Corporate services or business services are activities which combine or consolidate certain enterprise -wide needed support services, provided based on specialized knowledge, best practices , and technology to serve internal (and sometimes external) customers and business partners. The term corporate services providers (CSPs) is also used.
116-767: Corporate Service Providers may work in a diverse set of fields such as finance , consulting , IT service management , advisory services , auditing and so forth. Typically the emphasis of the service agreement is on providing clients with an improved functional and experiential quality over time. In the United Kingdom, the public audit agencies produced a report in May 2007 called "Value for Money in public sector corporate services". This provides performance indicators in five categories: Finance, Human Resources, Information & Communication Technology, Procurement, and Estates Management. A Business Advisory Service counsels clients re
232-413: A brass plate company , shell company or other special-purpose vehicle that has been set up in the jurisdiction. Usually located in either offshore financial centres or in onshore financial centres . Typical services include: In ordinary circumstances, corporate service providers may not, or alternatively will not, act as a trustee for the clients which they provide services to. This is to maintain
348-403: A stable or "smooth" dividend payout - as far as is reasonable given earnings prospects and sustainability - which will then positively impact share price; see Lintner model . Cash dividends may also allow management to convey (insider) information about corporate performance; and increasing a company's dividend payout may then predict (or lead to) favorable performance of the company's stock in
464-414: A "value- space "), where NPV is then a function of several variables . See also Stress testing . Using a related technique, analysts also run scenario based forecasts of NPV. Here, a scenario comprises a particular outcome for economy-wide, "global" factors ( demand for the product , exchange rates , commodity prices , etc.) as well as for company-specific factors ( unit costs , etc.). As an example,
580-482: A Constitutional amendment to abolish corporate personhood. The Citizens United majority opinion makes no reference to corporate personhood or the Fourteenth Amendment, but rather argues that political speech rights do not depend on the identity of the speaker, which could be a person or an association of people. Individual shareholders cannot generally sue over the deprivation of a corporation's rights; only
696-407: A U.S. historical context, the phrase "corporate personhood" refers to the ongoing legal debate over the extent to which rights traditionally associated with natural persons should also be afforded to juridical persons including corporations . A headnote issued by the court reporter in the 1886 Supreme Court case Santa Clara County v. Southern Pacific Railroad Co. claimed to state the sense of
812-417: A change in that factor is then observed, and is calculated as a "slope": ΔNPV / Δfactor. For example, the analyst will determine NPV at various growth rates in annual revenue as specified (usually at set increments, e.g. -10%, -5%, 0%, 5%...), and then determine the sensitivity using this formula. Often, several variables may be of interest, and their various combinations produce a "value- surface " (or even
928-514: A higher tax rate as compared, e.g., to capital gains ; see dividend tax and Retained earnings § Tax implications . Here, per the Modigliani–Miller theorem : if there are no such disadvantages - and companies can raise equity finance cheaply, i.e. can issue stock at low cost - then dividend policy is value neutral; if dividends suffer a tax disadvantage, then increasing dividends should reduce firm value. Regardless, but particularly in
1044-402: A juridical person can be a device for exercising shareholders' rights to free speech. Under this perspective, such constitutional rights might also extend to other associations of people, even where the association does not take on the formal legal form of a corporation. A second perspective, known as the 'real entity' or 'natural entity' view, shifts the presumption of corporate regulation against
1160-434: A listing of the various transaction-types here, and Financial analyst § Investment Banking for a description of the role. Financial risk management , generically, is focused on measuring and managing market risk , credit risk and operational risk . Within corporates, the scope is broadened to overlap enterprise risk management , and then addresses risks to the firm's overall strategic objectives , focusing on
1276-423: A modern CFO. Working capital is the amount of funds that are necessary for an organization to continue its ongoing business operations, until the firm is reimbursed through payments for the goods or services it has delivered to its customers. Working capital is measured through the difference between resources in cash or readily convertible into cash (Current Assets), and cash requirements (Current Liabilities). As
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#17328772895411392-427: A more diverse corporate landscape. Under Indian law the corporate, managing bodies, etc. and several other non-human entitles have been given the status of the " legal person ". In court cases regarding corporate, the shareholders are not responsible for the company's debts but the company itself being a "legal person" is liable to repay those debts or be sued for the non-repayment of debts. The non-human entities given
1508-569: A particular project, and use the weighted average cost of capital (WACC) to reflect the financing mix selected. (A common error in choosing a discount rate for a project is to apply a WACC that applies to the entire firm. Such an approach may not be appropriate where the risk of a particular project differs markedly from that of the firm's existing portfolio of assets.) In conjunction with NPV, there are several other measures used as (secondary) selection criteria in corporate finance; see Capital budgeting § Ranked projects . These are visible from
1624-746: A private corporation is included [in the Fourteenth Amendment]. Such corporations are merely associations of individuals united for a special purpose and permitted to do business under a particular name and have a succession of members without dissolution." This doctrine has been reaffirmed by the Court many times since. The 14th Amendment does not insulate corporations from all government regulation, any more than it relieves individuals from all regulatory obligations. Thus, for example, in Northwestern Nat Life Ins. Co. v. Riggs (203 U.S. 243 (1906)),
