corporate finance: theory and practice
TRANSCRIPT
Corporate finance, both an academic field with thorough research behind it and a very
important practice for corporations around the globe, is more than it seems. Of course theory
supports many of the crucial activities of corporate finance, but after all, the actual needs of
corporations and the business environment shape the approach that will be followed in real
life.
First and foremost, we should acknowledge the fact that corporate finance decision making
directly or indirectly affects every facet of modern corporate management and all business
functions inside a corporation. This is the main reason why as a field, it carries the
responsibility to increase – maximize the shareholder value. Increasing the value for the
shareholders thereof entails the further evolution and growth of a corporation to an extent that
it will be able at some point in time, to pay the excess cash generated as dividends to its
shareholders.
Corporate Finance Importance
The Primary Objective of Corporate Finance
As the primary objective of corporate finance
is to serve the shareholders’ best interests,
this cannot be done without a long-term
perspective. It should be noted here, that
managers who fail to understand this element
and try to boost their cash flows and earnings
temporarily by deliberately acting irresponsibly
or even illegally are destined to lead their
businesses to failure rather than growing them
and making them profitable.
Fundamentally, the long-term perspective of corporate growth lies at the
optimization of two main decisions. The first is the financing decision.
The financing decision is responsible, for the company to access the
right form of capital like equity, debt or hybrid instruments and at
a reasonable cost. Financial solutions vary, and there is a big range of
different forms and combinations of equity and debt capital.
For instance, a company could obtain credit financing through bank
loans, notes payable, or bond financing. Many times, the same the
industry where a company operates, defines the most suitable form of
financing. Also, the time horizon, the geography, the business
environment and the overall economic climate, further determine what
arrangements of capital will optimize the capital structure of the
company.
Corporate Growth Through Credit Financing
On the equity side of things, Equity financing is a more
relaxed type of capital when it comes to cash flow
obligations, but depending on the level of dilution (if any) can
alter the returns realized by the shareholders. Equity capital
could be public or private and combined with other elements
of the company’s business strategy, could literally skyrocket a
company’s growth potential. Apparently, all forms of capital
are important and depending on several business-specific
factors and the proper combination of them and timing can
make the difference.
Corporate Growth Through Equity Financing
The second decision is the investment decision. A company raises
capital in order deploy it in a profitable manner. That means that the
funds raised should achieve a higher rate of return than the cost of
capital or hurdle rate. Capital budgeting decisions outline a company’s
strategic direction by mainly identifying those investments and projects
that a firm must undertake. Those new investments must add positively
to the overall value of the firm. Poor investment decisions could have
serious financial and operational consequences that could continue for
many years. To avoid this, financial theory has provided numerous
financial models and techniques which safeguard the several
estimations and forecasts that take place inside the capital budgeting
process.
The Investment Decision
In today’s business environment, corporate finance covers
many aspects of the financial management practice. The
decisions of financing and investing, can become really
specialized and technical and here is when professional
corporate financiers and corporate finance advisers come into
play. The involvement of these professional firms could range
from minimal to a very sophisticated one that could unlock a
company’s potential or indicate opportunities that enhance
the existing business platform.
Professional Corporate Financiers
Typical transactions that are mainly driven by professional
firms involve:
Public listings and multi-listings on stock exchanges, Pre-IPO capital
solutions, bond issuances, raising seed capital for younger companies which
are in a growth phase, development capital or expansion capital for larger
ones, business sales or purchases of existing companies or assets, mergers
and acquisitions, private placements, debt issuances, Leveraged buyouts
and management buyouts, capital restructurings and older debt
replacements, refinancings, capital raising or co-investing with private equity,
venture capital, and other hedge funds, real estate or infrastructure funds,
Financing new projects and specialized investment vehicles for joint
ventures etc.
Typical Transactions of Corporate Finance
Financial evolution, has faced several positive developments through
the years. The most significant characteristic is that the professional
practice and the innovative spirit of corporate finance professionals
combined with the theoretical evolution of corporate finance
techniques, has created the foundations for a new age of financial
solutions that adapt to the real needs of corporations. Moreover,
corporate finance has as primary objective to maximize shareholders’
value but is even more than that. Its socioeconomic role is also very
important. Healthy corporations that grow in a structured way and
generate sales, produce new competitive products or services and
employ more people, have a positive impact on society and
economy.
A Broader Perspective