Corporate finance is a branch of finance that handles the financial chooses made by large businesses and the resources used to make these decisions. The main goal of corporate finance is to capitalize on the value of the entity while maintaining the financial risks of the company. Corporate finance, just like companies such as hughes net satellite, involves short-term and long-term choices such as capital investment and there are a variety of analysis tools employed.
Capital Investment
Capital investment choices are long-term decisions regarding which particular tasks the company invests in, deciding to fund using equity or debt, and deciding when and how to pay shareholders.
• Capital investment involves capital structure and fixed assets and decisions and the company selects projects that will create a positive net value.
• Capital investment decisions involve investment, funding, and dividend choices.
Process of Capital Investment Decisions
1. Investment Decision: the management of a business must distribute restricted resources to competing projects.
2. Value of Project: the value of projects must be estimated for companies to allocate capital. A discounted cash flow system is typically used to estimate the value of a project. The project with the highest net value is selected.
3. Valuing Flexibility: projects often result in major effects to the company and careful decisions must be made. Management of businesses sometimes implements tools that place precise value on certain options.
Common Analysis Tools
Two types of tools are often used interchangeably when valuing flexibility.
1. Decision Tree Analysis (DTA): values flexibility by including potential events and resulting decisions by management. Every choice by management is a direct response to certain events that lead to a possible path the business could take.
2. Real Options Analysis (ROA): used when the project value is dependent on the value of another variable or asset. ROA commonly uses models such as the bespoke simulation model or binomial options model to estimate value of the contingent.
Corporate finance is a complex subfield of finance and it involves a variety of concepts to ensure large businesses make effective financial decisions.