Principles of Corporate Finance
1. Value Maximization: The primary purpose of corporate finance is to augment shareholder value. This concept underscores the idea of choosing options that will yield the best long-term outcomes for a company and putting shareholder returns as the primary objective.
2. Time Value of Money: The principle of the “time value of money” considers the fact that the value of money changes with time, and factors such as inflation and opportunity costs affect it. The practice of corporate finance employs tools such as the discounted cash flow analysis to deal with the time value of money during investment decision making.
3. Cost of Capital: The study of cost of capital is the basis of capital budgeting. The cost of capital is the argument in favor of which returns are required by investors in order to make them overcome risks connected with investing. The purpose of Corporate finance is to lower the Weighted average cost of capital (WACC) and increase shareholder’s value.
4. Risk-Return Tradeoff: Risk-return trade-off is an essential concept that corporate finance theory refers to. The more potential returns there are, the greater the level of risk we have. Firms have to critical analyze and take risks while making an investment decision which would eventually result in a maximized risk-adjusted return.
5. Diversification: Diversification is a risk management technique that entails sharing the funds among different assets or projects to minimize total risks. Corporate finance gives priority to diversity as a risk reduction and returns increase tool.
6. Efficient Market Hypothesis (EMH): It is stated in efficient market hypothesis that asset prices aggregate all the available information and, thus, cannot be beaten systematically by active management. The reaction of corporate finance towards the EMH is manifested in capital allocation decisions and investment strategies.