What is the primary objective of corporate finance? In 2 pages with apa citation.
Corporate finance is a specialized branch of finance that deals with the financial decisions made by corporations and the tools and analysis used to make these decisions. The primary objective of corporate finance is to maximize shareholder value by managing the financial resources of the corporation in a way that generates the highest return for shareholders. This involves making strategic investment decisions, managing the firm's capital structure, and ensuring proper allocation of financial resources.
One of the key functions of corporate finance is investment decision making. This involves evaluating potential investment opportunities and choosing the projects that will provide the highest return on investment. Corporations must carefully analyze the costs and benefits of each potential investment to determine which projects will generate the most value for shareholders. This can involve assessing the risk associated with each investment, estimating the expected cash flows, and determining the appropriate discount rate to use in evaluating the project.
Another important function of corporate finance is managing the firm's capital structure. This involves determining the optimal mix of debt and equity financing to use to fund the company's operations. Corporations must balance the benefits of using debt, such as tax advantages and increased leverage, with the costs, such as interest payments and potential financial distress. By carefully managing the firm's capital structure, companies can minimize their cost of capital and maximize shareholder value.
In addition to managing investment decisions and capital structure, corporate finance also involves ensuring the proper allocation of financial resources within the firm. This includes managing working capital, such as cash, inventory, and accounts receivable, to ensure the firm has enough liquidity to meet its short-term obligations. Companies must also carefully manage their long-term investments, such as property, plant, and equipment, to ensure they are maximizing the return on these assets.
Overall, the primary objective of corporate finance is to maximize shareholder value by making strategic investment decisions, managing the firm's capital structure, and ensuring proper allocation of financial resources. By effectively managing these aspects of the business, corporations can create value for their shareholders and ultimately achieve long-term financial success.
References
Brigham, E. F., & Ehrhardt, M. C. (2016). Financial management: Theory and practice. Cengage Learning.
Brealey, R. A., Myers, S. C., & Allen, F. (2017). Principles of corporate finance. McGraw-Hill Education.