1740-567: A result, capital resource allocations relating to working capital are always current, i.e. short-term. In addition to time horizon , working capital management differs from capital budgeting in terms of discounting and profitability considerations; decisions here are also "reversible" to a much larger extent. (Considerations as to risk appetite and return targets remain identical, although some constraints – such as those imposed by loan covenants – may be more relevant here). The (short term) goals of working capital are therefore not approached on
1856-419: A single entity for easier taxation and regulation, simplifies complex transactions that would otherwise involve, in the case of large corporations, thousands of people, and protects the individual rights of the shareholders as well as the right of association . Generally, corporations are not able to claim constitutional protections that would not otherwise be available to persons acting as a group. For example,
1972-442: A stock buyback, in both cases increasing the value of shares outstanding. Alternatively, some companies will pay "dividends" from stock rather than in cash or via a share buyback as mentioned; see Corporate action . There are several schools of thought on dividends, in particular re their impact on firm value. A key consideration will be whether there are any tax disadvantages associated with dividends: i.e. dividends attract
2088-423: Is a Western concept applied to corporations. Ancient Indian society used legal personhood for political, social, and economic purposes. As early as 800 BC, legal personhood was granted to guild-like śreṇī that operated in the public interest. The late Roman Republic granted legal personhood to municipalities, public works companies that managed public services, and voluntary associations ( collegia ) such as
2204-587: Is another corporate service designed to help clients make financial decisions. Intellectual property protection is seen as an investment, this is a service some consultancies may also advise on. Similarly, stock exchange services can bring about specialist reports on past, current and forecasted stock exchange trends, with a personalised analysis. Where local Corporate Service Providers (CSPs) offer bundled basic services to support tax residency tests such as "central management and control" type tests (typical in UK law) of
2320-561: Is concerned with financial policies regarding the payment of a cash dividend in the present or retaining earnings and then paying an increased dividend at a later stage. The policy will be set based upon the type of company and what management determines is the best use of those dividend resources for the firm and its shareholders. Practical and theoretical considerations - interacting with the above funding and investment decisioning, and re overall firm value - will inform this thinking. In general, whether to issue dividends, and what amount,
2436-414: Is determined on the basis of the company's unappropriated profit (excess cash) and influenced by the company's long-term earning power. In all instances, as above, the appropriate dividend policy is in parallel directed by that which maximizes long-term shareholder value. When cash surplus exists and is not needed by the firm, then management is expected to pay out some or all of those surplus earnings in
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#17328772895412552-419: Is likely, and excess cash surplus exists and is not needed, then management is expected to pay out some or all of those surplus earnings in the form of cash dividends or to repurchase the company's stock through a share buyback program. Achieving the goals of corporate finance requires that any corporate investment be financed appropriately. The sources of financing are, generically, capital self-generated by
2668-432: Is on major " projects " - often investments in other firms , or expansion into new markets or geographies - but may extend also to new plants , new / replacement machinery, new products , and research and development programs; day to day operational expenditure is the realm of financial management as below . In general, each " project 's" value will be estimated using a discounted cash flow (DCF) valuation, and
2784-612: Is part of the larger debate on campaign finance reform and the role which money may play in politics. In the United States, legal milestones in this debate include: The corporate personhood aspect of the campaign finance debate turns on Buckley v. Valeo (1976) and Citizens United v. Federal Election Commission (2010): Buckley ruled that political spending is protected by the First Amendment right to free speech , while Citizens United ruled that corporate political spending
2900-400: Is possible by the company and excess cash surplus is not needed to the firm, then financial theory suggests that management should return some or all of the excess cash to shareholders (i.e., distribution via dividends). The first two criteria concern " capital budgeting ", the planning of value-adding, long-term corporate financial projects relating to investments funded through and affecting
3016-557: Is referred to as working capital management . These involve managing the relationship between a firm's short-term assets and its short-term liabilities . In general this is as follows: As above, the goal of Corporate Finance is the maximization of firm value. In the context of long term, capital budgeting, firm value is enhanced through appropriately selecting and funding NPV positive investments. These investments, in turn, have implications in terms of cash flow and cost of capital . The goal of Working Capital (i.e. short term) management
3132-413: Is right-financing whereby investment banks and corporations can enhance investment return and company value over time by determining the right investment objectives, policy framework, institutional structure, source of financing (debt or equity) and expenditure framework within a given economy and under given market conditions. One of the more recent innovations in this area from a theoretical point of view
3248-523: Is the Pecking Order Theory ( Stewart Myers ), which suggests that firms avoid external financing while they have internal financing available and avoid new equity financing while they can engage in new debt financing at reasonably low interest rates . Also, the capital structure substitution theory hypothesizes that management manipulates the capital structure such that earnings per share (EPS) are maximized. An emerging area in finance theory
