Corporate finance is the field of finance related to funding sources and capital structure of the firm, actions taken by managers to increase the value of the company to shareholders, and the tools and analysis used to allocate financial resources. The main purpose of corporate finance is to maximize or increase shareholder value. Although principally different from managerial finance that studies the financial management of all firms, rather than firms alone, the main concepts in corporate finance studies apply to the financial problems of all types of companies.
Correspondingly, the company's finance consists of two major sub-disciplines. The capital budget deals with setting criteria on which value-added projects should receive investment funding, and whether financing the investment with equity or debt capital. Working capital management is the management of the monetary fund of the company related to short-term operating balance of current assets and current liabilities; the focus here is on managing cash, inventory, and short-term loans and loans (such as credit terms granted to customers).
The company's financial terms and the corporate financiers are also associated with investment banking. The typical role of an investment bank is to evaluate the company's financial needs and to increase the appropriate type of capital that best suits those needs. Thus, the terms "corporate finance" and "finance company" can be attributed to transactions in which capital is generated to create, develop, grow or acquire business. Recent legal and regulatory developments in the US are likely to change the arrangement of regulatory groups and financiers willing to organize and provide financing for transactions with certain leverage.
Financial management overlaps with the financial function of the accounting profession. However, financial accounting is the reporting of historical financial information, while financial management is concerned with the allocation of capital resources to increase the value of the company to shareholders.
Video Corporate finance
Histori
Sejarah awal
Historically, the company's modern financial foundation has its roots in the Dutch Republic of the 17th century, the birthplace of the first officially listed public company, the first stock exchange and the first formal market.
Maps Corporate finance
Outline
The main purpose of financial management is to maximize or continue to increase shareholder value. Maximizing shareholder value requires managers to be able to balance capital funding between investments in projects that increase the profitability and long-term sustainability of the company, together with paying excess cash in the form of dividends to shareholders. Managers of growth companies (ie firms that get high returns on invested capital) will use most of the company's capital resources and cash surplus on investments and projects so that the company can continue to expand its business operations into the future. When companies achieve a level of maturity in their industry (ie companies that get an average return or lower than invested capital), managers of these companies will use the excess cash to distribute dividends to shareholders. Managers must conduct analysis to determine the proper allocation of the company's capital resources and cash surplus between the project and dividend payout to shareholders, as well as repay the related creditors' debt.
Choosing between an investment project will be based on several interrelated criteria. (1) The company's management seeks to maximize the value of the company by investing in projects that generate net worth when it is worth using the appropriate discount by taking into account the risks. (2) These projects should also be financed appropriately. (3) If there is no growth possible by the company and surplus cash surplus is not required for the company, financial theory suggests that management should return part or all of the excess cash to shareholders (ie, distribution through dividends).
This "capital budgeting" is the planning of long-term corporate finance projects, related to investments funded through and affecting the company's capital structure. Management should allocate the company's limited resources between competing opportunities (projects).
Capital budgeting also relates to setting criteria on which projects should receive investment funds to increase the value of the company, and whether to finance the investment with equity or debt capital. Investments should be made on the basis of added value to the future of the corporation. Projects that increase the value of a company may include different types of investments, including but not limited to expansion policies, or mergers and acquisitions. When there is no growth or expansion made possible by the company and the surplus cash surplus exists and is not required, then management is expected to pay part or all of the surplus income in cash dividend or to buy back the stock of the company through a share buyback. program.
Capital structure
Uppercase structure
Achieving the company's financial goals requires that every company's investment be financed appropriately. The source of financing is, in general, self-generated capital by firms and capital from external funders, obtained by issuing new debt and equity (and hybrid or convertible bonds). As above, since both the level of obstacles and the cash flow (and hence the riskiness of the firm) will be affected, the financing mix will affect the firm's valuation. There are two interrelated considerations here:
- Management should identify the "optimal mix" of financing - the capital structure that generates maximum corporate value (See Balance Sheet, WACC) but also must take into account other factors (see trade-off theory below). Project financing through debt generates obligations or obligations that must be served, thus raising the cashflow implications independently of the level of project success. Equity financing is less risky in relation to cash flow commitments, but results in dilution of stock ownership, control and income. The equity cost (see CAPM and APT) is also usually higher than debt costs - which, in addition, is a deductible expense - so equity financing can generate an increased level of obstacles which can offset the reduction of cash flow risk.
