What is Corporation Finance?

Osmand Vitez

Corporation finance, also known as corporate finance, is a business function companies use to assess various business opportunities and scenarios based on financial outcomes. Companies often use corporation finance to help analyze information relating to business decisions. Breaking down opportunities and scenarios into financial dollars can help managers understand the impact business decisions will have on their company’s physical and financial assets. While many corporate finance techniques exist in business, they often fall into one of two categories: quantitative or qualitative.

Companies assess business opportunities and scenarios based on likely financial outcomes to help make decisions.
Companies assess business opportunities and scenarios based on likely financial outcomes to help make decisions.

Quantitative corporation finance techniques usually include statistical or mathematical formulas used to break down financial information and calculate specific results. Common quantitative formulas include net present value, decision trees, return on investment, cost-benefit analysis, and various other techniques. This analysis method requires companies to gather specific financial information relating to current business operations and external financial information based on current market conditions. Companies enter this information into the corporation finance formula to determine the potential profit of business opportunities and the probability of failure relating to each opportunity.

Qualitative corporation finance techniques rely more on a manager’s education, experience, and expertise when making business decisions. Companies may use this technique when financial information is not readily available for certain business decisions. Qualitative techniques also allow companies to place more importance on the human element of making business decisions. Regardless of what statistical or mathematical calculations might report, companies may be more comfortable allowing managers to make final decisions based on their personal assessment of internal and external economic conditions.

Corporation finance is also used to calculate the financing methods companies may use for acquiring assets, expanding operations, or beginning new operations in various economic markets. Companies often use corporate finance to determine how much debt or equity financing they should use in their business operations. Debt financing usually relates to traditional bank or lender loans. Companies often use debt financing since it is readily available and loan terms may be favorable, depending on the company’s financial health. Drawbacks from debt financing may include the lengthy application processing time, fixed cash repayments, and the potential for negative effects on the company’s business credit.

Equity financing and corporation finance often includes capital investments from private investment firms or individual investors. Private investment firms may include venture capitalists, other businesses, or mutual fund agencies. Individual investors usually represent a company’s shareholders. Equity financing allows companies to generate capital with potentially more favorable terms than debt loans. Companies may also use equity financing to delay investor repayments, which may improve business decisions based on corporation finance techniques.

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