International Corporate Finance also known as investment banking is a branch of finance that is concerned with financial activities and decisions that international business organizations or multinational corporations make regarding budgeting and spending of money. It also deals with the tools these firms use to make and spend funds as well as the analysis for decision making. Corporate finance concerns the optimization of the company’s net worth as well as controlling its financial risks.
Corporate finance is a broader term that encompasses the various capital requirements of a firm. A company needs to evaluate and consider its working capital, and manage its financials both short term and long term. This involves making of decisions concerning working capital and short term financing. Corporate finance concerns with the firms ability to manage its working capital by evaluating its current assets over current liabilities.
Working capital therefore, ensures good operations of the company, with ability to service its debts and meet operational expenses. The company must manage its inventory records through proper record maintenance and proper recording to ensure smooth flow of production process so as to continue production without breaks or stoppages. Through proper inventory management, the cash flow is maximized, while unnecessary additional expenditures are minimized through accurate outsourcing of suppliers and proper raw material purchasing procedures and low reordering costs.
Access to capital by multinational corporations all over the world enables them to borrow finances in times of deficiencies. This promotes internal investments and growth through import of capital. It encourages worldwide flows of cash and controls too much domestic regulation through international financial institution (Beaney & Shaun 11-14).
Need for corporate finance
Corporate finance leads to an efficient and effective banking systems and a healthy competition of financial institution. International corporate finance provides necessary information on important areas of investments which results to good capital allocation. It also promotes the incorporation of economies making it possible for easy flow of capital. Easy flow of funds results to enhanced equality among corporations that forms the global financial system. Corporate finance equips the firm with the required techniques necessary for decision making for short term and long term considerations in decision making.
Corporations should make long term investment decisions by deciding the investment projects that requires heavy capital investment and the way those projects are to be financed. The projects may be financed by use of equity or debt. The firm’s management should consider the benefits of either paying dividends to its shareholders or refinancing its operations by retaining the profit to increase its financial base. It is the long-term finance decisions concerning the corporate capital structure and fixed assets. The company management should be able to make long term decisions depending on the corporate ability to increase the value of its shares through investing in projects that give good returns on their net value from investment.
The projects should be properly funded, after which the corporation can then give dividends to its shareholders. Some minor decisions pertains handling of capital and managing the short term liabilities, current assets, cash, inventories together with short-term loans. Corporate finance evaluates the firm’s financial needs and through investment bank, the required capital that best solves those needs is raised.
In making valid investment decisions, the management must proportionately allocate resources between the various projects in the best economical ways through capital budgeting. This requires clear estimate of each projects value, by considering the time, size and by predicting the future cash flows expected upon completion of the project (Beaney & Shaun 38-40).
Sources of corporate finance
To effectively achieve corporate finance projects should be funded appropriately. This is because the cash flow expected will be determined on how good the project was executed. The management must consider the best financing means in terms of capital structure that would lead to maximization of value. Project financing may be through equity or debt. Financing a project through debt leads to liability. This debt must be paid resulting to cash flow implications free of project success.
Financing of project through equity is more costly but less risky in terms of cash flow commitments. The management of a firm makes decisions on whether to issue dividends or not. The amount of dividends to offer is determined by the company’s un-appropriated profit and the prospects of profits to be generated coming financial year. Where projects income exceeds the hurdle rate, the firm must return the excess cash to the financiers after deducting all business expenses.
The corporation must decide on the best method of distributing divided, whether on cash basis or through share buyback. The management must advice the shareholders on the best way forward. Where tax has to be paid on dividends, the company may decide to retain the money or to conduct stock buyback hence strengthening the share value (Damodaran 251-253).
To maintain and increase profitability, multinational corporations must manage their cash. Cash management services are provided by banks. These services can be grouped into account reconciliation services, advanced web services, armored car services, automated clearing house, balance reporting services and sweep accounts. Account reconciliation services assist the firms to make positive pay. These are services that assist the corporation to keep track of the cleared cheques and those that have not been cleared. Through the advanced communication technology, corporations are able to use web services provided by large banks online to cater for the various banking and monetary services they require. On the armored car services, the banks collects large amounts of cash on behalf of large retail companies which handles large amount of cash on daily basis.
