Question

Discuss the three main areas of concern in corporate finance.

Answer 1

The following are the three main areas of concern in corporate finance:
1) Capital Budgeting
Corporate finance is concerned with what capital investments
will be profitable for a company.
For example, corporate finance of a company uses the NPV (net present value) method
and IRR (internal rate of return) method to evaluate the profitability
of a project.
A positive NPV is considered a good capital investment. In addition, a capital investment
that has an IRR greater than the cost of capital is considered a good investment.
2) Capital Structure
Corporate finance is concerned with creating the right mix of debt and equity for the company.
The cost of capital is the weighted average of the cost of equity and cost of debt.
The cost of capital is also referred to as the weighted average cost of capital (WACC).
The right mix of debt and equity will provide a favorable cost of capital for the company.
3) Short-term liquidity
Corporate finance is also concerned with the operating cash flow and the working capital of a company.
A company must have a positive operating cash flow to profitably continue its business
operations.
A company must also have a positive working capital to operate profitably.
The working capital is the current assets minus the current liabilities.
Current liabilities must be paid off when they are due. And the company
must have enough current assets to meet the payments of the current liabilities.