- The management should try to match the long-term financing mix with the funded asset as much as possible, both in terms of time and cash flow. Managing any potential asset liability mismatch or duration gap requires matching each of its assets and liabilities according to the maturity pattern ("Cash Flow Match") or duration ("immunization"); managing these relationships in short-term is a key function of working capital management, as discussed below. Other techniques, such as securitization, or hedging using interest rates or credit derivatives, are also common. See Asset liability management; Treasury management; Credit risk; Interest rate risk.
Most of the theories here, are under the umbrella of The Off-Trade Theory in which firms are assumed to exchange the tax debt benefits with the cost of bankruptcy debt when choosing how to allocate company resources. But economists have developed a set of alternative theories about how managers allocate corporate finance. One of the main alternative theories about how companies manage their capital is Pecking Order Theory (Stewart Myers), which shows that companies avoid external financing while they have available internal financing and avoid new equity financing while they can engage in new debt financing at interest rates which is quite low. Also, the substitution theory of Capital structure hypothesizes that management manipulates the capital structure so that earnings per share (EPS) are maximized. An emerging field of financial theory is the true financing in which investment banks and firms can increase their return on investment and corporate value over time by determining the right investment objectives, policy frameworks, institutional structures, financing sources (debt or equity) and frameworks expenditure in a given economy and under certain market conditions. One of the latest innovations in this field from a theoretical point of view is the hypothesis of Market Time. This hypothesis, inspired in the behavioral financial literature, suggests that companies look for cheaper types of financing regardless of their current level of internal resources, debt and equity.
Capital resources
Debt capital
Corporations may rely on loan funds (debt or credit capital) as a source of investment to support ongoing business operations or to finance future growth. Debt comes in several forms, such as through bank loans, notes payable, or bonds issued to the public. Bonds require companies to make regular interest payments (interest charges) on borrowed capital until the debt reaches the due date, in which the company must repay the obligations in full. Debt payments can also be made in the form of allowance for funds, in which the corporation pays an annual installment of the loan borrowed above the usual interest cost. Corporations that issue callable bonds are entitled to repay their obligations in full whenever the company feels that it is in their best interest to pay off the debt service. If interest charges can not be made by the company through cash payments, the company may also use collateral assets as a form of repayment of their debt obligations (or through a liquidation process).
Equity capital
Corporations can take turns selling company shares to investors to raise capital. Investors, or shareholders, expect that there will be a tendency to increase the value of the company (or appreciate its value) over time to make their investment into a profitable purchase. The value of shareholders increases as firms invest equity and other funds into projects (or investments) that generate a positive rate of return for owners. Investors prefer to buy shares in a company that will consistently get a positive rate of return in the future, thus increasing the stock market value of the company. Shareholder value can also be increased when a company pays excess cash surplus (funds from retained earnings that are not required for business) in the form of dividends.
Preferred stock
Preferred stock is an equity securities that may have a combination of features not owned by common stock including property of equity and debt instruments, and generally regarded as a hybrid instrument. Preferably senior (ie higher rank) for ordinary shares, but subject to bonds in the case of claims (or rights to their part of the company's assets).
Preferred stocks usually have no voting rights, but may carry dividends and may have priority over ordinary shares in dividend payments and after liquidation. Preferred stock terms are stated in "Certificate of Appointment".
Similar to bonds, preferred stocks are valued by major credit rating companies. Ranking for options is usually lower, because preferred dividends do not carry the same collateral as interest payments from bonds and they are junior to all creditors.
