Understanding Corporate Finance #EMBA 27

Kamal Okunola Written by MKO · 1 min read >

The ultimate goal for corporate finance is to maximize the value of a business through planning and implementing their resources all well balancing risk and managing profitability for the company,

The activities in corporate finance can be divided into three

  1. Capital investments this is where managers have to decide which projects to invest in and which businesses to acquire or to invest in their goal is to earn the highest possible risk adjusted return on those capital investments

2. the second category is capital financing: with capital financing the objective is to optimize capital

structure which means the firm will have the lowest weighted average cost of capital

3. Dividends and return of capital this is when managers have to decide how and when to return capital

to investors if they can’t find a good enough use for it in the business

Corporate finance is concerned with making capital investments that have high risk adjusted returns funding those investments with the lowest possible cost and best capital structure and then finally returning capital to investors

All these components of corporate finance fit together as managers attempt to maximize the value of their businesses there are two sides to the capital markets in corporate finance

on the one side are corporations which represent operating companies their businesses in all sorts of different industries and they need capital to grow and run their operations

on the other side of the capital markets we have institutions that represent investors these investors have money that they want to invest in companies so capital flows from those investors into the corporations and in exchange corporations issue back to the institutional investors bonds or shares in their company

in the middle of all this sits the investment bank and the investment bank which is also sometimes referred to as the sell-side uses its relationships and its contacts on both sides to facilitate these transactions

There are four key players in corporate finance

first is the corporations these are the companies that need capital

two are the institution’s they represent the investors that have money

three are the investment banks; they broker the transactions between corporations and institutions and

then finally the fourth is the public accounting firms which audit and oversee all of the financial information

In the secondary market you have additional institutional investors or fund managers who want to buy securities of publicly traded companies and you have some other fund managers

Secondary market is where investors buy and sell on a stock exchange or over the counter using investment banks and the investment banks have sales and trading departments as well as Equity Research departments that help facilitate all of these transactions between investors

There are two main categories in the market, the primary market investors and corporations.

We can further break them down into retail and institutional retail investors consist of high net worth individuals and institutional investors can include mutual funds, pension funds, private equity firms, venture capital and angel investors.


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