Corporate finance

financial managementbusiness financefinanceCorporateCorporate finance advisorycorporate financingfinancial structureWorking capital management#"Valuing flexibilitybusiness financing
Corporate finance is an area of finance that deals with sources of funding, the capital structure of corporations, the actions that managers take to increase the value of the firm to the shareholders, and the tools and analysis used to allocate financial resources.wikipedia
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Capital structure

capital-structurefinancial structuresenior
Corporate finance is an area of finance that deals with sources of funding, the capital structure of corporations, the actions that managers take to increase the value of the firm to the shareholders, and the tools and analysis used to allocate financial resources.
In finance, particularly corporate finance capital structure is the way a corporation finances its assets through some combination of equity, debt, or hybrid securities.

Finance

financialfinancesfiscal
Corporate finance is an area of finance that deals with sources of funding, the capital structure of corporations, the actions that managers take to increase the value of the firm to the shareholders, and the tools and analysis used to allocate financial resources.
Finance can be split into three sub-categories: public finance, corporate finance and personal finance.

Investment banking

investment bankinvestment bankerinvestment banks
The terms corporate finance and corporate financier are also associated with investment banking.
Traditionally associated with corporate finance, such a bank might assist in raising financial capital by underwriting or acting as the client's agent in the issuance of securities.

Managerial finance

financial managementfinancialFinance management
Although it is in principle different from managerial finance which studies the financial management of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms.
Managerial finance is an interdisciplinary approach that borrows from both managerial accounting and corporate finance.

Debt

debtsprincipalborrowing
Capital budgeting is concerned with the setting of criteria about which value-adding projects should receive investment funding, and whether to finance that investment with equity or debt capital.
A company may use various kinds of debt to finance its operations as a part of its overall corporate finance strategy.

Bankruptcy costs of debt

bankruptcy costs
Much of the theory here, falls under the umbrella of the Trade-Off Theory in which firms are assumed to trade-off the tax benefits of debt with the bankruptcy costs of debt when choosing how to allocate the company's resources.
Within the theory of corporate finance, bankruptcy costs of debt are the increased costs of financing with debt instead of equity that result from a higher probability of bankruptcy.

Tax benefits of debt

Much of the theory here, falls under the umbrella of the Trade-Off Theory in which firms are assumed to trade-off the tax benefits of debt with the bankruptcy costs of debt when choosing how to allocate the company's resources.
In the context of corporate finance, the tax benefits of debt or tax advantage of debt refers to the fact that from a tax perspective it is cheaper for firms and investors to finance with debt than with equity.

Joel Dean (economist)

Joel Dean
In general, each project's value will be estimated using a discounted cash flow (DCF) valuation, and the opportunity with the highest value, as measured by the resultant net present value (NPV) will be selected (applied to Corporate Finance by Joel Dean in 1951).
Joel Dean (1906–1979) was an economist best known for his contributions to corporate finance theory in general, and particularly to the area of capital budgeting.

Securitization

securitizedsecuritisationsecuritizing
Management must attempt to match the long-term financing mix to the assets being financed as closely as possible, in terms of both timing and cash flows. Managing any potential asset liability mismatch or duration gap entails matching the assets and liabilities respectively according to maturity pattern ("Cashflow matching") or duration ("immunization"); managing this relationship in the short-term is a major function of working capital management, as discussed below. Other techniques, such as securitization, or hedging using interest rate- or credit derivatives, are also common. See Asset liability management; Treasury management; Credit risk; Interest rate risk.
Under traditional corporate finance concepts, such a company would have three options to raise new capital: a loan, bond issue, or issuance of stock.

Financial modeling

financial modelfinancial modellingFinancial models
See Financial modeling.
At the same time, "financial modeling" is a general term that means different things to different users; the reference usually relates either to accounting and corporate finance applications, or to quantitative finance applications.

Outline of finance

List of valuation topicsFinanceList of insurance topics
See list of valuation topics.
The management and control of those assets

Economic value added

EVAeconomic value-addeconomic values
Alternatives (complements) to NPV include Residual Income Valuation, MVA / EVA (Joel Stern, Stern Stewart & Co) and APV (Stewart Myers).
In corporate finance, as part of fundamental analysis, economic value added (EVA) is an estimate of a firm's economic profit, or the value created in excess of the required return of the company's shareholders.

Stewart Myers

Stewart C. MyersMyers
Alternatives (complements) to NPV include Residual Income Valuation, MVA / EVA (Joel Stern, Stern Stewart & Co) and APV (Stewart Myers). One of the main alternative theories of how firms manage their capital funds is the Pecking Order Theory (Stewart Myers), which suggests that firms avoid external financing while they have internal financing available and avoid new equity financing while they can engage in new debt financing at reasonably low interest rates. ROV is usually used when the value of a project is contingent on the value of some other asset or underlying variable. (For example, the viability of a mining project is contingent on the price of gold; if the price is too low, management will abandon the mining rights, if sufficiently high, management will develop the ore body. Again, a DCF valuation would capture only one of these outcomes.) Here: (1) using financial option theory as a framework, the decision to be taken is identified as corresponding to either a call option or a put option; (2) an appropriate valuation technique is then employed – usually a variant on the Binomial options model or a bespoke simulation model, while Black Scholes type formulae are used less often; see Contingent claim valuation. (3) The "true" value of the project is then the NPV of the "most likely" scenario plus the option value. (Real options in corporate finance were first discussed by Stewart Myers in 1977; viewing corporate strategy as a series of options was originally per Timothy Luehrman, in the late 1990s.) See also #Option pricing approaches under Business valuation.
He is notable for his work on capital structure and innovations in capital budgeting and valuation, and has had a "remarkable influence" on both the theory and practice of corporate finance.

