Summary
The information that is presented and that is described of the corporate finances is that which focuses on the decisions of the companies, tools and analysis used to make those decisions. The main objective of corporate finance is to study the finances that are applicable to the financial problems of any type of company.
Decisions are the basis for decision making for the capital investment of the projected company.
Furthermore, the term corporate finance is often associated with investment banking, assessing the financial needs of a business, and raising the appropriate type of capital to meet those needs. Corporate finance can be associated with transactions in which capital is raised to create, develop, grow, and acquire businesses.
Abstract
The information presented and described corporate finance is one that focuses on business decisions and tools and analysis used to make these decisions the main objective of corporate finance is the study of finance that are applicable to problems of any financial company. Decisions are based on the decision-making for investment in capital of the company projected.
Moreover, the term is often associated with corporate finance investment banking often assess the financial needs of a business and raise the appropriate type of capital to meet those needs. Corporate finance can be associated with transactions in which capital is raised to create, develop, grow and acquire businesses.
What is finance?
Finance is the activities related to the exchange of different capital goods between individuals, companies, or States and with the uncertainty and risk that these activities entail. It is considered one of the branches of the economy. It is dedicated to the study of raising capital for investment in productive assets and investment decisions of savers. It is related to transactions and money management. In this framework, the acquisition and management, by a company, an individual, or the State itself, of the funds it needs to fulfill its objectives, and the criteria with which it disposes of its assets are studied; in other words, regarding the obtaining and management of money, as well as other securities or money substitutes, such as securities, bonds, etc.
According to Bodie and Merton, finance "studies the way in which scarce resources are allocated over time." Finance is, therefore, about the conditions and opportunity with which capital is obtained, its uses, and the returns that an investor obtains from his investments.
The academic study of finance is mainly divided into two branches, which reflect the respective positions of the one who needs funds or money to make an investment, called corporate finance, and the one who wants to invest their money by giving it to someone who wants to use it to invest, called asset valuation. The corporate finance area studies how it is more convenient for an investor to get money, for example, by selling shares, borrowing from a bank or selling debt in the market. The asset valuation area looks at how an investor is better off investing their money, for example, by buying stocks, lending / buying debt, or accumulating cash.
These two branches of finance are divided into others. Some of the most popular areas within the study of finance are: Financial Intermediation, Behavioral Finance, Microstructure of the Financial Markets, Financial Development, International Finance, and Consumer Finance. A recently created discipline is neurofinance, a branch of neuroeconomics, in charge of studying brain biases related to managing the economy.
What is a company?
A company is an organization, institution or industry, dedicated to activities or pursuit of economic or commercial purposes, to satisfy the needs of goods or services of the plaintiffs, while ensuring the continuity of the productive-commercial structure as well as its necessary investments.
Adam Smith is among the first to theorize about it. For him a company is the organization that allows the "internationalization" of the forms of production: on the one hand it allows the factors of production (capital, labor, resources) to meet and on the other it allows the division of labor. Even though for Smith the "natural" and efficient form of such an organization was one motivated by private interest - for example: "Thus it is that the private interest and passions of individuals naturally dispose them to return their possessions (stock in the original) towards employment that in the ordinary case are more advantageous for the community ”6 - Smith proposes that there is also a need or area that demands public action:“ According to the Natural Liberty system, the Sovereign only has three duties to attend to, third,the obligation to carry out and conserve certain public works and certain public institutions, the realization and maintenance of which may never be of interest to a particular individual or to a small number of individuals, because the benefit of the same could never reimburse their expenses to no particular individual or any small group of individuals, although they often reimburse a large society in excess. 'although they often reimburse a large society in excess. ”although they often reimburse a large society in excess. ”
What corporate (or)?
A corporation or corporate partnership is a legal entity created under the laws of a State as a legal entity recognized as a legal person and covered by company law. It has its own privileges and responsibilities different from those of its members (natural persons).