Preferred stock is a special class of stock that may have a combination of features not owned by common stock. The following features are usually associated with preferred stock:
- Options in dividends
- Preferences in assets, in case of liquidation
- Convertibility to common stock.
- Call Ability, in the corporate options
- Nonvoting
Investment and project appraisal
In general, each project's value will be estimated using a discounted cash flow assessment (DCF), and the highest-rated opportunity, as measured by the net present result (NPV) value will be selected (applied to Corporate Finance by Joel Dean in 1951). This requires estimating the size and timing of all additional cash flows generated from the project. The future cash flows are then discounted to determine their present value (see Time value of money). These values ​​are then summed, and the net amount of this initial investment expenditure is the NPV. View Financial modeling.
NPV is strongly influenced by the discount rate. Thus, identifying the right discount rate - often termed, the project "hurdle" - is essential for selecting projects and good investment for the company. The level of impediment is the acceptable minimum return of an investment - that is, the appropriate discount rate for the project. The level of obstacles should reflect investment risk, usually measured by the volatility of cash flows, and should take into account the financing mix relevant to the project. Managers use models such as CAPM or APT to estimate the discount rate appropriate for a particular project, and use the weighted average cost of capital ( WACC ) to reflect the selected financing mix. (A common mistake in choosing a discount rate for a project is to apply a WACC that applies to the whole company.) Such an approach may not be appropriate if a particular project risk is very different from that of an existing company's asset portfolio.)
In relation to NPV, there are several other steps that are used as selection criteria (secondary) in corporate finance. This is visible from DCF and includes discounted return period, IRR, modified IRR, equivalent annuity, capital efficiency, and ROI. Alternatives (complementary) to NPV include Income Income Residual, MVA/EVA (Joel Stern, Stern Stewart & amp; Co) and APV (Stewart Myers). View list of assessment topics .
Valuation flexibility
In many cases, for example the R & amp; D, the project may open (or close) various lines of action to the company, but this fact will not (usually) be captured in a strict NPV approach. Some analysts explain this uncertainty by adjusting the discount rate (eg by raising capital costs) or cash flow (using equivalent certainty, or applying (cutting) the "haircut" to the approximate number). Even when employed, this latter method usually does not precisely take account of risk changes during the project life cycle and therefore fails to adjust risk adjustments appropriately. Management therefore (sometimes) uses a tool that places an explicit value on this option. Thus, while in the DCF valuation, the most probable or average cash flow or certain scenario or scenario is discounted, here the "flexible and gradual nature" of the investment is modeled, and hence the "all" potential outcome is considered. See more below the Real option assessment. The difference between the two assessments is the "value of flexibility" inherent in the project.
The two most common tools are Decision Tree Analysis (DTA) and Real options valuation (ROV); they can often be used interchangeably:
- DTA appreciates flexibility by including possible (or state) events and management decisions . (For example, a company will build a plant given that demand for its product exceeds a certain level during the pilot phase, and outsource production is otherwise, in turn, due to further demand, it will also expand the plant, and defend it otherwise.In the DCF model, , there is no "branching" - each scenario should be modeled separately.) In a decision tree, any management decision in response to an "event" produces a "branch" or "pathway" that the company can follow; the probability of any event determined or determined by management. After the tree is built: (1) "all" possible events and resultant paths are seen by management; (2) provided this "knowledge" of events that can follow, and assuming rational decision making, management chooses branches (ie actions) that correspond to the probability of the highest value-weighted path; (3) this path is then taken as a representative of the value of the project. See Decision # Choice theory under uncertainty.
- ROV is usually used when the value of a project is contingent on the value of some other asset or underlying variable. (For example, the survival of a mining project depends on the price of gold: if the price is too low, management will ignore the mining right, if enough, management will develop the ore body, again DCF valuation will capture only one of these results.) Here: (1) using the financial option theory as a framework, the decision to be taken is identified as in accordance with the call option or put option; (2) appropriate assessment techniques are then used - usually variants in the Binomial option model or bespoke simulation models, while the Black Scholes type formulas are used less frequently; see Contingent's claims assessment. (3) The "real" value of the project is the NPV of the "most likely" scenario plus the option value. (The real choice in corporate finance was first discussed by Stewart Myers in 1977, looking at corporate strategy as a series of options initially per Timothy Luehrman, in the late 1990s.) See also Approach pricing approaches under Business ratings.
