Corporate finance is the part of finance in which we take financial decision relating to companies. Corporate finance study is helpful to maximize return on investment of company at minimum risk. In CFA Course Level - 2, it is important topic which is taught by teacher. In corporate finance, CFA students have to study corporate investment decisions, corporate financing decisions, corporate working capital decisions and financial risk management. Now, we are explaining these decisions of corporate finance one by one.
1. Corporate Investment Decisions
Suppose, any corporate has 10000 branches in 193 countries and as certified financial analyst, it is your duty to take the decisions of investment of $ 500 billion for buying building, plants, furniture and machinery of these 10000 branches. This decision may be difficult for one officer only if you do not know capital budgeting tools and its effective use with the help of computer software. But an expert CFA will make the list of all fixed assets by creating data base of its purchasing price, active life and related benefits. And then, he will calculate its NPV by applying appropriate discount rate.
For example, each machinery has three supplier. But we have to choose one the best. At that time, higher NPV project will be accepted. We also consider our this investment's risk and we will compare its risk with other investment projects. We can also use other discounted cash flow valuation methods like IRR, CAPM, discounted paying back period method. For knowing uncertainty level, we will do sensitive analysis. Even after real big investment, our work will not stop. We will make cash flow statement for knowing actual net cash inflows from particular investment.
2. Corporate Financing Decisions
Corporate financing decisions are taken for supply of money for corporate investment projects. Suppose, in above example, we have collected $ 500 billion from share capital but actual need for investment for good profit is $ 700 billion, then how will you get $ 200 billion? Answer is through corporate debt financing. But, we will take this decision by following way:
a) We want to get cheap loan - Compare cost of capital.
b) We do not want to to lose our control - Make good financial mix.
3. Working Capital Management Decisions
We need working capital for buying current assets, paying current expenses and current liabilities and other purposes. So, in working capital management, we manage our all current assets. We take decisions when, how and from where will we buy inventory? What will be credit limit for our customers? When will we pay to our creditors. Good management of this will be helpful for us for reducing stress on long term fun for the purpose of working capital.
Financial Risk Management
Due to happening of future loses, increasing the cost of products, changing of interest rate and exchange rate, we have to face different type of risks. So, in corporate finance, it is our prime duty to measure all these risks. Classify all these risks in liquidity risk, solvency risk, legal risk and natural risk or any other. Use good techniques for managing it. In these techniques, we can include hedging, option, future contracts, credit rating, currency swap, interest rate swap, credit reporting and following rules to prevent money laundering.