Company finances
One of the company's missions is to create value, but also maximize it as best as possible, through the efficient use of financial resources. Shareholders must know how to manage their business and prevent crises since, when surprised, their assets could be damaged.
To avoid this situation, it is advisable to carry out a valuation plan so that each partner is aware of the decisions made regarding investment, sale of shares, financing, operations and dividends, among other aspects.
What does financing mean?
In every facet of our life, we need to know how to manage our money. In the case of business, it is vital that business owners develop and carry out planning techniques to ensure the future existence of the company. Investors must seek the return and perceive the returns, without having to fall into risks.
Running a business successfully means making the best use of your money. That is why shareholders must give appropriate financing to investments, both short and long term. One way to increase company profits is through the "good use" of another's resources, that is, through the "leverage" technique: borrow funds are received and contributed to a business that performs better percentage.
Corporate finance measures the level of return on an investment, they study the real assets (tangible and intangible) and the raising of funds, the rate of growth of the company, size of credit granted to customers, Employee compensation, indebtedness, acquisition of companies, among other areas.
- Risk and benefit: Investors operate in different markets trying to get the best return for their money while trying to minimize the risk of their investment. The capital market offers an efficient frontier at all times, which relates a certain profitability to a certain level of risk or volatility. The investor obtains a higher expected return in exchange for supporting greater uncertainty. The price of uncertainty is the difference between the return on investment and the interest rate of those securities that are considered safe. We know this difference as a risk premium. The value of money over time: Given the same amount of money, an investor prefers to have it in the present than in the future. Thus,the intertemporal transfer of money has a discount factor (if we exchange future income for present capital, for example, in a mortgage loan), or with a return (if we exchange present income for future income, for example, in a pension plan). Interest rate: It is defined as the price paid for the funds requested in loan, in a period of time. It is usually expressed as a percentage and represents an exchange rate between the price of money today in terms of future money.It is defined as the price paid for the funds requested on loan, over a period of time. It is usually expressed as a percentage and represents an exchange rate between the price of money today in terms of future money.It is defined as the price paid for the funds requested on loan, over a period of time. It is usually expressed as a percentage and represents an exchange rate between the price of money today in terms of future money.
In Spain the interest rate is known as «interest rate».
The interest rate directly affects consumption, commerce and investment, since part of the consumption is paid by credit cards, part of the merchandise bought and sold by businesses is bought on credit, and investments are always supported by bank loans. or issuance of debt through bonds: As the interest rate rises, consumption and investment decrease, as individuals and companies find it more difficult to pay their debts; by lowering the interest rate, consumption and investment increase due to the stimulus of paying less interest.
- The relationship between liquidity and investment: The need to have liquid money both for the exchange of goods and services and for making an investment makes the money-merchandise market have its own supply and demand, and its own costs and prices. Opportunity costs: Refers to the sacrifice that any agent that participates in a market must make when deciding to dispense with a consumption or an investment to use its resources, being these by definition scarce, in another project. Leverage: As a general concept, it refers to the action of using the debt to finance an investment. Financial leverage refers to investment from indebtedness, which affects the company's fixed costs. This debt generates a financial cost. Inflation:Economic process that consists of a continuous rise in the prices of most of the products and services, and, therefore, of a loss of the value of money to be able to acquire those goods and services. Inflation has a direct impact on the interest rate: since inflation reduces the value of money, the higher the inflation, the higher the interest rate necessary to compensate a saver for lending their money.
Corporate finance
Corporate finance is an area of finance that focuses on the monetary decisions that companies make and the tools and analytics used to make those decisions. The main objective of corporate finance is to maximize shareholder value. Although in principle it is a different field of financial management, which studies the financial decisions of all companies, and not just corporations, the main concepts of study in corporate finance are applicable to the financial problems of any type of company..
Discipline can be divided into long-term and short-term decisions and techniques. Capital investment decisions are long-term choices about which projects should receive financing, whether to finance an investment with equity or debt, and whether to pay dividends to shareholders. On the other hand, short-term decisions focus on balancing reactive and passive short-term. The goal here is close to cash, inventory and short-term financing management.
