Corporate Finance Theory and Practice

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