The corporations are thus released of the risks associated with handling cash. Through the services of automated clearing house, multinational companies are able to pay their employees and creditors electronically. This relieves of the corporations’ hustles associated with a lot of paperwork. Such companies can retrieve their accounts data via the websites availed by the banks. International banks provide sweep accounts. Through these accounts, the bank assists companies’ trade in the money market for a short period with higher returns.
Through this process the company is able to finance itself without necessarily depending on external funding. This is to the benefit of the firm. The banks provide zero balance accounting where by every department in the corporation is allocated an account. Money collected from all the departments’ accounts is collectively kept in the main bank account of the company (Chance 117-118).
Long term and short term working capital
The short term finances of corporations are catered through bank loans. Corporations are able to obtain loans both short term and long term at ease due to their large capital base and asset accumulation. International corporate finance also entails the concern of debt management. Large corporations operate on debt basis. They attract customers through a suitable credit policy.
The company must do everything possible to increase the value of the shareholders investment such as investing in projects that guarantee high rate of returns. The corporation must also manage risks. This is done through financial risk management. Corporate implements simple devices to manage risks. The devices include use of futures and options. Futures are traded on a future exchange. Most of the firms’ orders and supplies are done through contract bases. The future contracts require that both parties should honor the contract terms. The options contract is not quite different from the futures contract. The firm has the authority of whether to engage in contract or not. Options can be in two types of contracts, the put option and the call option.
Trading of options is carried out through clearing houses. To properly manage he financial risks, corporations must adequately manage risks. This is done through the use of hedge funds. This is a basic type of investment funds which charges a performance fee, these funds operate on the field of derivative, futures and swaps markets. Through investment banking, multinational companies are able to sell and issue securities to the public at minimized costs and hence able to raise a substantial amount of money.
Corporations can also raise capital through issue of more shares, liquidation of assets or through acquisition of debts. The investment bank manages corporate mergers and acquisitions. Multinational banks assist companies to raise money and increase their capital base by selling securities through capital markets. These banks offer advice to the firm on issues concerning mergers and acquisitions, their importance and legal requirements in such a move. Investment banking offers the necessary advice and the necessary financial services to firms and customers on matters that concerns foreign exchange between markets and economies and commodity income (Damodaran 261).
The activities of corporate finance are provided by the investment bank. A large full service corporate finance bank offers all these services. These banks act as the mediator between the investors and the firms. They provide a good transaction ground for sale of securities. Investment banks caries out a detailed research of the multinational financial needs and requirements and report to potential investors while still advising the firms on the best ways of increasing their present net value.
The banks trade securities and bonds on behalf of the forms with the best market rate. The banks provide information to the firms regarding the period on when and how to offer their securities in the market and the price on which to trade their securities. The corporations should maximize the use of their resources to avoid unnecessary spending on resources that are scarce to acquire and which are costly to the firm. The investment bank offers protection against securities that are not safe to trade on and that can resort to loss of finance to the corporation (Campbell 72-75).
Investment banking helps customers raise money in the bond and securities market and offer necessary advice on business trends. Through this enhanced facilities, the bank on behalf of the firms offers services such as subscribing investors, sourcing for bidders and mediating negotiations with a potential merger. A marketing device by the corporate finance which consists of careful arrangement and analysis of investment consideration of a current or potential customer known as a pitch book is used to provide financial information required to market a bank to a potential mergers and acquisitions customer.
If the arrangements are successful, the bank facilitates the deal for the customer. The corporate financing department is divided into two groups. These groups are the industry coverage and product coverage groups. Industry coverage group deals with matters related to the whole industry and all the factors that can affect the operations of the firm either internally or externally. The product coverage group deals with non-products aspect of the firm in relation to the firm’s relationship with other firms in the industry.