The term corporate finance is often associated with investment banking. The typical role of an investment banker is to assess the financial needs of a company and raise the appropriate type of capital to meet those needs themselves. Thus, corporate finance can be associated with transactions in which capital is raised to create, develop, grow, and acquire businesses.
Key concepts in finance
The dilemma between risk and benefit
The more profitability an investor expects, the more risk he is willing to take. Investors are risk averse, that is, for a given level of risk they seek to maximize return, which can also be understood to be that they seek to minimize risk for a given level of return.
the value of money in the time
It is preferable to have an amount of money now than the same in the future. The owner of a financial resource must be paid something to dispense with that resource, in the case of the saver, it is the interest rate, in the case of the investor the rate of return or return.
The dilemma between liquidity and the need to invest
Cash is necessary for daily work (working capital) but at the cost of sacrificing greater investments.
Opportunity costs
Consider that there are always several investment options. Opportunity cost is the rate of return on the best investment alternative available. It is the highest return that will not be earned if funds are invested in a particular project is not earned. It can also be considered as the loss that we are willing to assume, for not choosing the option that represents the best alternative use of money.
Appropriate financing
Long-term investments must be financed with long-term funds, and similarly, short-term investments must be financed with short-term funds. In other words, investments must be matched with adequate financing for the project.
Leverage (use of debt)
The good use of funds acquired by debt serves to increase the profits of a company or of the investor. An investor who borrows funds at 15%, for example, and contributes them to a business that yields 20% in theory, is increasing his own profits with the good use of other resources, but also increases the risk level of the company. investment, typical of a financial simulation exercise or financial projections.
Efficient diversification
The prudent investor diversifies his total investment, dividing his resources among several different investments. The effect of diversifying is to distribute risk and thus reduce total risk.
Main areas
The finance field of study encompasses both asset valuation and analysis of financial decisions to create value. The objective of the management team of a company should be the maximum possible creation of value, that is, to maximize profits for the shareholders or owners, maximizing the value of the investment projects that the company is taking and obtaining the highest possible profitability.
Companies create value when the invested capital generates a rate of return higher than its cost.
The value of the company is represented by the market value of its assets; Not surprisingly, this must be equal to the market value of your liabilities, which, in turn, is equal to the sum of the market value of your shares plus the market value of your debts.
- legal structure of a corporation capital structure. Investment and financial models risk capital capital cost and financial leverage (WACC) mergers and acquisitions investment bank equity and debt issuance techniques: dividend policyfinancial difficulties: corporate restructuringethics and corporate social responsibility
Risk
Risk is the possibility that the actual results will differ from those expected or the possibility that some unfavorable event will occur.
Total risk: Systematic risk + Non-systematic risk
Systematic risk (not diversifiable or unavoidable): It affects the returns of all the securities in the same way. There is no way to protect investment portfolios from such risk, and it is very useful to know the degree to which the returns on an asset are affected by such common factors, for example a political decision affects all securities equally.
Unsystematic risk (diversify or avoidable or idiosyncratic): This risk derives from the variability of the returns of the securities not related to market movements as a whole. It can be reduced through diversification.
Corporate finance focuses on four types of decisions:
- Investment decisions, which focus on the study of the real assets (tangible or intangible) in which the company should invest. Financing decisions, which study the raising of funds (from investors who acquire the financial assets issued by the company) so that the company can acquire the assets in which it has decided to invest.Decisions on dividends, must balance crucial aspects of the entity. On the one hand, it involves remuneration of share capital and, on the other hand, it deprives the company of financial resources. Management decisions, which concern day-to-day financial and operational decisions.
Starting from the basic objective of corporate finance, which is to maximize the value or wealth for the shareholders or owners, one of the fundamental questions focuses on measuring the contribution of a certain decision to the shareholder value. To answer this question, asset valuation or valuation techniques have been created.
