Corporate Finance I - Capital Budgeting, Capital Structure and Working Capital Management (2024)

FAQs

Corporate Finance I - Capital Budgeting, Capital Structure and Working Capital Management? ›

Hence, capital budgeting focuses on selecting the best investment projects, capital structure involves determining the appropriate mix of debt and equity financing, and working capital management revolves around efficiently managing short-term assets and liabilities.

What Are the 3 Main Areas of Corporate Finance? The main areas of corporate finance are capital budgeting (e.g., for investing in company projects), capital financing (deciding how to fund projects/operations), and working capital management (managing assets and liabilities to operate efficiently).

Capital structure is the particular combination of debt and equity used by a company to finance its overall operations and growth. Equity capital arises from ownership shares in a company and claims to its future cash flows and profits.

Capital budgeting is a method of estimating the financial viability of a capital investment over the life of the investment. Unlike some other types of investment analysis, capital budgeting focuses on cash flows rather than profits.

A well-run firm manages its short-term debt and current and future operational expenses through its management of working capital, the components of which are inventories, accounts receivable, accounts payable, and cash.

The five basic corporate functions are financing (or capital raising), capital budgeting, financial management, corporate governance, and risk management. These functions are all related, for example, a company needs financing to fund its capital budgeting choices.

Its structure can be a combination of long-term and short-term debt and/or common and preferred equity. The ratio between a firm's liability and its equity is often the basis for determining how well balanced or risky the company's capital financing is.

Hence, capital budgeting focuses on selecting the best investment projects, capital structure involves determining the appropriate mix of debt and equity financing, and working capital management revolves around efficiently managing short-term assets and liabilities.

For instance, a company may have a capital structure of 60% equity and 40% debt, indicating that 60% of its funds are raised through equity, and 40% through debt.

The types of capital structure are equity share capital, debt, preference share capital, and vendor finance. In addition, it ensures accurate funds utilization for business. The right capital structure level decreases the overall capital cost to the highest level. Also, it increases the public entity's valuation.

What does working capital management manage? ›

Working capital management represents the relationship between a firm's short-term assets and its short-term liabilities. It aims to ensure that a company can afford its day-to-day operating expenses while also investing the company's assets in the most successful direction possible.

Capital budgeting is the process of evaluating long-term investments. Examples include the addition or replacement of a fixed asset, like machinery, or a large-scale project, such as buying real estate or another company.

Three ratios that are important in working capital management are the working capital ratio, the collection ratio, and the inventory turnover ratio.

The three types of working capital are permanent working capital, temporary working capital, and negative working capital. Permanent working capital is the minimum number of current assets required to run a business.

Basic Areas in Finance. Finance is divided into three primary areas in the domestic market: business finance, investments, and financial markets and institutions (see Figure 1.2).

There are three types of financial decisions- investment, financing, and dividend. Managers take investment decisions regarding various securities, instruments, and assets. They take financing decisions to ensure regular and continuous financing of the organisations.

Finance is the management of money which includes investing, borrowing, lending, budgeting, saving and forecasting. There are four main areas of finance: banks, institutions, public accounting and corporate.

In the financial services industry, there are several national and regional associations that advisors may consider joining. The FPA, FSP, NAPFA, and FMA are just four of the most well-respected associations, which we discuss in turn.