💡 What Is Corporate Finance?
Imagine a company has money coming in and going out every day. Someone has to decide where that money should go, how much should be borrowed, what projects should be invested in, and how much profit should be given to shareholders.
That is where corporate finance comes in.
🏢 How Can a Business Be Organized?
Businesses can generally be organized in three major forms:
Sole Proprietorship
A business owned by one person. It is usually simple to establish and operate.
Partnership
A business owned by two or more people. Partners share the responsibilities, profits and risks.
Corporation
A corporation is a separate legal entity created through legal incorporation documents.
👤 One owner → Sole Proprietorship
🤝 Two or more owners → Partnership
🏛️ Separate legal entity → Corporation
Corporate finance mainly focuses on how money is managed within these corporations.
🎯 What Decisions Does a Financial Manager Make?
A financial manager has to answer four important questions:
Where should the company invest its money? For example, should it purchase a new machine?
Where should the company get the money? Should it borrow money or raise money from owners?
How much profit should be distributed to shareholders and how much should be retained in the business?
How much cash and short-term assets should the company maintain to meet its daily obligations?
🎯 The Ultimate Goal
The main goal of financial management is to maximize the intrinsic value of the company's stock over the long term.
In simple words: Build sustainable long-term value instead of chasing temporary increases in share price.
📈 Why Does Stock Price Maximization Matter?
Maximizing the value of a company is not simply about increasing shareholders' wealth. A successful company also needs to satisfy its customers and operate efficiently.
Better Products
Companies are encouraged to create products and services that satisfy customer needs.
Innovation
Successful businesses invest in new technology and better ways of doing things.
Employment
Growing businesses can create more employment opportunities.
Managers can increase expected cash flows, receive cash sooner, and reduce the risks associated with those cash flows.
A company should also provide good customer service, keep enough inventory available and maintain convenient business locations.
💸 How Does Money Move From Savers to Businesses?
Businesses often need money to expand, purchase assets or start new projects. But where does that money come from?
Capital moves between savers and borrowers through different financial processes.
🔄 Direct Transfer
In a direct transfer, a business obtains money directly from savers without using a financial intermediary.
Saver
Stocks / Bonds
Business
A company issues bonds and investors purchase those bonds directly. The company receives the money, while investors receive a financial claim against the company.
🌐 Understanding the Financial Environment
The financial environment includes the markets and institutions through which financial assets are created, bought and sold.
📜 What Is a Security?
A security is a financial claim or legal document representing ownership or a right to receive money.
Examples include: stocks, bonds and Treasury bills.
🏦 Financial Intermediaries
Financial intermediaries act as a bridge between people who have surplus money and people or organizations that need money.
Savers
Financial
Intermediary
Borrowers
🏦 Financial Intermediaries and Financial Markets
Financial Intermediaries
Financial intermediaries collect money from savers and make it available to borrowers.
Banks
Collect deposits and provide loans to individuals and businesses.
Mutual Funds
Pool money from many investors and invest it in financial assets.
Credit Unions
Member-based institutions that provide financial services and loans.
💡 What Is a Financial Market?
A financial market is a place or system where buyers and sellers come together to exchange financial assets.
📅 Debt Markets by Maturity
| Type | Maturity | Simple Meaning |
|---|---|---|
| Short-term | Less than 1 year | Borrowing for a short period. |
| Intermediate-term | 1–10 years | Medium-term borrowing. |
| Long-term | More than 10 years | Borrowing for a long period. |
📊 Money Market, Capital Market and Primary Market
Nepal Stock Exchange (NEPSE)
The Nepal Stock Exchange operates as an equity market, where shares of companies can be bought and sold.
💵 Money Market
The money market deals with short-term financial instruments with a maturity of less than one year.
These instruments are generally highly liquid.
Examples: Treasury bills and certificates of deposit.
📈 Capital Market
The capital market deals with long-term financial instruments.
Examples: Common stocks and corporate bonds.
🆕 Primary Market
The primary market is where newly issued securities are sold for the first time by the issuer to investors.
Company
New Securities
Investor
The important point is that the securities are being issued for the first time.
🧠 Quick Revision
- Corporate Finance = Management of money inside a corporation.
- Financial Manager = Makes major financial decisions.
- 4 major decisions = Investment + Financing + Dividend + Working Capital.
- Main goal = Maximize the intrinsic value of the firm's stock in the long run.
- Security = Financial claim such as stock, bond or Treasury bill.
- Financial Intermediary = Connects savers with borrowers.
- Financial Market = System where financial assets are exchanged.
- Money Market = Short-term instruments, less than 1 year.
- Capital Market = Long-term financial instruments.
- Primary Market = New securities issued for the first time.
- NEPSE = Equity market in Nepal.
🌿 Corporate Finance: Summary at a Glance
Corporate finance is all about how a company obtains, manages and uses money to create long-term value.
🏢 Business Organization
- Sole Proprietorship
- Partnership
- Corporation
Corporate finance mainly focuses on financial management within corporations.
🎯 Financial Manager's Decisions
- Investment
- Financing
- Dividend
- Working Capital
📈 Ultimate Goal
Maximize the intrinsic value of the firm's stock over the long term.
Focus on sustainable value rather than temporary increases in share price.
💡 Increase Firm Value
- Increase expected cash flows
- Receive cash sooner
- Reduce risk
- Satisfy customer needs
- Encourage innovation
- Create employment
💸 Movement of Money
Money moves from savers to businesses and borrowers.
It can happen directly or through financial intermediaries.
🌐 Financial Environment
Includes securities, financial markets and financial intermediaries.
Examples of securities include stocks, bonds and Treasury bills.
📊 Remember the Main Financial Markets
Examples: Treasury bills and certificates of deposit.
Examples: common stocks and corporate bonds.
