Corporate finance is the area of finance that focuses on monetary decisions made by companies and the tools and analysis used to make such decisions.
The ultimate goal is to create value for the shareholder or the stakeholders.
The decisions that are made can be divided into two blocks.
The companies have three sources of financing: (i) equity funds or contributed by shareholders, (ii) funds from third parties or contributed by lenders and (iii) own funds generated by the company.
Companies turn to these sources of financing to finance their needs based on the costs and availability of these or the intended use of funds.
The pillar on all of them is the WACC or weighted average cost of capital that will be a key measure in making short and long-term decisions. The WACC measures the average cost of raising funds from a company based on its composition of funding sources.
The main financing decisions include operations such as debt issuance, refinancing, capital increases, divestitures, stock exchanges through issuance of new shares, entry of venture capital funds...
Companies have to make investment decisions to use the funds they capture or generate in their activity. Investment decisions may be an increase in fixed assets to increase production in the case of industrial activities or investment in hiring of personnel in the case of service industries or intellectual capital.
The pillar on these decisions is the ROIC or return on capital invested which will be a key measure when making decisions in the short and long term.
The main investment decisions may include, for example, company acquisitions, strategic alliances, commercial agreements with clients or absorption mergers with companies with complementary businesses...
Investment and financing decisions need to be made in a coordinated way with the goal of ROIC being sustainable over the long term over WACC. That will be the way to create value in the company and therefore, for stakeholders including shareholders and owners of the company.