Corporate finance principles influence financial decision-making and determine a company's value, profitabilitand risk profile. Understanding corporate finance helps assess whether a company is a good investment. $S&P 500(.SPX)$ $SPDR S&P 500 ETF Trust(SPY)$ $NASDAQ 100(NDX)$ $Invesco QQQ(QQQ)$ $DJIA(.DJI)$
1.Capital Structure
A company finances itself through a mix of equity (shares) and debt (loans and bonds).
Debt-to-equity ratio: High debt can mean high risk, but also potentially high returns.
Cost of capital: Companies with lower borrowing costs are often more financially stable.
2.Aims and objectives of corporate finance
The aim is to maximise the company's value, or for public companies, the company's share price. Share pricereflects both: (i) free cash flow per share and (il) free cash flow yield. The latter is largely dictated by thefinancial market, which individual companies have little control over. Therefore, companies should maximisetheir free cash flow per share.
They should do this by following the three principles of corporate finance:
Invest in growth assets
Finance growth assets using low cost debt
Return surplus capital to investors
3.Growth Strategies
Companies invest a blend of external finance and their own retained earnings.
Return on capital (ROC): Measures how efficiently a company uses its capital to generate returns.
Mergers and acquisitions (M&A): Growth through investing outside the company.
Capital expenditures (CAPEX): Growth through investing inside the company.
4. Dividend Policy and Share Buybacks
Companies distribute profits in two main ways:
Dividends: Regular payouts indicate financial stability.
Share buybacks: Can boost free cash flow per share, but only works properly when thr company'sshares are fairly valued or undervalued.
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