3364-424: Is the market timing hypothesis . This hypothesis, inspired by the behavioral finance literature, states that firms look for the cheaper type of financing regardless of their current levels of internal resources, debt and equity. The process of allocating financial resources to major investment - or capital expenditure is known as capital budgeting . Consistent with the overall goal of increasing firm value ,
3480-418: Is the legal notion that a juridical person such as a corporation , separately from its associated human beings (like owners, managers, or employees), has at least some of the legal rights and responsibilities enjoyed by natural persons. In most countries, a corporation has the same rights as a natural person to hold property, enter into contracts, and to sue or be sued. Granting non-human entities personhood
3596-429: Is the management of the company's monetary funds that deal with the short-term operating balance of current assets and current liabilities ; the focus here is on managing cash, inventories , and short-term borrowing and lending (such as the terms on credit extended to customers). The terms corporate finance and corporate financier are also associated with investment banking . The typical role of an investment bank
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3712-446: Is the process of forming a company corporation officially in the country of residence. It is also possible non-residents to set up a company: see offshore company . However, laws vary in all countries. International corporate service consultants specialise in dealing with incorporation in the country in question. Once application is successful, the company will receive a certificate of incorporation . Which provides valid existence of
3828-502: Is then observed. This histogram provides information not visible from the static DCF: for example, it allows for an estimate of the probability that a project has a net present value greater than zero (or any other value). Continuing the above example: instead of assigning three discrete values to revenue growth, and to the other relevant variables, the analyst would assign an appropriate probability distribution to each variable (commonly triangular or beta ), and, where possible, specify
3944-414: Is therefor incapable of representing itself in a court process. In these rare cases the corporate service provider may decide to act as a trustee for the client. Corporate finance Corporate finance is the area of finance that deals with the sources of funding, and the capital structure of businesses, the actions that managers take to increase the value of the firm to the shareholders , and
4060-407: Is therefore to ensure that the firm is able to operate , and that it has sufficient cash flow to service long-term debt, and to satisfy both maturing short-term debt and upcoming operational expenses. In so doing, firm value is enhanced when, and if, the return on capital exceeds the cost of capital; See Economic value added (EVA). Managing short term finance and long term finance is one task of
4176-519: Is to bestow the character and properties of individuality on a collective and changing body of men." In the 1886 case Santa Clara v. Southern Pacific – 118 U.S. 394 (1886), Chief Justice Waite of the Supreme Court orally directed the lawyers that the Fourteenth Amendment equal protection clause guarantees constitutional protections to corporations in addition to natural persons, and
4292-449: Is to evaluate the company's financial needs and raise the appropriate type of capital that best fits those needs. Thus, the terms "corporate finance" and "corporate financier" may be associated with transactions in which capital is raised in order to create, develop, grow or acquire businesses. Although it is in principle different from managerial finance which studies the financial management of all firms, rather than corporations alone,
4408-475: The current assets (generally cash and cash equivalents , inventories and debtors ) and the short term financing, such that cash flows and returns are acceptable. Use of the term "corporate finance" varies considerably across the world. In the United States it is used, as above, to describe activities, analytical methods and techniques that deal with many aspects of a company's finances and capital. In
4524-558: The Dutch Republic during the 17th century. By the early 1800s, London acted as a center of corporate finance for companies around the world, which innovated new forms of lending and investment; see City of London § Economy . The twentieth century brought the rise of managerial capitalism and common stock finance, with share capital raised through listings , in preference to other sources of capital . Modern corporate finance, alongside investment management , developed in
4640-513: The First Bank of the United States . Although the Federal government has from time to time chartered corporations, the general chartering of corporations has been left to the states. In the late 18th and early 19th centuries, corporations began to be chartered in greater numbers by the states, under general laws allowing for incorporation at the initiative of citizens, rather than through specific acts of
4756-585: The Privacy Act of 1974 , since the statute refers to any "individual," which it defines as "a citizen of the United States or an alien lawfully admitted for permanent residence." Since the Supreme Court's ruling in Citizens United v. Federal Election Commission in 2010, upholding the rights of corporations to make unlimited political expenditures under the First Amendment, there have been several calls for
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4872-488: The United Kingdom and Commonwealth countries, the terms "corporate finance" and "corporate financier" tend to be associated with investment banking – i.e. with transactions in which capital is raised for the corporation or shareholders; the services themselves are often referred to as advisory, financial advisory, deal advisory and transaction advisory services. See under Investment banking § Corporate finance for
4988-495: The Walter model , dividends are paid only if capital retained will earn a higher return than that available to investors (proxied: ROE > Ke ). Management may also want to "manipulate" the capital structure - including by paying or not paying dividends - such that earnings per share are maximized; see Capital structure substitution theory . Managing the corporation's working capital position to sustain ongoing business operations
