Applied corporate finance deals with the various applications of corporate finance. The various tools and theories of corporate finance are applied in a number of domains or sectors. Companies that are experiencing instant and adverse financial circumstances apply different tools of corporate finance for steadying their functions and designing their balance sheets in such a manner so that adequate financing can be done for performing the business operations.
This in turn enhances the cash flow. The primary aim of the applications of corporate finance is the maximization of the value of a firm and at the same time, minimizing the financial risks of the company. In this context, the calculation of the exact valuation of the firm is one of the most essential initiatives for maximizing its value and this is the reason why valuation of businesses is so significant.
Various applications or tools of corporate finance are implemented for the purpose of business valuation. Applied corporate finance deals with both short term and long-term decisions and procedures.
One example of long-term decisions is the capital investment decision and working capital management is an example of a short-term decision, which deals with the management of current assets and current liabilities.
Investment banks also require to utilize the applications of corporate finance because the investment banker analyzes investment schemes of a bank for taking investment opinions.
The capital investment decisions are applied regarding the form of capital and fixed assets and include dividend decision, financing decision and investment decision. The decision regarding the appropriate allocation of resources is taken with the help of capital budgeting methods.
The applications of corporate finance bear a substantial degree of importance in case of project valuation and flexibility valuation. The financing decision and the dividend decision depend on the various applications of corporate finance because a large number of tools, theories and models of corporate finance are applied for taking these decisions.
Different types of applications of corporate finance can be categorized into the following:
Fisher Separation Theorem
Capital Asset Pricing Model or CAPM
Net Present Value Method or NPV
Time Value of Money
Discounted Cash Flow Method or DCF
Arbitrage Pricing Theory (APT)
Return on Investment or ROI
Weighted Average Cost of Capital (WACC)
IRR or Internal Rate of Return
Real Options Analysis
DTA or Decision Tree Analysis
Black Scholes Model
Balance Sheet Analysis
Pecking Order Theory
Market Timing Hypothesis
JIT or Just in Time
Supply Chain Management
Economic Production Quantity (EPQ)
Economic Order Quantity (EOQ)
A number of corporate finance applications are utilized in investment banking and public and personal finance.
Last Updated on : 27th June 2013