Question

What are the three important questions of corporate finance you will need to address? Please briefly explain them and indicate how they are related to the areas in the balance sheet of a company.

Answer 1

Three main questions in Corporate Finance.

 

a) Capital Budgeting

It is an important aspect of Corporate Finance. As against a normal budget, capital budgeting deals with the budgeting or planning for long term investments. The long term investments could vary from organisation to organisation but all organisations be it small or big at some point in time needs to do capital budgeting. The organisations might be posed with the decisions like buying a new machinery, venturing into a new business/projects, replacing an existing machine, buying vs. leasing, etc. A careful evalution or budgeting of these proposals is utmost important as any improper evaluation or wrong decision would lead to heavy loss for the organisation.

 

b) Capital structure

Capital structure is another important aspect in Corporate Finance. Capital structure shows the combination of Debt and equity in a company. In other words, it shows how the company has financed its growth and how well the company is mixed. This mix of debt and equity is very important as it shows the funding structure of the company. It also shows the riskiness of the borrowing practice in a company.

 

c) Working capital Management

While the Capital budgeting and capital structure deals with long term and Non-current assets and liabilities aspects in the balance sheet, working capital management deals with the short term aspects. Working capital management focuses on managing the Current assets and current liabilities. The purpose of working capital management is to ensure that the corporation has sufficient liquidity to meet its short term and near term obligations. Hence, working capital management is very important aspect of corporate finance. If the working capital is not managed properly, it might lead to a liquidity crunch for the corporation and might affect the day to day operation of the business.

Three main questions in Corporate Finance.

a) Capital Budgeting

b) Capital structure

c) Working capital Management