5104-419: The "flexible and staged nature" of the investment is modelled , and hence "all" potential payoffs are considered. See further under Real options valuation . The difference between the two valuations is the "value of flexibility" inherent in the project. The two most common tools are Decision Tree Analysis (DTA) and real options valuation (ROV); they may often be used interchangeably: Dividend policy
5220-699: The "legal person" status by the law "have rights and co-relative duties; they can sue and be sued, can possess and transfer property". Since these non-human entities are "voiceless" they are legally represented "through guardians and representatives" to claim their legal rights and to fulfill their legal duties and responsibilities. Specific non-human entities given the status of "legal person" include "corporate personality, body politic , charitable unions etc.", as well as trust estates , deity , temples, churches , mosques , hospitals , universities , colleges , banks , railways , municipalities , and gram panchayats (village councils), rivers, all animals and birds. In
5336-418: The "person", individual shareholders are not legally responsible for the corporation's debts and damages. Similarly, individual employees, managers, and directors are liable for their own malfeasance or lawbreaking while acting on behalf of the corporation, but are not generally liable for the corporation's actions. Among the most frequently discussed and controversial consequences of corporate personhood in
5452-526: The Constitution of the United States. This opinion appears to us to be equally supported by reason, and by the former decisions of this Court." Beginning with this opinion, the U.S. Supreme Court has continuously recognized corporations as having the same rights as natural persons to contract and to enforce contracts. Seven years after the Dartmouth College opinion, the Supreme Court decided Society for
5568-474: The Court accepted that corporations are for legal purposes "persons", but still ruled that the Fourteenth Amendment was not a bar to many state laws which effectively limited a corporation's right to contract business as it pleased. However, this was not because corporations were not protected under the Fourteenth Amendment—rather, the Court's ruling was that the Fourteenth Amendment did not prohibit
5684-550: The Court regarding the equal protection clause of the Fourteenth Amendment as it applies to corporations, without the Court having actually made a decision or issued a written opinion on that point. This was the first time that the Supreme Court was reported to hold that the Fourteenth Amendment's equal protection clause granted constitutional protections to corporations as well as to natural persons , although numerous other cases, since Dartmouth College v. Woodward in 1819, had recognized that corporations were entitled to some of
5800-471: The DCF and include discounted payback period , IRR , Modified IRR , equivalent annuity , capital efficiency , and ROI . Alternatives (complements) to NPV, which more directly consider economic profit , include residual income valuation , MVA / EVA ( Joel Stern , Stern Stewart & Co ) and APV ( Stewart Myers ). With the cost of capital correctly and correspondingly adjusted, these valuations should yield
5916-423: The DCF model inputs. In many cases, for example R&D projects, a project may open (or close) various paths of action to the company, but this reality will not (typically) be captured in a strict NPV approach. Some analysts account for this uncertainty by adjusting the discount rate (e.g. by increasing the cost of capital ) or the cash flows (using certainty equivalents , or applying (subjective) "haircuts" to
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#17328772895416032-582: The Latin corpus ("body"), and juridical personhood is often assumed in medieval writings; by the Renaissance period, European jurists routinely held that churches and universities chartered by the government could gain property, enter into contracts, sue, and be sued, independent of its members. The government (or the Pope) granted religious organizations "the power of perpetual succession": church property would not revert to
6148-709: The Propagation of the Gospel in Foreign Parts v. Town of Pawlet (1823), in which an English corporation dedicated to missionary work, with land in the U.S., sought to protect its rights to the land under colonial-era grants against an effort by the state of Vermont to revoke the grants. Justice Joseph Story , writing for the court, explicitly extended the same protections to corporate-owned property as it would have to property owned by natural persons. Seven years later, Chief Justice Marshall stated: "The great object of an incorporation
6264-503: The Supreme Court has not recognized a Fifth Amendment right against self-incrimination for a corporation, since the right can be exercised only on an individual basis. In United States v. Sourapas and Crest Beverage Company , "[a]ppellants [suggested] the use of the word 'taxpayer' several times in the regulations requires the fifth-amendment self-incrimination warning be given to a corporation." The Court did not agree. Likewise, corporations and organizations do not have privacy rights under
6380-511: The Supreme Court held that the Fourteenth Amendment applied to corporations. Since then the doctrine has been repeatedly reaffirmed in case law. In 1818, the United States Supreme Court decided Trustees of Dartmouth College v. Woodward – 17 U.S. 518 (1819), writing: "The opinion of the Court, after mature deliberation, is that this corporate charter is a contract , the obligation of which cannot be impaired without violating
6496-523: The United States is the extension of a limited subset of the same constitutional rights . Corporations as juridical persons have always been able to perform commercial activities, similar to a person acting as a sole proprietor , such as entering into a contract or owning property. Therefore, corporations have always had a "juridical personality" for the purposes of conducting business while shielding individual shareholders from personal liability (i.e. protecting personal assets which were not invested in
6612-459: The analyst may specify various revenue growth scenarios (e.g. -5% for "Worst Case", +5% for "Likely Case" and +15% for "Best Case"), where all key inputs are adjusted so as to be consistent with the growth assumptions, and calculate the NPV for each. Note that for scenario based analysis, the various combinations of inputs must be internally consistent (see discussion at Financial modeling ), whereas for
