Analysis professional designation offered by the AAFM ™ American Academy of Financial Management™ Also known as the FAD Financial Analyst Designate credential. ... MFC may stand for: In biology and the human anatomy: Medial Femoral Condyle Medial (Pre)Frontal Cortex Microbiological fuel cell Microfibrillar Collagen Mixed Flask Culture In computing: Memory Flow Controller, a part of a computer architecture, e. ... MBA redirects here. ... Master of Business Administration (MBA) is a tertiary degree in business management. ... MComm, or M. Comm, is the common shorthand form of the postgraduate degree Master of Commerce. ... The degree of Doctor of Business Administration (D.B.A.) is a research doctorate that focuses upon business practice. ... DBA may mean: // Decibels audible Diamond-Blackfan anemia Dibenzylideneacetone .dba format, a calendar format for Palm Desktop Doctor of Business Administration, an academic doctoral degree dba, a low-cost German airline The Dallas Bar Association for lawyers in Texas, USA A database administrator (or analyst) A-weighted decibels (dBA), in... The Certified Business Manager (CBM) is a professional credential created and administered by the Association of Professionals in Business Management (APBM). ... CBM may have one of several meanings: CAM-Brain Machine – a research tool for the simulation of artificial brains, based on Cellular Automata Machines Canadian Baptist Ministries / Ministères Baptistes Canadienne Coalbed methane CBM (AM), a former CBC Radio One AM station in Montreal; replaced by CBME CBM America Corp. ... Accountant, or Qualified Accountant, or Professional Accountant, is a certified accountancy and financial expert in the jurisdiction of many countries. ... Accountant, or Qualified Accountant, or Professional Accountant, is a certified accountancy and financial expert in the jurisdiction of many countries. ... Certified Accountant redirects here. ... For other meanings of CPA see CPA (disambiguation) Certified Public Accountants (CPAs) are accounting professionals of the United States who have passed the Uniform CPA exam, which was developed and is maintained by the American Institute of Certified Public Accountants (AICPA), and have subsequently met additional state requirements for licensure... Chartered Certified Accountant (Designatory letters ACCA or FCCA) is a United Kingdom chartered accounting designation awarded by the Association of Chartered Certified Accountants (ACCA) The term Chartered Certified Accountant was introduced in 1996. ... Chartered Certified Accountant (Designatory letters ACCA or FCCA) is a United Kingdom chartered accounting designation awarded by the Association of Chartered Certified Accountants (ACCA) The term Chartered Certified Accountant was introduced in 1996. ... The Chartered Institute of Management Accountants (CIMA) is a United Kingdom professional body that offers a qualification in management accountancy, focusing on accounting for business. ... Chartered Accountant (CA) is the title used by members of certain professional accountancy associations in the British Commonwealth countries and Ireland. ... Chartered Accountant (CA) is the title used by members of certain professional accountancy associations in the British Commonwealth countries and Ireland. ... Cost accounting or cost control professional designation offered by the AAFM ™ American Academy of Financial Management™ The CCA ™ is a Graduate Post Nominal (GPN) that is only available for accountants with an accredited degree, MBA, Chartered Accountant License, law degree, CPA, PhD or specialized executive training. ... The American Academy of Financial Management ™, or AAFM ™ as it is known, is a professional association dedicated to the finance sector and finance professionals. ... The title Certified Management Accountant is a professional designation awarded by various professional bodies around the world. ...

References

  1. ^ The framework for this section is based on Notes by Aswath Damodaran at New York University's Stern School of Business
  2. ^ Beaney, Shean, "Defining corporate finance in the UK", The Institute of Chartered Accountants, April 2005

See also

Computation of corporate finance problems, standard portfolio problems, option pricing and applications, and duration and immunization. ... Business organizations is an area of law that covers the broad array of rules governing the formation and operation of different kinds of entities by which individuals can organize to do business. ... Categories: Possible copyright violations ... To meet Wikipedias quality standards, this article or section may require cleanup. ... Investment banks help companies and governments (or their agencies) raise money by issuing and selling securities in the capital markets (both equity and debt). ... Managerial economics (also called business economics), is a branch of economics that applies microeconomic analysis to specific business decisions. ... Private equity is a broad term that refers to any type of equity investment in an asset in which the equity is not freely tradable on a public stock market. ... A real option is the right, but not the obligation, to undertake some business decision, typically the option to make a capital investment. ... Venture capital is a general term to describe financing for startup and early stage businesses as well as businesses in turn around situations. ... The concept of right-financing was coined by English Political Economist Dr. Peter Middlebrook to highlight the importance of adopting the appropriate policy, institutional and financial support mechanisms to maximize sustainable returns on both public and private investments over time. ... This article is about finance. ... Following is a list of accounting topics. ... Topics in finance include: // Finance an overview Arbitrage Capital (economics) Capital asset pricing model Cash flow Cash flow matching Debt Default Consumer debt Debt consolidation Debt settlement Credit counseling Bankruptcy Debt diet Debt-snowball method Discounted cash flow Financial capital Funding Financial modeling Entrepreneur Entrepreneurship Fixed income analysis Gap financing... Topics in finance include: // Finance an overview Arbitrage Capital (economics) Capital asset pricing model Cash flow Cash flow matching Debt Default Consumer debt Debt consolidation Debt settlement Credit counseling Bankruptcy Debt diet Debt-snowball method Discounted cash flow Financial capital Funding Financial modeling Entrepreneur Entrepreneurship Fixed income analysis Gap financing... Topics in finance include: // Finance an overview Arbitrage Capital (economics) Capital asset pricing model Cash flow Cash flow matching Debt Default Consumer debt Debt consolidation Debt settlement Credit counseling Bankruptcy Debt diet Debt-snowball method Discounted cash flow Financial capital Funding Financial modeling Entrepreneur Entrepreneurship Fixed income analysis Gap financing...

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Corporate Finance (253 words)
For the last 20 years, Corporate Finance has written about the ways that companies have found to manage their capital and cash more efficiently.
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Narrowly interpreted, corporate finance is the study of the investment and financing policies of corporations.
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