Facts

Each year companies create capital budgets to decide what areas of their business operations need upgrading or expanding. Once the capital projects are chosen, executive management will decide on the financing methods needed for the project.

Considerations

Companies will develop an investment strategy to see which financing method offers the most benefits for the capital project. Using current cash flow for capital project financing is a poor choice, since this cash is used for daily operations.

Types

Three types of corporate financing are typically used: bank loans, bonds and equity. These methods are chosen using theoretical formulas to estimate the rate of returns companies will receive using each method.

Theories/Speculation

The Capital Asset Pricing Model (CAPM) or Weighted Average Cost of Capital (WACC) are the common business formulas used to determine the best finance methods.

Effects

Bank loans and bonds will increase the long-term debt on a company's financial statement. Large amounts of long-term debt increase a company's systematic risk; equity financing will lower the company's stock price, creating negative goodwill for existing shareholders.

Source:

Quick MBA: Corporate Finance

Youtube: What is Corporate Finance

More Information:

Google Books: Corporate Finance: A Focused Approach