Calculate the uncertainty
Given the inherent uncertainty in project forecasting and assessment, analysts will expect to assess the project's sensitivity to various inputs (ie assumptions) to the DCF model. In a typical sensitivity analysis, the analyst will vary one key factor while holding all other inputs constant, ceteris paribus . The sensitivity of the NPV to that factor change is then observed, and is calculated as "slope":? NPV/? Factor. For example, the analyst will determine the NPV at various growth rates in the annual revenue as specified (usually at a specified increase, eg -10%, -5%, 0%, 5%....), and then determine the sensitivity of using this formula. Often, some variables may be interesting, and their various combinations produce "surface values", (or even "space-values",) where NPV then is a function of several variables. See also Stress testing.
Using related techniques, analysts also run estimates based on the NPV scenario. Here, the scenario consists of specific results for broad "global" factors (demand for products, exchange rates, commodity prices, etc...) and internally consistent (see discussion on financial modeling), while for sensitivity approaches, it is not necessary. The application of this methodology is to define an "unbiased" NPV, where management determines the (subjective) probability for each scenario - the NPV for the project is the weighted average probability of the various scenarios; see Method First Chicago. (See also rNPV, where cash flow, as opposed to scenario, is a weighted probability.)
Further progress that "overcomes the limitations of sensitivity and scenario analysis by examining the effects of all possible combinations of variables and their realizations" is to build a stochastic or probabilistic financial model - as opposed to the traditional static and deterministic model as above. For this purpose, the most common method is to use Monte Carlo simulations to analyze the NPV project. This method was introduced to be financed by David B. Hertz in 1964, although it has recently become common: current analysts can even run simulations in a spreadsheet-based DCF model, usually using additional risk analysis, such as @Risk or Crystal Ball . Here, the (heavy) cash flow component affected by the simulated uncertainty, mathematically reflects their "random character". In contrast to the scenario approach above, the simulation yields some random thousand but possible outcomes, or trials, "cover all possible contingencies of the real world in proportion to their likelihood;" see Monte Carlo Simulation versus the "What If" scenario. The output is the NPV project histogram, and the average NPV of potential investment - as well as other volatility and sensitivity - is then observed. This histogram provides invisible information from static DCF: for example, allowing probability estimates that the project has a net present value greater than zero (or any other value).
Continuing with the above example: instead of assigning three discrete values ​​for revenue growth, and for other relevant variables, the analyst will assign an appropriate probability distribution for each variable (generally triangular or beta), and, if possible, determine the observation or alleged correlation between variable. This distribution would then become a repeatable "sample" - combining this correlation - thus generating several thousand random scenarios but possibly, by appropriate judgment, which is then used to produce an NPV histogram. The resulting stats (average NPV and standard deviation of NPV) will be a more accurate reflection of the "randomness" of the project than the variance observed under the scenario-based approach. It is often used as an estimate of the "underlying spot price" and volatility for the real-value option assessment as above; see the Real option assessment: Input assessment. A stronger Monte Carlo model will include the possibility of a risk event (eg, credit crunch) that drives variation in one or more of the DCF model inputs.
Dividend policy
The dividend policy relates to the financial policy regarding current cash dividend payments or paying the dividend increases at a later stage. Whether to issue dividends, and in what amounts, is determined primarily on an unspecified profit basis (excess cash) and is affected by the company's long-term earnings power. When a cash surplus exists and is not required by the firm, management is expected to pay part or all of the surplus revenue in cash dividend or to buy back the company's shares through a share buyback program.
