Corporate Finance

Academic definition

Corporate finance is a branch of finance that focuses on how corporations manage capital structure, investment decisions, and value creation for shareholders. It deals with decisions on financing (debt vs. equity), capital budgeting (which projects to invest in), and dividend policy (how profits are distributed). The goal is to maximize firm value, typically modeled via the Net Present Value (NPV) of future cash flows:

$$\text{NPV}=\sum _{t=1}^N\frac{{\text{FCF}}_t}{(1+\text{WACC}{)}^t}-I,$$ where ${\text{FCF}}_t$ is the free cash flow at time t, WACC is the weighted average cost of capital, and I is initial investment. Other important concepts include the Modigliani-Miller theorem, which explores capital structure irrelevance under perfect markets.

Simplified explanation

Corporate finance is about how companies decide what to invest in, how to pay for it (with loans or investor money), and how to make sure the business grows and creates value.

How it appears in the game

As a CEO of a company, you will have to deal with many concepts in corporate finance to maximize your profits. Understanding how everything fits together is one of the objectives of this game.

References

• Arnold, G. (2005). Handbook of Corporate Finance: A Business Companion to Financial Markets, Decisions and Techniques. Financial Times Prentice Hall.
• Berk, J. B., & DeMarzo, P. M. (2007). Corporate finance. Pearson Education.
• Damodaran, A. (2014). Applied corporate finance. John Wiley & Sons.
• Corporate Finance (Wikipedia).

Related concepts

• Finance
• Finance Interactive