Corporate finance is the area of finance dealing with the sources of funding and the capital structure of corporations, the actions that managers take to increase the value of the firm to the shareholders, and the tools and analysis used to allocate financial resources.
Sources of Capital Raised:
- Debt Capital – this includes bank loans, notes payable, or bonds issued to the public. Debt requires the company to make regular interest payments (interest expenses) on the borrowed capital until the debt reaches its maturity date. Failure to pay the interest or principal value can result in bankruptcy.
- Preference Shares / Preferred Stock – Preferred stock is a hybrid equity security which often have properties of both an equity and a debt instrument. Preferreds are senior (i.e. higher ranking) to common stock, but subordinate to bonds in terms of claim (or rights to their share of the assets of the company).
- Equity / Stocks – Companies can sell shares to investors to raise capital. Investors, or shareholders, expect that there will be an upward trend in value of the company (or appreciation) over time to make their investment a profitable purchase. An initial public offering (IPO) is the first time that the stock of a private company is offered to the public.