If there is no positive NPV opportunity, ie projects where the return exceeds the level of obstacles, and surplus cash surplus is not required, then - financial theory suggests - management should return part or all of the cash surplus to shareholders as dividends. This is a common case, but there are exceptions. For example, shareholders of "stock growth", hopes that the company will, almost by definition, retain most of the surplus cash surplus so it can fund future projects internally to help increase the value of the company.
Management should also choose form of the dividend distribution, generally as cash dividend or through share buyback. Various factors can be considered: where shareholders have to pay tax on dividends, firms may choose to retain earnings or buy back shares, in both cases increase the value of shares outstanding. Alternatively, some companies pay "dividends" of shares rather than cash; see Company actions. Financial theory suggests that dividend policy should be defined by the type of company and what management determines is the best use of dividend resources for the company to its shareholders. As a general rule, shareholder growth companies would prefer managers to retain earnings and not pay dividends (using excess money to reinvest into operations), whereas shareholders of value or secondary stock would prefer the management of these firms to pay profit surplus in the form of cash dividends when positive returns can not be earned through reinvestment of non-distributed income. The stock buyback program is acceptable when the value of the share is greater than the realized profit from the undistributed earnings reinvestment. In all cases, the right dividend policy is usually directed by what maximizes long-term shareholder value.
Working capital management
Managing the working capital position of a company to maintain ongoing business operations is referred to as working capital management . This involves managing the relationship between short-term corporate assets and short-term liabilities. In general this is as follows: As above, the purpose of Corporate Finance is to maximize the value of the company. In the long-term context, capital budgeting, corporate value is enhanced through proper selection and funding of positive NPV investments. This investment, in turn, has implications for cash flow and capital costs. The purpose of Working Capital management (ie short-term) is to ensure that the company is able to operate, and that it has sufficient cash flow to service long-term debt, and to meet both short-term debt maturity and future operating costs.. Thus, firm value is increased when, and if, the return on capital exceeds the cost of capital; See value added economy (EVA). Managing short-term finance and long-term finance is one of the tasks of modern CFOs.
Working capital
Working capital is the amount of funds needed for an organization to continue its ongoing business operations, until the company is replaced through payment for goods or services that have been delivered to its customers. Working capital is measured by the difference between resources in cash or ready to be converted into cash (Current Assets), and cash requirements (Current Liabilities). As a result, the allocation of capital resources related to working capital is always current, ie short-term. In addition to the time horizon, working capital management differs from capital budgeting in terms of discount and profitability considerations; they are also "reversible" to some extent. (Considerations regarding risk appetite and return targets remain the same, though some obstacles - as imposed by the loan agreement - may be more relevant here).
The objectives (short-term) of working capital are not approached on the same basis as (long-term) profitability, and working capital management implements different criteria in allocating resources: key considerations are (1) cash flow/liquidity and (2) profitability/return capital (where cash flow is probably the most important).
- The most widely used cash flow measure is the net operating cycle, or cash conversion cycle. This is the time difference between cash payments for raw materials and cash collection for sales. The cash conversion cycle shows the company's ability to convert its resources into cash. Since this figure effectively corresponds to the time when the firm's cash is tied up in operations and is not available for other activities, management generally aims at a low net amount. (Another measure is the same gross operating cycle as the net operating cycle except that it does not take into account the period of suspension of the creditor.)
- In this context, the most useful profitability measure is Return on capital (ROC). The result is shown as a percentage, determined by dividing the relevant income for 12 months with the capital used; Return on equity (ROE) shows this result for company shareholders. As above, the value of the firm is increased when, and if, the return on capital exceeds the cost of capital.
Working capital management
Guided by the above criteria, management will use a combination of policies and techniques for working capital management. These policies aim to manage current assets (generally cash and cash equivalents, inventories and debtors) and short-term financing, so that cash flows and returns are acceptable.
- Money management . Identify cash balances that allow businesses to meet their daily expenses, but reduce cash storage costs.
