What is corporate finance theory?
The theory of corporate finance is a set of principles that companies can observe when deciding related to enterprises. The common principles of this theory include calculations of pure current value, financing decisions that include debt or capital resources, financial conditions and cash flow management. Many companies use corporate finance theory to help find information or support business decisions with qualitative calculations. The use of these calculations helps to remove part of subjectivity with business decisions using mathematical principles.
The pure current value is one of the main principles of corporate finance theory. This process forces managers to estimate future cash flows from business operations or new business opportunities and the discount is back to today's dollar value. The percentage of the discount is usually the cost of capital that the company has to pay for borrowed funds. If the sum of total discounted cash flows is greater than the amount paidFor the new business Opportunity, then the company would participate in this activity.
external capital sources are another important theory of corporate finance. Companies will have two options: debt and own capital. The use of the right combination of these two financing options ensures that the company maximizes its revenue from the further profit obtained from business operations. Debt financing comes in the form of loans or corporate bonds issued to investors. These options are often the easiest to complete, even if they have more negativity with investors. The capital itself is either shares or direct investments from financial services companies. The capital itself is more advantageous because the company does not pay for repayment during bankruptcy. The corporate finance theory uses formulas as a weighted average cost of capital or the price of the price of capital assets to determine how much of each method of financing is necessary for GeneralCapital for new business operations.
Financial conditions are mathematical calculations that help companies determine the power of their financial statements. The theory of corporate finance requires more uses from the ratios that test the balance sheet than those relying on information from the profit and loss statement. The balance sheet conditions help companies to determine how much the lever effect is used to obtain assets used in business. Too much lever effect suggests that more profit is required to repay loans or investors. The ratios will also lead to cash management tools that are another feature of this theory. For correct isolation of the company, the managers will prepare budgets that companies provide a financial plan for future expenses. Budgets are an operational, capital or standard nature and provide information for all levels within the company.