6728-445: The assets of the company). Preferred stock usually carries no voting rights, but may carry a dividend and may have priority over common stock in the payment of dividends and upon liquidation . Terms of the preferred stock are stated in a "Certificate of Designation". Similar to bonds, preferred stocks are rated by the major credit-rating companies. The rating for preferreds is generally lower, since preferred dividends do not carry
6844-414: The basis of value-added to the future of the corporation. Projects that increase a firm's value may include a wide variety of different types of investments, including but not limited to, expansion policies, or mergers and acquisitions . The third criterion relates to dividend policy . In general, managers of growth companies (i.e. firms that earn high rates of return on invested capital) will use most of
6960-481: The board of directors has the standing to assert a corporation's constitutional rights in court. During the colonial era, British corporations were chartered by the crown to do business in North America. This practice continued in the early United States. They were often granted monopolies as part of the chartering process. For example, the controversial Bank Bill of 1791 chartered a 20-year corporate monopoly for
7076-594: The client's organisation when dealing with complex banking and finance issues. Specialist information and tips are provided by the consultancy to manage finances appropriately, and some can set up a corporate bank account for clients. Some examples of tailored services include: Accounting and tax services are useful for companies wanting to outsource their basic work. The services involve preparing and submitting obligatory documents required by authorities associated with business practice. Some basic services include: Market research for investment along with risk evaluation
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#17328772895417192-415: The company (or appreciate in value) over time to make their investment a profitable purchase. Shareholder value is increased when corporations invest equity capital and other funds into projects (or investments) that earn a positive rate of return for the owners. Investors prefer to buy shares of stock in companies that will consistently earn a positive rate of return on capital in the future, thus increasing
7308-426: The company under the registered name given. A registered agent , also known as a resident agent or statutory agent , is a business or individual designated to receive service of process (SOP) when a business entity is a party in a legal action such as a lawsuit or summons. Some examples of related services include: Corporate services such as finance and banking were first introduced to remove pressure from
7424-411: The context indicates otherwise— the words "person" and "whoever" include corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals; This federal statute has many consequences. For example, a corporation may enter contracts, sue and be sued, and be held liable under both civil and criminal law. Because the corporation is legally considered
7540-546: The corporation). Ralph Nader , Phil Radford and others have argued that a strict originalist philosophy should reject the doctrine of corporate personhood under the Fourteenth Amendment. Indeed, Chief Justice William Rehnquist repeatedly criticized the Court's invention of corporate constitutional "rights", most famously in his dissenting opinion in the 1978 case First National Bank of Boston v. Bellotti ; though, in Bellotti , Rehnquist's objections are based on his "views of
7656-434: The current and future state of their Company , with the aim of advancing the prospects of the enterprise in question. This service, used across various industries, involves (i) examining the relevant legal, tax, financial, market, and/or risk factors , and then (ii) advising re start-up (including company formation ), or more common, re ongoing strategic and operational improvements to the business. Company incorporation
7772-417: The decision. Shareholders of a " growth stock ", for example, expect that the company will retain (most of) the excess cash surplus so as to fund future projects internally to help increase the value of the firm. Shareholders of value- or secondary stocks, on the other hand, would prefer management to pay surplus earnings in the form of cash dividends, especially when a positive return cannot be earned through
7888-404: The decisioning here focuses on whether the investment in question is worthy of funding through the firm's capitalization structures (debt, equity or retained earnings as above). Here, to be considered acceptable, the investment must be value additive re: (i) improved operating profit and cash flows ; as combined with (ii) any new funding commitments and capital implications. Re the latter: if
8004-540: The early Catholic Church . The diverse collegia had different rights and responsibilities that were independent of the individual members. Some collegia resembled later medieval guilds and were allowed to advance the needs of a trade as a whole, but collegia were otherwise barred from enriching their members. In the Middle Ages, juridical persons were chartered either as corporations or as foundations in order to facilitate collective perpetual ownership of assets beyond
8120-578: The end of the century, commercial ventures frequently sought incorporation in Europe and the Americas. By the 19th century, the direction of British and American corporate law had diverged; British law of this period (such as the Joint Stock Companies Act 1856 ) appeared to focus more on corporations that more closely resembled traditional joint ventures, while American law was driven by the need to manage
8236-480: The equal protection of the laws, applies to these corporations. We are all of the opinion that it does." While the headnote is not part of the Court's opinion and thus not precedent , two years later, in Pembina Consolidated Silver Mining Co. v. Pennsylvania – 125 U.S. 181 (1888), the Court clearly affirmed the doctrine, holding, "Under the designation of 'person' there is no doubt that
8352-553: The financial exposures and opportunities arising from business decisions, and their link to the firm’s appetite for risk , as well as their impact on share price . The discipline is thus related to corporate finance, both re operations and funding, as below; and in large firms, the risk management function then overlaps "Corporate Finance", with the CRO consulted on capital-investment and other strategic decisions. Corporate personhood Corporate personhood or juridical personality