- Inventory management . Identify inventory levels that allow uninterrupted production but reduce investment in raw materials - and minimize reordering costs - and thereby increase cash flow. Note that "inventory" is usually the field of operations management: given the potential impact on cash flow, and on the balance sheet in general, finances are usually "involved in oversight or supervisory means". See supply chain management; Just In Time (JIT); Quantity of economic orders (EOQ); Dynamic lot size model; Quantity of economic production (EPQ); Lot's Economic Scheduling Issues; Inventory control issues; Safety stock.
- Debtor management . There are two interrelated roles here: Identify the appropriate credit policy, which is the credit terms that will attract customers, so that any impact on cash flows and cash conversion cycles will be offset by increased revenues and therefore Return of Capital (or otherwise ); see Discounts and benefits. Apply appropriate Credit scoring policies and techniques so that the default risk on new business is acceptable under these criteria.
- Short-term funding . Identify appropriate financing sources, given the cash conversion cycle: the supply is ideally funded by the credit provided by the supplier; However, it may be necessary to use bank loans (or overdrafts), or to "convert debtors into cash" through "factoring".
Relationships with other areas of finance
Investment banking
The use of the term "corporate finance" varies widely throughout the world. In the United States it is used, as above, to describe the activities, methods and techniques of analysis that relate to many aspects of finance and corporate capital. In the UK and Commonwealth countries, the terms "corporate finance" and "finance companies" tend to be associated with investment banking - that is, transactions where capital is raised for corporations. This may include
- Increase seed, initial capital, development or expansion
- Mergers, demergers, acquisitions or sales of private companies
- Mergers, demergers, and acquisitions of public companies, including public-to-personal transactions
- Purchase management, purchases or similar companies, divisions or subsidiaries - usually supported by private equity
- Company's equity issues, including the company's float on a recognized stock exchange to raise capital for development and/or to restructure ownership
- Increase capital through other forms of equity, debt, and related securities for refinancing and business restructuring
- Joint venture financing, project financing, infrastructure financing, public-private partnerships and privatization
- Secondary equity issues, either through personal placement or further issues in the stock market, are primarily related to any of the transactions listed above.
- Collect debts and restructure debt, especially if it is associated with the types of transactions listed above
Financial risk management
Risk management is the process of measuring risk and then developing and implementing strategies to manage ("hedge") those risks. Financial risk management, typically, is focused on the impact on corporate value due to adverse changes in commodity prices, interest rates, foreign exchange rates and stock prices (market risk). It will also play an important role in short-term cash and treasury management; See above. It is common for large companies to have a risk management team; often this overlaps with the internal audit function. While it is impractical for small companies to have formal risk management functions, many still apply informal risk management. See also Company risk management.
This discipline typically focuses on hedged risks using traded financial instruments, usually derivatives; see Hedging cash flows, foreign currency hedges, financial engineering. Due to the company's specific, over-the-counter (OTC) contracts tend to be expensive to create and monitor, derivatives that trade on established financial markets or markets are often preferred. These standard derivative instruments include options, forward contracts, forward contracts and swaps; exotic derivatives "second generation" usually trade OTC. Note that hedging related transactions will attract their own accounting treatments: see Hedge accounting, Mark-to-market accounting, FASB 133, IAS 39.
This area is related to the company's finances in two ways. First, a strong exposure to business and market risk is a direct result of prior capital investment. Second, the two disciplines share the purpose of enhancing, or preserving, the value of the company. There is a fundamental debate related to "Risk Management" and shareholder value. According to the Modigliani and Miller framework, hedging is irrelevant because diversified shareholders are assumed to be indifferent to company-specific risks, whereas, on the other hand, hedging is seen as creating value because it reduces the likelihood of financial difficulties. The further question, is the desire of shareholders to optimize risk versus taking pure risk exposure (risk events that only have a negative side, such as loss of life or limb). The debate links the value of risk management in the market to the cost of bankruptcy in that market.
See also
- Financial accounting
- The stock market
- Security (financial)
- Growth stock
- Financial planning
- Investment bank
- Business capital
- Financial statement analysis
- Company tax
- Corporate governance
Source of the article : Wikipedia
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