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What Are the Basics of Corporate Finance?

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  • Written By: M. Kayo
  • Edited By: Susan Barwick
  • Last Modified Date: 25 September 2016
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Corporate finance deals with the management and financial activity of a corporation. Some corporations have an office of corporate finance and employ financial experts to manage the company's financial activity. The basics of corporate finance include the involvement of investment bankers, determining the value of a corporation or its stock, and mergers and finance activities. All of these components work individually and together to help determine the worth of a corporation and its ability to borrow or raise money, allowing further expansion of the business.

Investment banking is one of the basics of corporate finance and primarily involves raising the cash needed to expand the business. For example, if a corporation wants to do business in another country, it may need to build a factory or office building there. A corporation will likely go to an investment bank that assists the corporation in raising capital. Such money-raising methods typically involve stocks, bonds, or securities. The investment bank underwrites the offer of a corporation's stock to the public through an initial public offering (IPO) or issues debt in the form of bonds.

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Valuation is another basic component of corporate finance that is conducted when a corporation is going to sell a portion of its organization, such as a division or branch. A corporation has an obligation to its shareholders to determine the value of the assets to be sold. Valuation determines the current market value of the asset so that it can be used as collateral for borrowing. For example, a corporation may sell off its overseas branch to obtain the money needed to fund research for a new product. The term valuation can also refer to the market value of a corporation's stock based on the net worth and expected earnings of the issuing corporation.

Another important activity regarding the basics of corporate finance is mergers and acquisitions. When two companies combine their assets and liabilities to form a larger company, it is called a merger. The purpose of a merger is to combine forces, allowing both organizations to help the new, larger corporation make even more money. An acquisition is similar, except a larger company will typically retain its previous name and identity while absorbing the smaller company into itself. When a smaller company is acquired by a larger company, the smaller company is usually established as a subsidiary or division of the larger company.

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