This paper provides an illustration of the field of corporate finance as it relates to business. It looks at some of the decision-making processes involved in maintaining the delicate balance between profitability and cost. The reader gleans an in-depth understanding of the situations and issues that can mean the difference between a path toward success and the road to bankruptcy.
Keywords Bond; Corporate Finance; Credit Supply Uncertainty; Dividend; Optimal Investment
Finance: Corporate FinanceOverview
At the turn of the 20th century, industrialist John D. Rockefeller found himself the target of the ire of his competitors and the scrutinizing eye of the media. In order to circumvent laws that prevented businesses from owning property out of state, Rockefeller decided to incorporate his oil business and create for it a holding company (or trust) known as Standard Oil. His move paid off — Standard Oil would in short time dominate the entire industry; from production to refining to shipping and barrel-making.
For his decimated competitors, who lay prostrate at the feet of Standard Oil, Rockefeller had gone too far by single-handedly destroying his competition. Journalist Ida Tarbell joined the fight against Standard, writing articles designed to inflame simmering public opinion against Rockefeller's business practices. The public backlash was powerful, as was the nation's political response. Rockefeller countered that the price of oil was decreasing due to Standard's presence in the industry, but his claims fell on deaf ears. Anti-trust suits were lodged against Standard Oil, and by 1911, the corporation was broken down into dozens of smaller companies.
However, Rockefeller got the last laugh. Ironically, the dissolution of his company meant that his holdings in each of these "splinter" groups would increase in value. With Rockefeller's presence in every one of these offshoot oil providers, his personal wealth increased exponentially. Already retired from business, Rockefeller could now breathe much easier — as America's first billionaire (Anecdotage.com, 2008).
In the latter 20th century, as well as the early years of the 21st century, corporations are arguably the most powerful entities in commerce. They are as myriad in size and configuration as the business environment in which they operate. From the smallest, non-profit association to the largest multinational entity, corporations are the preferred vehicle for those who seek to maximize profit-generation while minimizing costs and liability.
It is this latter point that suggests a difficult balancing act. Although risk is always a factor to consider in the development of a business, it is considered sage advice for those who invest in a business to protect his or her investment at all costs. By ensuring that profits are flowing consistently, systems and operations are streamlined and obstacles to long-term growth are addressed or circumvented, companies engaged in the practice of corporate finance are galvanizing the foundations on which the organization is built.
This paper provides an illustration of the field of corporate finance as it relates to business. It looks at some of the decision-making processes involved in maintaining the delicate balance between profitability and cost. The reader gleans an in-depth understanding of the situations and issues that can mean the difference between a path toward success and the road to bankruptcy.The Crux of Corporate Management
Business owners and entrepreneurs must tread a delicate path. In their quest for commercial success, they must be wary of the pratfalls and obstacles that await them in business. Managers and owners must make a series of critical decisions that weigh the costs and investments as well as real and potential profits to be generated through the business process. This decision-making process is known as "corporate finance."
A relatively new practice (the notion was introduced in the 1950s), the traditional model of corporate finance encompasses three major concerns by which the entrepreneur or business manager makes financial decisions. These three arenas are:
- Optimal investment;
Of course, how each of these three elements impacts the others has long been the source of debate — without a thorough understanding of this interaction (as well as the equilibrium that must be established in light of this triumvirate of areas), the traditional view of corporate finance must be updated (Jensen & Smith, 1984).
An interesting and as-yet underanalyzed aspect of corporate finance is the rationale of corporate managers in their pursuit of effective long-term financial policy. Weighing the best options at the disposal of chief financial officers and CEOs is a difficult and yet extremely important undertaking. Many experts, although not averse to attempting to understand the mindset of these managers (like corporate finance as a whole, the field of "behavioral finance" is still in its fledgling stages), look to the actual activities themselves as the basis for corporate financial behavior. For example, the benefits of a corporate acquisition, which may disproportionately favor the target rather than the corporation itself (such a move may therefore prove suboptimal for the CFO as an extension of corporate financial policy) (Subrahmanyam, 2008).
The decision-making process of corporate financial managers such as chief financial officers may be better understood by paying attention to the three basic concerns facing a corporation's fiscal strategy. Before one can analyze the relationship between these three critical elements of corporate finance, it is important to provide a clear definition of each individual issue. This paper next turns to each of these arenas, beginning with one of the most salient (and preferable) courses of action: Optimal investment strategy.Optimal Investment
By its very nature, investment is a risk. Of course, some investments are more risky than others, and some potentially reap greater returns and therefore appear worth the risks. In any business setting, investments are critical even if the potential exists for negative returns in the short-run. It is therefore incumbent upon corporate financial officers and CEOs to weigh the myriad of investment options that exist and pursue the strategy that best meets corporate goals.
Effective corporate financial policy is dependent on infusions of funds into key endeavors. From an internal point of view, some of these areas include research and development, staff development and training, mergers and acquisitions and marketing activities. For some companies, the endeavor may not be to continue development of key products or expand operations — it may be to ensure that a new company grows to the status it needs to in order to succeed, or it may even be to revitalize a corporation that is struggling to regain its former stature in the face of a troubled market or previous internal mismanagement. Regardless of the rationale behind the pursuit of optimal investment, the goal of the investment strategy is not always to simply meet established performance goals and...
(The entire section is 3184 words.)