8468-734: The firm and capital from external funders, obtained by issuing new debt and equity (and hybrid- or convertible securities ). However, as above, since both hurdle rate and cash flows (and hence the riskiness of the firm) will be affected, the financing mix will impact the valuation of the firm, and a considered decision is required here. See Balance sheet , WACC . Finally, there is much theoretical discussion as to other considerations that management might weigh here. Corporations may rely on borrowed funds (debt capital or credit ) as sources of investment to sustain ongoing business operations or to fund future growth. Debt comes in several forms, such as through bank loans, notes payable, or bonds issued to
8584-399: The firm's capital structure , and where management must allocate the firm's limited resources between competing opportunities (projects). Capital budgeting is thus also concerned with the setting of criteria about which projects should receive investment funding to increase the value of the firm, and whether to finance that investment with equity or debt capital. Investments should be made on
8700-420: The firm's capital resources and surplus cash on investments and projects so the company can continue to expand its business operations into the future. When companies reach maturity levels within their industry (i.e. companies that earn approximately average or lower returns on invested capital), managers of these companies will use surplus cash to payout dividends to shareholders. Thus, when no growth or expansion
8816-535: The firm's long term profitability; and paying excess cash in the form of dividends to shareholders; also considered will be paying back creditor related debt. Choosing between investment projects will thus be based upon several inter-related criteria. (1) Corporate management seeks to maximize the value of the firm by investing in projects which yield a positive net present value when valued using an appropriate discount rate in consideration of risk. (2) These projects must also be financed appropriately. (3) If no growth
8932-491: The firm. The hurdle rate is the minimum acceptable return on an investment – i.e., the project appropriate discount rate . The hurdle rate should reflect the riskiness of the investment, typically measured by volatility of cash flows, and must take into account the project-relevant financing mix. Managers use models such as the CAPM or the APT to estimate a discount rate appropriate for
9048-463: The forecast numbers; see Penalized present value ). Even when employed, however, these latter methods do not normally properly account for changes in risk over the project's lifecycle and hence fail to appropriately adapt the risk adjustment. Management will therefore (sometimes) employ tools which place an explicit value on these options. So, whereas in a DCF valuation the most likely or average or scenario specific cash flows are discounted, here
9164-412: The form of cash dividends or to repurchase the company's stock through a share buyback program. Thus, if there are no NPV positive opportunities, i.e. projects where returns exceed the hurdle rate, and excess cash surplus is not needed, then management should return (some or all of) the excess cash to shareholders as dividends. This is the general case, however the "style" of the stock may also impact
9280-443: The founders' lifespans, and to avoid their fragmentation and disintegration resulting from personal property inheritance laws. Later on, incorporation was advocated as an efficient and secure mode of economic development: advantages over existing partnership structures included the corporation's continuing existence if a member died; the ability to act without unanimity ; and limited liability. The word "corporation" itself derives from
9396-469: The future; see Dividend signaling hypothesis The second set relates to management's thinking re capital structure and earnings, overlapping the above . Under a "Residual dividend policy" - i.e. as contrasted with a "smoothed" payout policy - the firm will use retained profits to finance capital investments if less / cheaper than the same via equity financing; see again Pecking order theory . Similarly, under
9512-481: The initial investment outlay is the NPV . See Financial modeling § Accounting for general discussion, and Valuation using discounted cash flows for the mechanics, with discussion re modifications for corporate finance. The NPV is greatly affected by the discount rate . Thus, identifying the proper discount rate – often termed, the project "hurdle rate" – is critical to choosing appropriate projects and investments for
9628-428: The integrity of the client organization and its ability to represent itself in legal processes . It also avoids excessive risk on behalf of the purveyor of corporate services. This practice seeks to ensure that the corporate personhood of the client is secured. Exceptions to this may be in litigations or corporate bankruptcy filings where the enterprise entity of the client is considered legally incapacitated and
9744-449: The investment is large in the context of the firm as a whole, so the discount rate applied by outside investors to the (private) firm's equity may be adjusted upwards to reflect the new level of risk, thus impacting future financing activities and overall valuation. More sophisticated treatments will thus produce accompanying sensitivity - and risk metrics , and will incorporate any inherent contingencies . The focus of capital budgeting
9860-439: The large amounts of investment capital large business required, especially for capital intensive yet risky projects such as railroads. Following the reasoning of the Dartmouth College case and other precedents (see § Case law in the United States below), corporations could exercise the rights of their shareholders and these shareholders were entitled to some of the legal protections against arbitrary state action. Their cause
9976-676: The legislature. The degree of permissible government interference in corporate affairs was controversial from the earliest days of the nation. In 1790, John Marshall , a private attorney and a veteran of the Continental Army , represented the board of the College of William and Mary , in litigation that required him to defend the corporation's right to reorganize itself and in the process remove professors, The Rev John Bracken v. The Visitors of Wm & Mary College (7 Va. 573; 1790 Supreme Court of Virginia ). The Supreme Court of Virginia ruled that
10092-405: The limitations of sensitivity and scenario analyses by examining the effects of all possible combinations of variables and their realizations" is to construct stochastic or probabilistic financial models – as opposed to the traditional static and deterministic models as above. For this purpose, the most common method is to use Monte Carlo simulation to analyze the project's NPV. This method
