1. Key Functions of Corporate Finance

1.1. Capital Budgeting (Investment Decisions)

Capital budgeting involves determining which projects or investments a company should undertake. These are long-term investments that require significant financial resources.

Evaluation Methods:

• Net Present Value (NPV)
• Internal Rate of Return (IRR)
• Payback Period
• Profitability Index (PI)

1.2. Capital Structure (Financing Decisions)

Capital structure refers to how a company finances its operations and investments, using a mix of debt, equity, and other financial instruments.

• Debt Financing: Companies can borrow funds via loans, bonds, or debentures. Debt financing is advantageous because interest payments on debt are tax-deductible.
• Equity Financing: Involves raising capital through issuing stocks or shares. This doesn't require repayment but dilutes the ownership of existing shareholders.
• Optimal Capital Structure: The key challenge in corporate finance is finding the optimal mix of debt and equity that minimizes the cost of capital while maintaining financial flexibility.

1.3. Working Capital Management

Working capital management involves ensuring a company has enough short-term assets to cover its short-term liabilities.

• Current Assets: Includes cash, accounts receivable, and inventory.
• Current Liabilities: Includes accounts payable, short-term loans, and other short-term obligations.

2. Financial Risk Management

2.1. Types of Financial Risks:

• Market Risk
• Credit Risk
• Liquidity Risk
• Interest Rate Risk
• Currency Risk

2.2. Hedging and Derivatives:

Hedging is a risk management strategy used to offset potential losses in one area by making gains in another.

• Forward Contracts: Agreements to buy or sell an asset at a future date at a predetermined price.
• Options: Contracts giving the holder the right to buy or sell an asset at a specified price before a certain date.
• Swaps: Agreements to exchange cash flows or financial instruments over time.

3. Dividend Policy

One of the crucial decisions in corporate finance is determining how to allocate profits.

• Pay Dividends: Distribute profits to shareholders.
• Retain Earnings: Reinvest profits into the business for growth.

4. Mergers and Acquisitions (M&A)

• Mergers: Two companies combine to form a new entity.
• Acquisitions: One company buys another, and the target company ceases to exist as an independent entity.

5. Valuation of Businesses

Valuing a company is a fundamental activity in corporate finance

• Discounted Cash Flow (DCF)
• Comparable Company Analysis
• Precedent Transactions
• Asset-Based Valuation

6. Financial Reporting and Analysis

Financial reporting involves preparing financial statements (balance sheet, income statement, and cash flow statement) that provide insights into the company’s financial health and performance