Discounted cash flow

discount rateDCFdiscounted
In general, each project's value will be estimated using a discounted cash flow (DCF) valuation, and the opportunity with the highest value, as measured by the resultant net present value (NPV) will be selected (applied to Corporate Finance by Joel Dean in 1951).
Discounted cash flow analysis is widely used in investment finance, real estate development, corporate financial management and patent valuation.

Real options valuation

real optionsreal options analysisreal option
See further under Real options valuation.
Real options analysis, as a discipline, extends from its application in corporate finance, to decision making under uncertainty in general, adapting the techniques developed for financial options to "real-life" decisions.

Market timing hypothesis

One of the more recent innovations in this area from a theoretical point of view is the Market timing hypothesis.
It is one of many such corporate finance theories, and is often contrasted with the pecking order theory and the trade-off theory, for example.

Monte Carlo methods in finance

Monte Carlo simulationsimulationsimulation techniques
ROV is usually used when the value of a project is contingent on the value of some other asset or underlying variable. (For example, the viability of a mining project is contingent on the price of gold; if the price is too low, management will abandon the mining rights, if sufficiently high, management will develop the ore body. Again, a DCF valuation would capture only one of these outcomes.) Here: (1) using financial option theory as a framework, the decision to be taken is identified as corresponding to either a call option or a put option; (2) an appropriate valuation technique is then employed – usually a variant on the Binomial options model or a bespoke simulation model, while Black Scholes type formulae are used less often; see Contingent claim valuation. (3) The "true" value of the project is then the NPV of the "most likely" scenario plus the option value. (Real options in corporate finance were first discussed by Stewart Myers in 1977; viewing corporate strategy as a series of options was originally per Timothy Luehrman, in the late 1990s.) See also #Option pricing approaches under Business valuation.
Monte Carlo methods were first introduced to finance in 1964 by David B. Hertz through his Harvard Business Review article, discussing their application in Corporate Finance.

Working capital

capitalWorking capital analysiscapitalized
Working capital management is the management of the company's monetary funds that deal with the short-term operating balance of current assets and current liabilities; the focus here is on managing cash, inventories, and short-term borrowing and lending (such as the terms on credit extended to customers).
Working capital management

Return on equity

ROE(RoE)equity returns
In this context, the most useful measure of profitability is Return on capital (ROC). The result is shown as a percentage, determined by dividing relevant income for the 12 months by capital employed; Return on equity (ROE) shows this result for the firm's shareholders. As above, firm value is enhanced when, and if, the return on capital exceeds the cost of capital.
In corporate finance, the return on equity (ROE) is a measure of the profitability of a business in relation to the equity, also known as net assets or assets minus liabilities.

First Chicago Method

An application of this methodology is to determine an "unbiased" NPV, where management determines a (subjective) probability for each scenario – the NPV for the project is then the probability-weighted average of the various scenarios; see First Chicago Method.
The First Chicago Method takes account of payouts to the holder of specific investments in a company through the holding period under various scenarios; see Quantifying uncertainty under Corporate finance.

Pecking order theory

pecking orderpecking order theory of capital structure
One of the main alternative theories of how firms manage their capital funds is the Pecking Order Theory (Stewart Myers), which suggests that firms avoid external financing while they have internal financing available and avoid new equity financing while they can engage in new debt financing at reasonably low interest rates.
Corporate finance

Business valuation

Option pricing approaches#Option pricing approachesappraised
ROV is usually used when the value of a project is contingent on the value of some other asset or underlying variable. (For example, the viability of a mining project is contingent on the price of gold; if the price is too low, management will abandon the mining rights, if sufficiently high, management will develop the ore body. Again, a DCF valuation would capture only one of these outcomes.) Here: (1) using financial option theory as a framework, the decision to be taken is identified as corresponding to either a call option or a put option; (2) an appropriate valuation technique is then employed – usually a variant on the Binomial options model or a bespoke simulation model, while Black Scholes type formulae are used less often; see Contingent claim valuation. (3) The "true" value of the project is then the NPV of the "most likely" scenario plus the option value. (Real options in corporate finance were first discussed by Stewart Myers in 1977; viewing corporate strategy as a series of options was originally per Timothy Luehrman, in the late 1990s.) See also #Option pricing approaches under Business valuation.
For general discussion as to context see #"Valuing flexibility" under corporate finance, and Contingent claim valuation; for detail as to applicability and other considerations see #"Limitations" under real options valuation.

Trade-off theory of capital structure

trade-off theoryTrade-offs
Much of the theory here, falls under the umbrella of the Trade-Off Theory in which firms are assumed to trade-off the tax benefits of debt with the bankruptcy costs of debt when choosing how to allocate the company's resources.
Corporate finance

Triangular distribution

triangularright-triangle distributionTriangular Probability Density Function
Continuing the above example: instead of assigning three discrete values to revenue growth, and to the other relevant variables, the analyst would assign an appropriate probability distribution to each variable (commonly triangular or beta), and, where possible, specify the observed or supposed correlation between the variables.
See for example under corporate finance.

Monte Carlo method

Monte CarloMonte Carlo simulationMonte Carlo simulations
For this purpose, the most common method is to use Monte Carlo simulation to analyze the project's NPV.
This is because the “what if” analysis gives equal weight to all scenarios (see quantifying uncertainty in corporate finance), while the Monte Carlo method hardly samples in the very low probability regions.