10208-733: The limited application of the First Amendment to the States" and not on whether corporations qualify as "persons" under the Fourteenth Amendment. Nonetheless, these justices' rulings have continued to affirm the assumption of corporate personhood, as the Waite court did, and Justice Rehnquist himself eventually endorsed the right of corporations to spend in elections (the majority view in Bellotti ) in his dissenting opinion in McConnell v. FEC . A central point of debate in recent years has been what role corporate money plays and should play in democratic politics. This
10324-483: The local lord, nor be taxed, upon the death of church members. Some town charters explicitly granted medieval towns the right of self-governance. Commercial endeavors were not among the entities incorporated in the medieval era, and even risky trading companies were originally run as common-law partnerships rather than corporations; the incorporation of the East India Company monopoly in 1600 broke new ground, and by
10440-404: The main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms. Financial management overlaps with the financial function of the accounting profession . However, financial accounting is the reporting of historical financial information, while financial management is concerned with the deployment of capital resources to increase a firm's value to
10556-616: The majority opinion in Citizens United argued both from an 'association' perspective ("if the antidistortion rationale were to be accepted... it would permit Government to ban political speech simply because the speaker is an association that has taken on the corporate form") and from a 'natural entity' perspective ("the worth of speech 'does not depend upon the identity of its source, whether corporation, association, union, or individual ' "). Treating juridical persons as having legal rights allows corporations to sue and to be sued, provides
10672-527: The market value of the stock of that corporation. Shareholder value may also be increased when corporations payout excess cash surplus (funds from retained earnings that are not needed for business) in the form of dividends. Preferred stock is a specialized form of financing which combines properties of common stock and debt instruments, and is generally considered a hybrid security. Preferreds are senior (i.e. higher ranking) to common stock , but subordinate to bonds in terms of claim (or rights to their share of
10788-491: The obligation in full whenever the company feels it is in their best interest to pay off the debt payments. If interest expenses cannot be made by the corporation through cash payments, the firm may also use collateral assets as a form of repaying their debt obligations (or through the process of liquidation ). Corporations can alternatively sell shares of the company to investors to raise capital. Investors, or shareholders, expect that there will be an upward trend in value of
10904-408: The observed or supposed correlation between the variables. These distributions would then be "sampled" repeatedly – incorporating this correlation – so as to generate several thousand random but possible scenarios, with corresponding valuations, which are then used to generate the NPV histogram. The resultant statistics ( average NPV and standard deviation of NPV) will be a more accurate mirror of
11020-465: The opportunity with the highest value, as measured by the resultant net present value (NPV) will be selected (first applied in a corporate finance setting by Joel Dean in 1951). This requires estimating the size and timing of all of the incremental cash flows resulting from the project. Such future cash flows are then discounted to determine their present value (see Time value of money ). These present values are then summed, and this sum net of
11136-599: The oral argument should focus on other issues in the case. In the Santa Clara case the court reporter, Bancroft Davis , noted in the headnote to the opinion that the Chief Justice, Morrison Waite , began oral argument by stating, "The court does not wish to hear argument on the question whether the provision in the Fourteenth Amendment to the Constitution , which forbids a State to deny to any person within its jurisdiction
11252-470: The original Crown charter provided the authority for the corporation's Board of Visitors to make changes including the reorganization. As the 19th century matured, manufacturing in the U.S. became more complex as the Industrial Revolution generated new inventions and business processes. The favored form for large businesses became the corporation because the corporation provided a mechanism to raise
11368-418: The project's "randomness" than the variance observed under the scenario based approach. (These are often used as estimates of the underlying " spot price " and volatility for the real option valuation below; see Real options valuation § Valuation inputs .) A more robust Monte Carlo model would include the possible occurrence of risk events - e.g., a credit crunch - that drive variations in one or more of
11484-455: The property is held via a corporation rather than directly under the owner's own name. Corporate attorney John Norton Pomeroy argued in the 1880s that "Statutes violating their prohibitions in dealing with corporations must necessarily infringe upon the rights of natural persons. In applying and enforcing these constitutional guaranties, corporations cannot be separated from the natural persons who compose them." Similarly, proponents might argue
11600-784: The protections of the Constitution. In Burwell v. Hobby Lobby Stores, Inc. (2014), the Court found that the Religious Freedom Restoration Act of 1993 exempted Hobby Lobby from aspects of the Patient Protection and Affordable Care Act because those aspects placed a substantial burden on the company's owners' free exercise of sincerely held religious beliefs. U.S. courts have extended certain constitutional protections to corporations under various rationales. An early perspective, variously known as 'contractual', 'associate', or 'aggregate' theory, holds that owners of property have certain constitutional protections, even when
11716-505: The public. Bonds require the corporation to make regular interest payments (interest expenses) on the borrowed capital until the debt reaches its maturity date, therein the firm must pay back the obligation in full. One exception is zero-coupon bonds (or "zeros"). Debt payments can also be made in the form of sinking fund provisions, whereby the corporation pays annual installments of the borrowed debt above regular interest charges. Corporations that issue callable bonds are entitled to pay back
