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Question
What is corporate finance and state two decisions which are the basis of corporate finance?
Solution
Definition:
‘‘corporate finance deals primarily with the acquisition and use of capital by business corporation.’’
Meaning:
The term corporate finance also includes financial planning, study of the capital market, money market and share market. It also covers capital formation and
Two decisions that are the basis of corporate finance.
- Financing Decision: The business firm has access to the capital market to fulfill its financial needs. The firm has multiple choices of sources of financing. The firm can choose whether it wants to raise equity capital or debt capital. Firms can even opt for a bank loan, public deposits, debentures, etc. to raise funds. The finance manager ensures that the firm is well capitalised i.e. they have the right amount of capital and that the firm has the right combination of debt and equity.
- Investment Decision: Once the business firm has gained access to capital, the finance manager has to take a decision regarding the use of the funds in a systematic manner so that it will bring a maximum return for its owners. For this, the firm has to take into consideration the cost of capital. Once they know the cost of capital, the firm can deploy or use the funds in such a way that returns are more than the cost of capital.
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RELATED QUESTIONS
Match the correct pairs:
| Group “A” | Group “B” | ||
| 1 | Financial planning | a. | Dividend |
| 2 | Public deposit | b. | Less applications than expected |
| 3 | Private placement | c | Owned capital |
| 4 | Secured debentures | d. | Advance programming of the financial plan |
| 5 | Return on share | e. | Bonus |
| f. | Issuing shares without inviting the public for subscription |
||
| g. | Maximum 7 years | ||
| h. | Security about repayment | ||
| i. | Maximum 36 months | ||
| j. | Management of business activities |
Match the pairs.
| Group ‘A’ |
Group 'B' |
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a) Capital budgeting |
1) Sum of current assets |
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b) Fixed capital |
2) Deals with acquisition and use of capital |
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c) Working capital |
3) Fixed liabilities |
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d) Capital structure |
4) Sum of current liabilities |
|
e) Corporate finance |
5) Fixed assets |
|
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6) Investment decision |
|
7) Financing decision |
|
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8) Deals with the acquisition and use of assets |
|
|
9) Mix-up of various sources of funds |
|
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10) Product mix |
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During recession period sales will ______
Correct the underlined word and rewrite the following sentence.
Finance is needed to pay dividend to debenture holders.
Correct the underlined word and rewrite the following sentence.
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Correct the underlined word and rewrite the following sentence.
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Answer in brief.
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Finance is the management of ______ affairs of the company.
Business firm gives green signal to the project only when it is profitable.
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Corporate Finance
Business firm gives green signal to the project only when it is profitable.
Business firm gives green signal to the project only when it is profitable.
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