The Three Main Areas of Corporate Finance

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1.0 Introduction Finance is a mixture of both economics and accounting. Finance is generally concerned with three main areas which are corporate finance, capital markets and investments. Corporate finance or financial management is related to decisions made by a company which involves what and how much assets should a company attain and secured to maintain the optimum level of performance and maximize the asset's value. Capital Markets refers to the market where the It is very important for the manager of a business to select a suitable source of finance because There are two types of financing, long term and short term to medium term financing. 1.1 Long Term Financing Long term financing can be divided further into two which are debt and equity sources. Key characteristics Long term financing mean that the will be more than one year. 1.1.1 Long Term Debt Most common long term debt is debentures. 1.1.2 Preferred Stock 1.1.3 Common Stock 1.2 Short Term Financing Bank overdraft, trade credit, factoring and invoice discounting, hire purchase, leasing and others are examples of short term source of financing. There are useful for business to solve short term financial problems because they can be borrowed at short notice and are flexible, meaning that the business can borrow any certain amount within a limited range (e.g. bank overdraft) or use to finance an asset (e.g. hire purchase). 1.2.1 Secured Borrowing The meaning of secured borrowing is that there are assets which are pledged against the debt as collateral. If in the occurrence that the debtor wouldn't be able to repay the loan and forfeited, the creditor will collect the pledged asset as payment for the debt. Usually, the collateral would make up ... ... middle of paper ... Rate of Return (ARR) 4.2 DCF Investment Appraisal DCF or discounted cash flow There are two choices which a business could choose from, net present value (NPV) and internal rate of return (IRR). Net present value Both of these methods are far more superior to traditional investment appraisal methods as mention previously. As comparison, NPV solves all three problems mentioned before in payback period. NPV takes into account of all timings of cash flows 5.0 Advanced Investment Appraisal As mention before, discounted cash flow is by far more superior from traditional investment appraisal methods. However, to make use of it, to more accurately reflect the real 5.1 Inflation and Taxation 5.2 Capital Rationing and Sensitivity Analysis 7.0 Conclusion All of the above are interrelated to each other to improve the accuracy of the calculations.
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