The term Corporate Finance designates a special field of the financial system, which argues with questions to the optimal capital structure, to the dividend politics of the enterprise as well as the evaluation of investment decisions and the determination of the enterprise value.

This term originating from the English-language literature and teachings covers investment calculation, Unternehmensfinanzierung and capital market theory into for instance the fan taught traditionally in the German-speaking countries. In the German literature also the term Unternehmensfinanzierung is used as synonym.

To increase the discipline divided into a long-term and short term decision horizon and into techniques with the primary goal the enterprise value, as the capital net yield are increased or the capital costs are lowered, without being received risks, which exceed the own risk load-carrying capacity. Investment decisions cover the long-term selection of the projects in to be invested are, with the question whether these projects with own capital funds or with outside capital are financed and whether and when dividends to the shareholders to be paid to be supposed. The short term decisions of the Corporate finance are called Working Capital management and to employ itself with the management of the circulating capital (Current ate) and the short term commitments (liabilities current), to which the liquidity management, the optimization one gives to the capital freeze in the camp and the short term debts and investments of funds special attention. Corporate finance is a part of the finance management, which has an easily broader range of application and beside bodies under private law to all other forms of organizations refers.

Investment decisions

The long-term financing decisions refer to the fixed assets and the capital structure and as investment decisions are designated. These decisions are based on different interdependenten criteria. Generally the management must maximize the enterprise value, by into projects with a positive bar value one invests. If the expected refluxes of capital from these projects with an appropriate rate of discount are evaluated, these projects must be financed also with the same interest rate.

If there is no such the management should pay the surplus liquidity to the shareholders. The investment decisions cover thus investment decisions, financing decisions and the dividend politics.

Investment decisions

The decision-making process into the management limited resources between competitive business fields allozieren as capital requirement calculation (Capital Budgeting) one designates. In order to be able to fall these decisions to the Kapitalallokation, the value of each or each project as a function of capital volumes, temporal distribution and the predictability and/or uncertainty of the future payment stream must be measured.

Project evaluation

The current value of a project is determined in all rule by the fact that all project-relevant payment rivers are discounted on the today's time. The project with the highest bar value (Net present VALUE, NPV) is realized as the first. For this amount and time of all future payment stream must become estimated. These are then discounted with the discount interest rate and added to the bar value. The bar value concept is today the furthest common method for the determination of the present value of an investment.

The bar value is considerably affected by the choice of the discount interest rate. The choice of the correct interest rate determines considerably the correctness of the decision which can be made. The discount interest rate represents a lower bound for the project net yield. It corresponds the risk-free interest rate plus to a project-specific risk addition. The project risks are determined typically over the expected of the payment stream. In order to measure a rate of discount for a specific project, managers of models use as for instance CAPM or APT. For the evaluation of the selected financing mode the weighted average capital costs (weighted AVERAGE cost OF capital, WACC) are used. Secondary criteria for choice give to be used into the Corporate finance different other characteristic numbers in connection with the bar value than. These are related to the bar value method and cover BREAK even analysis, internal interest rate (English: ERR, internal guess OF return), the Equivalent Annual Cost procedure (EAC) and the capital net yield (ROI). See also: Share evaluation and fundamental analysis

Flexible evaluation models

In many scenarios, e.g. research and development projects a project for an enterprise can completely new action ways open, these possibilities not become however in a view of bar value with considered. Therefore occasionally instruments are used here, which assign an explicit value to these options. During as in the bar value method the most probable, average or scenario-specific payment stream to be abdiskontiert, are weighted and computed in the flexible evaluation different status-dependent scenario developments with their potential, different refluxes of capital with their probability. The difference to the simple bar value method lies in the modelling and evaluation of different, possible development paths. In these different option values can be contained, which are to be evaluated.

The two most frequently applied instruments are here the decision tree and the material options.

• The decision tree analysis reaches the evaluation of different development scenarios, as exogenous events with probabilities and management decisions based on it are measured. Each management decision as answer to an event produces an edge and/or a branch in the decision tree, which an enterprise can follow. (Ex.s: The management will go only into the phase 2 from a project, if the phase 1 could successfully be locked. Phase 3 however depends on phase 2. The consequence of events and whereupon the following decisions lead to different final results and form in each case a development path in the decision tree. In the bar value method there are no conditioned bypasses - each phase must be modelled as alone standing scenario). The path with the highest probability-weighted bar value results in the representative project value.
• The beginning of the material options is used if the value of a project is dependent of another value importance. (Ex.s: The feasibility of a mining industry project for gold promotion depends on the gold price at the market. If the gold price is too deep, the mining industry project will not be realized, if it is sufficient large, the dismantling project will be accomplished). Here the option price theory is used as framework, those decision which can be made corresponds either to a call option or a PUT option. The evaluation effected then with the Binomialmodell or - less frequently for this purpose - via Black Scholes, see option price evaluation. Value of the project "“protects"” corresponds then to the bar value of the most probable scenario plus its option value.

Financing decisions

Each business investment must be financed appropriately. As to be mentioned above by the choice of the financing both the rate of discount as well as affects the future payment stream. The composition of the financing from own capital funds and outside capital affects thus the value of an investment. The management must therefore the optimal financing-mixes determines, i.e. the capital structure is to be found, which leads to the maximum value (see for this: Balance structure management, Fisher separate ion theorem, in addition, Modigliani Miller theorem).

With the choice of the Unternehmensfinanzierung many factors bring in into the decision also. In the capital structural policy the relationship from own capital funds to outside capital is specified and/or its change goals. Depending on additional Finanzierungsbedarfe over stranger or self financing is opened, i.e. the additionally necessary capital is taken up as outside capital with longer or shorter running time or than own capital funds. As measures are for example the listing, the capital increase or shifting outside capital mentioned. The project financing by outside capital (indebtedness) represents a commitment, whose interest charge must be served. From this interest discharges with appropriate influence of the project bar value result. Equity financing is less risky in the reference to cash-flow commitments, but it leads to a reduction of the yield on equity, if the result goals of the project are not reached. The costs of own capital funds are typically also higher than the costs of a foreign indebtedness (see CAPM and WACC and in such a way leads equity financing to a increased rate of discount, which exceeds the interest rate risks of an outside financing in the final result by far. The management must also ensure in the further that the capital admission as exactly as possible concerning amount and Timing coincide with the payment stream of the expenditures on capital assets.

Articles in category "Corporate Finance"

We found here 39 articles.

Related Websites

We found here 3 related websites.

• Careers in Finance: Corporate Finance: Overview
  A career in corporate finance means you would work for a company to help it ... Jobs in corporate finance are also relatively stable while performance in ...


• Corporate Finance
  For the last 20 years, Corporate Finance has written about the ways that companies have found to manage their capital and cash more efficiently. ...


• Corporate Finance Lectures
  Corporate finance class syllabus and project description Lecture note packet 1: Management Objectives and Investment Analysis (Download pdf file). ...