Corporate Finance

Frequently Asked Questions

• What is corporate finance?

  Corporate finance focuses on how corporations can use long- and short-term financial planning and other strategies to source funding, structure capital, make investments and employ accounting techniques to maximize shareholder value. It focuses both on day-to-day cash flow and on long-term planning.

  Learn More: Corporate Finance Definition
• How do corporations finance themselves?

  Corporations have a wide range of ways to raise capital for growth. These include retained earnings (better known as profits), taking on debt, and selling off ownership (equity funding). Success lies in finding the correct mix of these methods—and companies can be valued by how they balance their funding sources.

  Learn More: What Are the Sources of Funding Available for Companies?
• How does capital budgeting work in a corporation?

  Capital budgeting uses three methods to determine whether a possible capital investment makes sense. The payback period calculates how long it would take for the project to earn enough to recover its cost. The internal rate of return is how much the project should earn—and whether that’s higher than the borrowing cost. The net present value method lets you compare the proposed project to other options to see which project would make more.

  Learn More: An Introduction to Capital Budgeting
• How do you read a corporate cash flow statement?

  A cash flow statement is a sort of corporate checkbook that reconciles a company’s balance sheet and income statement. It records the inflow and outflow of cash and lets investors know whether the revenues that a company has booked on its income statement have actually been received. Note that while a positive cash flow is good, the statement doesn’t account for liabilities and assets; it’s not a complete picture. Some companies with negative cash flows may still be good investments.

  Learn More: Corporate Cash Flow: Understanding the Essentials
• What’s more important—market capitalization or equity?

  Both are important, but equity—the company’s assets minus liabilities—is a more accurate way to estimate what a company is worth. Market capitalization is the total worth of all a company’s outstanding shares; it can fluctuate daily, if not hourly, with the share price on the stock market.

  Learn More: Market Capitalization vs. Equity: What’s the Difference?
• Why is corporate finance strategy important to all managers?

  Strategic financial management is how companies make money—and that is the ultimate report card for a manager. Skilled managers focus on long-term success (strategic management), though they may also use tactical management tools to position the company for the short term. Key elements include planning, budgeting, risk assessment and management, establishing ongoing procedures and strategies targeted to the industry/sector in which the company operates.

  Learn More: Strategic Financial Management