Corporate finance vs Accounting
Unlike accounting, which aims to reflect, as accurately as possible, the company's transactions; finances focus on the future of it, but through the study of value. However, is corporate finance necessary? The answer is yes, here are some advantages of this process:
- They help to prevent results They improve the understanding of financial aspects They drive good investor decisions They represent an approximation to the reality of the company They provide data for business prediction and control
The most important mission of company executives is to generate the maximum possible value creation, that is, to make the company more and more valuable. When the capital invested generates a rate of return higher than its cost, then value will be being generated.
Management of the Maneuver Fund
The working capital is the amount of capital that is available to an organization. That is, it is the difference between the resources in cash or easily convertible into cash (current assets), and the needs for cash (Current Liabilities).
In addition to time horizon, working capital decisions differ from capital investment decisions in terms of discounting and profitability considerations, but are also "reversible" to some extent.
Working capital management decisions are not made under the same conditions as long-term decisions, and management follows different criteria in decision making: the main considerations are cash flow and liquidity and profitability and the return on capital (of which cash flow is probably the most important).
The most widely used measure of cash flow is the average maturity period, the net operating cycle or cash conversion cycle. This represents the time difference between the cash payment of raw materials and the collection of sales. The cash conversion cycle indicates the ability of the business to convert its resources into cash. Another measure is the gross operating cycle, which is the same as the net operating cycle, except that it does not take into account the creditor deferral period.
Long-term investment decisions
Investment decisions are made over the long term and are related to fixed assets and capital structure. Decisions are based on several interrelated criteria. Corporate management seeks to maximize the value of the company by investing in projects that produce a positive net present value when valued at an appropriate discount rate. These projects must also be adequately funded. If there are no such opportunities, shareholder value maximization states that management must return excess cash to shareholders (i.e., distribution through dividends). Therefore, companies must make decisions about:
- What investments to undertake through investment valuation What financing structure to use through its capital structure and the Modigliani-Miller Theorem The amount of the dividend to be paid to shareholders
Leverage
In finance, leverage is a general term used to refer to techniques that allow you to multiply profits and losses. The most common ways to achieve this multiplier effect are by borrowing money, buying fixed assets, and using derivatives. Important examples are:
A business entity can leverage its income by purchasing fixed assets. This will increase the ratio of fixed to variable costs, which will mean that a change in revenue will translate into a larger change in profit.
Operating Leverage
A company can take advantage of its capital to borrow money. The more you borrow, the profits or losses are spread out on a proportionally smaller basis and are proportionally larger as a result.
Financial appeceament
Both effects are produced by the effect of indebtedness that causes a difference between economic profitability and financial profitability.
Financial risk management
Risk management is the process of measuring risk and developing and applying strategies to manage that risk. Financial risk management focuses on the risks that can be managed ("hedged"), using the financial instruments exchanged (usually changes in the prices of raw materials, interest rates, exchange rates and exchange prices). the actions). Financial risk management will also play an important role in treasury management.
This field is related to corporate finance in two ways. First, the company's risk exposure is a direct result of previous investment and financing decisions. Secondly, both disciplines share the objective of improving or preserving the value of the company. All large companies have risk management teams.
Derivatives are the most widely used instruments in financial risk management. Since creating single derivative contracts is costly to create and control, the most profitable financial risk management methods generally involve derivatives trading on well-established financial markets. These standard derivative instruments include options, futures contracts, forwards and swaps. Despite this, derivatives can also be contracted outside the market by direct agreement between the contractors, this type of derivative is called OTC or Over The Counter.
conclusion
Corporate finance, or corporate finance is an approach to lead the process of capital budgeting, corporate finance with leads to maximize value or wealth for shareholders or owners, one of the fundamental questions focuses In measuring the contribution of a certain decision to the value of the shareholder, valuation or asset valuation techniques have been created.
Finance focuses on how companies can create and maintain value through the efficient use of financial resources.