It addresses the issues of how the firm handles sensitive issues such as debts and equity financing. They usually work and collaborate with industry groups to cater for the best services of to the needs of a customer. Through buying and selling of products, corporate finance performs functions on sales and trading (Campbell 146).
The firms buy and sell securities and bonds through the money market with an aim of making high returns in terms of profits. To achieve this, they must have adequate knowledge of the money market which is provided by investment. The investment bank carries out advisory roles to prominent investors and companies on investment options that can guarantee high rate of returns on their investments.
The investment banks collects their clients orders, evaluate them and looks for the best supplier who prices and carries out the transactions or makes new products to solve that particular need. The investment bank provides an appropriate environment where employees work to develop products that brings forth high profit margin than use of securities. It also encompasses the suggestion to customers by the salesperson as well as how the structures create new products. Investment banks undertake risks through proprietary trading. Proprietary trading is usually carried out by special traders who do not interfere with traders.
They also undertake risks through principal risks. These are risks faced by a trader after buying or selling a product to a customer and do not hedge the total exposure. International corporate finance does carry out research on market trends. It has a department that asses companies and provide details concerning their ability to trade in bonds and securities. The research departments provide reports that are crucial to investors and stakeholders in deciding and making decisions regarding their investments. (Chance 114-119).
Corporate finance also deals with private equity. This is any type of equity investment in which trading cannot be done in the in the public markets. The private equity investment can be sub divided into various categories including; angel investing, leverage buyout, growth capital, venture capital, and mezzanine capital. Buyout occurs when a company decides not to pay divided in terms of cash and when the operations of the company are highly funded through debts from investment banks.
The growth capital fund is a special type of fund that is usually borrowed to cater for a variety of needs in the corporation. Angel investing can be substituted with the ownership equity investment method. In case of new and emerging business, the venture capital is implemented as a form of private equity capital. Corporate finance comprises the work of providing money for corporations’ activities. The company should balance its risks with profits and invest in areas which are less risky while considering the shareholders interest. Corporations require both long term and short term financing. Owners’ equity and long term debts constitute the long term finance of the firm. Short term funding also known as working capital is provided through bank credit (Chance 120-121).
At times companies opt to manage funds by acquiring assets with the hope that their value can either maintain or appreciate. Before an investment is carried out, the corporate must have relevant objectives and constraints. This constitutes the institution or individual goals, time frame, risk avoidance and tax consideration. Carry out proper hedging strategy and measure the portfolio of the performance.
For corporations to run smoothly, capital is essential. This is the money that gives the business the ability to provide goods and services. For proper utilization of these resources, budgeting is important. The budget gives the plan of the business, its objectives, targets and financial terms of the corporations. The budget may be short term or long term. Long term budgets are drawn for a period of 5-10 years. They provide a clear vision of the company. Short term budget is drawn for a period of one year.
It’s usually drawn to control and operate for that year. Capital budgeting is important. It is concerned with fixed assets requirement and how to finance the expenditures. Cash also requires to be budgeted. Companies should draw a detailed budget that includes the firm’s sources of capital and how the capital will be utilized. A cash budget shows the beginning or operating cash balance, the expected receipts in cash.
All the planned spending or cash outflows for the trading period excluding the interests paid on short-term loans and all other expenses not associated with cash flows such as depreciation and amortization. It also depicts the excess or deficiency of cash. This shows the cash needs versus the available cash. It also discloses the financial needs such as borrowing and repayment of the loans and their interests and the ending balance (Campbell 89).
Beaney & Shaun. “Defining corporate finance in the UK” The Institute of Chartered Accountants, 2005.Web.
Campbell R. H. Investment Decisions and Capital budgeting. 2002. The Investment Decision of the Corporation. Web.
Chance D. M. The 20 Principles of Financial Management. Louisiana State University. 2007. Web.
Damodaran, A. Corporate Finance: First Principles, New York: University’s Stern School of Business. 2000. Web.