Here, we will explain “corporate finance” which increases corporate value. What is corporate finance? We will also introduce three indicators for determining corporate value and the financing methods used in corporate finance.
Table of Contents
Increasing
Simply put, corporate finance refers to ” financial activities to increase the value of a company.”
With the aim of “increasing corporate value”,
- What kind of financing will you do?
- how to invest money
- How to return the funds obtained from investments
We will implement it while considering such things.
Also, if corporate finance is in good condition, cash flow (usable money) will stabilize and improve.
If free cash flow (money that can be used freely) increases in the future, further growth can be expected by strengthening the company/organization and developing the business.
Please note that corporate finance has various meanings other than “financial activities of a company,” and the way it is understood changes depending on the context.
- Corporate finance and financial strategy
- How to raise funds
- Means and methods for investment decisions
In this article, I will use the term “financial activities to increase the value of a company” as introduced at the beginning.
What is the difference between corporate finance and project finance?
A term similar to corporate finance is “project finance.”
These two have different “purposes of financial activities”.
- corporate finance
- project finance
Corporate finance targets the “company as a whole,” while project finance targets the “project unit.”
In addition, when raising funds such as investments and loans, the value of the object is evaluated, but the evaluation target is different for each company, project, and so on.
How to find corporate value in corporate finance?
Corporate finance is a “financial strategy to increase corporate value,” but what exactly is “corporate value”?
Also, how should we calculate the corporate value to clarify it?
What is corporate finance?
Corporate value refers to the economic value of the company itself.
It expresses how much “free cash flow” a company will generate in the future. You could also call it “corporate price.” What is corporate finance?
Free cash flow is a company’s net assets (assets, not liabilities), so the more it increases, the more stable the business will be.
In addition, if stable management continues, the company’s value will increase and it will be advantageous when seeking investment.
This is because investors use “corporate value” as a criterion for making investment decisions.
By implementing “strategies to increase corporate value” through corporate finance, you can increase the net worth you can use freely and stabilize your management. As a result, it will be easier to raise funds such as investments, and you will be able to further increase your corporate value.
What are the “indicators” used to determine corporate value?
Corporate value is calculated using the following three indicators. What is corporate finance?
- NPV (net present value)
- IRR (internal rate of return)
- DCF method (discounted cash flow)
Let’s look at each in detail.
NPV (net present value)
NPV (Net Present Value) is an indicator that shows how much profit you can get from investing.
It is generally used as an indicator when making investment decisions.
First of all, Project Value (PV) means the present value of money that can be earned in the future. As the word “current” indicates, when calculating PV, it is calculated based on current value, taking into account the possibility that the value of money will fluctuate in the future .
* “^” refers to a power, that is, a calculation that multiplies the same number. What is corporate finance?
If the business you are about to start has an annual interest rate of 4% and you will receive 10 million yen in 2 years, the calculation formula will be as follows. What is corporate finance?
10 million yen ÷ (1 + 0.04)^2 = 9,245,562 yen
In other words, the “current value” = PV of a business that will generate 10 million yen in two years is 9,245,562 yen.
If the investment amount is small compared to the PV (present value), it can be considered that a profit can be obtained = the business is worth investing in. What is corporate finance?
And NPV can be calculated as calculated PV (present value) – investment cost.
Investors set a “hurdle rate (minimum required yield when making investment decisions)” for IRR, and invest when the hurdle rate becomes greater than IRR. What is corporate finance?
There was an element called “discount rate” in the formula introduced earlier as “PV calculation formula”, and this is IRR.What is corporate finance?
The higher the IRR, the more the project is evaluated as a worthwhile investment.
DCF method (discounted cash flow)
DCF method (Discounted Cash Flow) is discounted cash flow.
Corporate value is calculated by multiplying the “free cash flow” that the company will generate in the future by a certain discount rate. What is corporate finance?
[Formula]
Total future free cash flow – WACC (% / weighted average cost of capital) = Theoretical present value of the company. What is corporate finance?
By the way, “NPV (net present value)” is also one of the DCF methods. What is corporate finance?
What is the financing method in corporate finance?
There are various methods of financing in corporate finance.
If you use the following seven methods to invest the funds you raise and further increase your assets, you will be able to increase your corporate value. What is corporate finance?
sale of assets
This is a method of raising funds by selling assets that are rarely used, such as real estate, securities, and commercial vehicles. What is corporate finance?
By using the funds raised for investment, you may receive a return.
Issuance of shares
In the case of a stock company, there is a method of raising funds by issuing shares and receiving investments. What is corporate finance?
Raising funds through the issuance of shares has the advantage of making it easier to use the funds effectively as there is no obligation to repay them. What is corporate finance?
However, please note that dividends must be paid according to the percentage of shares held.
Investment from venture capital (VC)
Another way to raise funds is to receive investment from venture capital (VC). What is corporate finance?
Venture capital is an organization that gathers investors and makes investments in companies with promising growth potential.
As with the issuance of shares, it is an “investment” and there is no obligation to repay it.
However, it is important to note that the transfer of shares is necessary and that this may result in “interference with management.”
You should also know that to receive investment, you must pass a certain screening process.
Investment from angel investors
An angel investor is an individual investor who invests to support a newly started company.
Since it is a form of individual investment, the amount invested is not that large. However, there is no screening process like that of “venture capital,” and even companies with little recognition may be able to receive investment if a match is established. What is corporate finance?
Again, there is no obligation to repay the invested funds, but there is a need to provide dividends or stock returns.
Utilization of grants and subsidies
When a business is just starting up, it is often necessary to raise funds through grants and subsidies from the national and local governments.
In Japan, there are many grants and subsidies that you can apply for when starting a business, and they can be used as great support when starting a business. Since it is not a loan, there is no need for repayment.
However, the use of grants and subsidies requires screening, and it is not guaranteed that you will receive them.
In addition, grants and grants often have limited “purposes,” so be sure to understand what they can be used for before applying.
Issuance of corporate bonds
A “corporate bond” is something like a “debt” that a company borrows from an investor.
A method of raising funds by borrowing money from investors and using it for business purposes.
In addition to large to medium-sized corporate bonds, there are also “small private placement bonds” that are issued to 49 or fewer investors.
Small private placement bonds are corporate bonds that are issued only to people related to the company, and the procedures are simple and can be issued without collateral.
If the issue amount is less than 100 million yen or if you are a small to medium-sized company, small private placement bonds may be the easiest corporate bond to use.
get a loan
Many companies choose “loans from financial institutions” as a method of raising funds for corporate finance.
Loans are subject to screening, and the higher a company’s creditworthiness, the easier it is to borrow money.
Since it is easy to raise large amounts of funds at once, many companies use loans for capital investment in their businesses.
However, it is important to note that since you are borrowing money, you are obligated to repay it, and because interest is charged on the principal, you will have to pay back more than you borrowed.
summary
If you can continue to increase your corporate value through corporate finance, it will be easier to continue and expand your corporate activities.
To achieve this, it is important to “know the current corporate value” and “invest in projects that increase corporate value.”
If you want your company to be profitable, have high value, and have a promising future, learn about corporate finance and use it effectively.