Finance is the study and management of money, investments, and other financial instruments.
- It involves activities such as borrowing, lending, saving, budgeting, and forecasting to efficiently allocate resources over time under conditions of uncertainty.
Three Major Domains of Finance:
- Public Finance:
- It deals with the financial activities of the government and public sector organizations. It focuses on revenue generation (mainly through taxation), government expenditures, budgeting, and public debt management.
- Corporate Finance:
- It refers to the financial activities related to running a business. It focuses on funding sources, capital structure, investment decisions, and strategies to maximize shareholder value.
- Personal Finance:
- It involves the financial decisions and activities of an individual or household. It includes budgeting, saving, investing, retirement planning, and insurance.
Concept of Corporate Finance:
Corporate Finance is the area of finance that deals with how corporations manage their funding sources, capital structuring, and investment decisions.
- It focuses on maximizing shareholder value through long-term and short-term financial planning and strategy implementation.
- Nowadays, corporate finance, business finance, financial management, and managerial finance are used as synonym of each other.
Key Concepts in Corporate Finance:
- Capital Budgeting:
- It refers to the process of evaluating and selecting long-term investments (like new projects or equipment).
- Techniques: Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period.
- Capital Structure:
- The mix of debt and equity used by a company to finance its operations.
- Goal: Find an optimal balance to minimize cost of capital and risk.
- Working Capital Management:
- Managing short-term assets and liabilities to ensure the firm has enough liquidity for daily operations.
- Includes inventory, accounts receivable/payable, and cash management.
- Dividend Decisions:
- Concerned with how much of the profits should be distributed to shareholders as dividends and how much should be retained for reinvestment.
- Financial Risk Management:
- Identifying and managing exposure to financial risks (like currency fluctuations, interest rate changes, and credit risk).
Objectives of Corporate Finance:
- Maximize shareholder wealth (main goal)
- Ensure efficient use of financial resources
- Maintain financial stability and flexibility
- Achieve sustainable growth
