Corporate finance is an area of finance that deals with sources of funding, the capital structure of companies, actions that managers take to increase the value of the firm to the shareholders and the tools and analysis used to allocate financial resources.
Funds are generated from two main categories of resources – Equity and Liability
Equity examples are proceeds from the sale of stock, returns from investments, and retained earnings.
Liabilities include bank loans or other debt accounts payable, product warranties and other types of commitments from which an entity derives value.
Resource allocation, the second function of corporate finance, is the investment of funds with the intent of increasing shareholder wealth over time.
Two basic categories of investments – Current assets and Fixed assets.
Current assets include cash, inventory and accounts receivable.
Fixed assets are buildings, property, and machinery.
In addition, the resource allocation function is concerned with intangible assets such as goodwill, patents, workers, and brand names.
It is the job of a company’s principals or treasurer to conduct both of the investment categories in a manner that maximises shareholder wealth, or share price. Financial managers must balance the interests of owners, or shareholders; creditors, including banks and bondholders; and other parties, such as employees, suppliers, and customers. For example, a corporation may choose to invest its resources in risky ventures in an effort to offer its shareholders the potential for large profits. However, risky investments may reduce the perceived value of the company, thus decreasing its value in the market and increasing the rate of interest that the firm must pay to borrow money in the future. Conversely, if the company invests too conservatively, it could fail to maximise the value of its equity. If the firm performs better than other companies, its share price will rise, in theory, enabling it to raise additional funds at a lower cost, among other benefits.
Practical issues and factors influenced by corporate finance include employee salaries, marketing strategies, customer and the purchase of new equipment.
Audley Chaucer can advise in corporate transactions of all types, from constitutional issues to shareholder agreements, and advising management teams and financiers on financial and investment structures and agreements. We are increasingly undertaking Private Equity deals in various sectors.
Ian Lake
