Chapter 1
Frequently Asked Questions
1. What is Corporate Finance?
Short Answer
Corporate finance describes the financial decisions of corporations. Its main objective is to maximize corporate value while reducing financial risk. The financial manager has responsibility for corporate finance decisions.
Long Answer
In order to understand what corporate finance is, we need to understand who the financial manager is and what his or her responsibilities are.
The financial manager is responsible for financing the firm and acts as an intermediary between the financial system's institutions and markets, on the one hand, and the enterprise, on the other. He or she has two main roles:
1. To ensure the company has enough funds to finance its expansion and meet its obligations. In order to do this, the company issues securities (equity and debt) which the financial manager sells to financial investors at the highest possible price. In today's capital market economy, the role of the financial manager is less a buyer of funds, with an objective to minimize cost, but more a seller of financial securities. By emphasizing the financial security, we focus on its value, which combines the notions of return and risk. We thereby reduce the importance of minimizing the cost of financial resources, because this approach ignores the risk factor. Casting the financial manager in the role of salesman also underlines the marketing aspect of the job. Financial managers have customers (investors) whom they ...
