Basically, corporate finance is the study of the actions that managers take to increase the value of the shareholders of a corporation. It deals with the sources of funding for a company, the tools and analysis that are used to allocate financial resources, and the capital structure of a company.
Equity financing
Whether your business is pre-revenue or already has revenues, equity financing can be a big help. The main benefit of using this method is that it allows your business to make an investment without having to worry about returning the funds. This means your cash flow will not be affected, and your company can continue to grow.
There are several types of equity financing. Some common types include equity crowdfunding, angel investors and venture capitalists. However, it’s important to know which kind is best for your company.
There are also some drawbacks to equity financing. One of the biggest disadvantages is the fact that you have to give up some percentage of the future value of your business. This can be costly. On top of that, equity financing may not carry the same tax shields as debt financing.
Another big disadvantage of equity financing is the lack of voting power. If you’re not careful, you could end up losing the entire value of your investment.
Refinancing
Using refinancing in corporate finance helps a company increase cash flow and lower its monthly payment. The process involves taking out a new loan to pay off the remaining portion of the original debt. Refinancing can also increase the amount of capital a company has available for investment or expansion.
The primary goal of corporate refinancing is to reduce risk and improve the financial condition of the company. It also offers the opportunity to lower monthly interest payments and to obtain more favorable terms. It can free up cash for other business needs and allow the business to expand or buy new equipment.
The process of refinancing debt varies depending on the borrower’s credit rating, the health of the business and the type of debt. It can also involve fees such as origination fees, underwriting fees and prepayment penalties.
Companies that have improved their credit rating can use refinancing to reduce the cost of their existing debt. A larger upfront payment can typically lead to a lower interest rate. Alternatively, a company can issue new equity to reduce the debt load. This is generally done when a company cannot access traditional credit markets.
Restructuring
Depending on the firm’s circumstances, restructuring can be an important part of the overall process of improving its performance. It can result in a number of benefits, including enhanced efficiency, lower costs, and increased productivity. In some cases, it may also result in the closure of underperforming business units.
The goal of a corporate restructuring is to increase the competitiveness of a firm. This might involve reorganizing the operations of the firm, such as cutting expenses, introducing new products, or improving distribution channels. Restructuring may also be used to enhance a firm’s financing structure, or to maximize the value of a company.
In addition to reducing costs, a corporate restructuring can benefit the firm by improving its production mix. It can help introduce new products and services, and increase customer satisfaction. In some instances, restructuring can even lead to the sale of a company.
Restructuring is a difficult process, especially if it is done without a strategic plan. Restructuring costs can add up quickly, especially if a firm wishes to close down facilities or eliminate divisions.
Returning excess earnings to investors
Using the excess earnings method of valuation, a company’s assets are discounted based on two capitalization rates: the rate of return on tangible assets and the rate of return on goodwill. Then, the result is subtracted from the total earnings. The excess earnings are the company’s net earnings above the rate of return on net tangible asset value. This method is used to estimate the value of a firm and is also referred to as the hybrid method.
If a company produces lots of excess profits, this indicates that the management is efficient and capable of improving the value of the firm. As a result, the return on equity will be higher.