11832-488: The reinvestment of undistributed earnings; a share buyback program may be accepted when the value of the stock is greater than the returns to be realized from the reinvestment of undistributed profits. Management will also choose the form of the dividend distribution, as stated, generally as cash dividends or via a share buyback . Various factors may be taken into consideration: where shareholders must pay tax on dividends , firms may elect to retain earnings or to perform
11948-440: The same basis as (long term) profitability, and working capital management applies different criteria in allocating resources: the main considerations are (1) cash flow / liquidity and (2) profitability / return on capital (of which cash flow is probably the most important). Guided by the above criteria, management will use a combination of policies and techniques for the management of working capital. These policies aim at managing
12064-416: The same guarantees as interest payments from bonds and they are junior to all creditors. Preferred stock is a special class of shares which may have any combination of features not possessed by common stock. The following features are usually associated with preferred stock: As mentioned, the financing mix will impact the valuation of the firm: there are then two interrelated considerations here: Much of
12180-423: The same result as the DCF. See also list of valuation topics . Given the uncertainty inherent in project forecasting and valuation, analysts will wish to assess the sensitivity of project NPV to the various inputs (i.e. assumptions) to the DCF model . In a typical sensitivity analysis the analyst will vary one key factor while holding all other inputs constant, ceteris paribus . The sensitivity of NPV to
12296-412: The scenario approach above, the simulation produces several thousand random but possible outcomes, or trials, "covering all conceivable real world contingencies in proportion to their likelihood;" see Monte Carlo Simulation versus "What If" Scenarios . The output is then a histogram of project NPV, and the average NPV of the potential investment – as well as its volatility and other sensitivities –
12412-403: The second (more realistic) case, other considerations apply. The first set relates to investor preferences and behavior (see Clientele effect ). Investors are seen to prefer a “bird in the hand” - i.e. cash dividends are certain as compared to income from future capital gains - and in fact, may employ some form of dividend valuation model in valuing shares. Relatedly, investors will then prefer
12528-479: The second half of the 20th century, particularly driven by innovations in theory and practice in the United States and Britain. Here, see the later sections of History of banking in the United States and of History of private equity and venture capital . The primary goal of financial management is to maximize or to continually increase shareholder value. This requires that managers find an appropriate balance between: investments in "projects" that increase
12644-444: The sensitivity approach these need not be so. An application of this methodology is to determine an " unbiased " NPV, where management determines a (subjective) probability for each scenario – the NPV for the project is then the probability-weighted average of the various scenarios; see First Chicago Method . (See also rNPV , where cash flows, as opposed to scenarios, are probability-weighted.) A further advancement which "overcomes
12760-567: The shareholders. Corporate finance for the pre-industrial world began to emerge in the Italian city-states and the low countries of Europe from the 15th century. The Dutch East India Company (also known by the abbreviation " VOC " in Dutch) was the first publicly listed company ever to pay regular dividends . The VOC was also the first recorded joint-stock company to get a fixed capital stock . Public markets for investment securities developed in
12876-506: The states. The dominant view from the 1920s to the 1980s, championed by philosopher John Dewey , asserted that such perspectives are often overgeneralizations, and that the decision to grant corporate rights in a given sphere should be governed by the consequences of doing so . The 1980s saw an explosion of economic analyses, with a corporation often viewed as a nexus of contracts and as an economic agent appointed to act on behalf of its shareholders. Some rulings combine multiple perspectives;
12992-480: The theory here, falls under the umbrella of the Trade-Off Theory in which firms are assumed to trade-off the tax benefits of debt with the bankruptcy costs of debt when choosing how to allocate the company's resources. However economists have developed a set of alternative theories about how managers allocate a corporation's finances. One of the main alternative theories of how firms manage their capital funds
13108-458: The tools and analysis used to allocate financial resources. The primary goal of corporate finance is to maximize or increase shareholder value . Correspondingly, corporate finance comprises two main sub-disciplines. Capital budgeting is concerned with the setting of criteria about which value-adding projects should receive investment funding , and whether to finance that investment with equity or debt capital. Working capital management
13224-534: The type of regulation at issue, whether of a corporation or of sole proprietorship or partnership. Federal statutes that refer to "persons" generally include both natural and juridical ones, unless a different definition is given. This general rule of interpretation is specified in Title 1, section 1 of the U.S. Code , known as the Dictionary Act, which states: In determining the meaning of any Act of Congress, unless
13340-419: Was introduced to finance by David B. Hertz in 1964, although it has only recently become common: today analysts are even able to run simulations in spreadsheet based DCF models, typically using a risk-analysis add-in, such as @Risk or Crystal Ball . Here, the cash flow components that are (heavily) impacted by uncertainty are simulated, mathematically reflecting their "random characteristics". In contrast to
13456-588: Was strengthened by the adoption of general incorporation statutes in the states in the late 19th century, most notably in New Jersey and Delaware, which allowed anyone to form corporations without any particular government grant or authorization, and thus without the government-granted monopolies that had been common in charters granted by the Crown or by acts of the legislature (see Delaware General Corporation Law ). In Santa Clara County v. Southern Pacific Railroad (1886),
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