Corporate Finance: Objectives and Funding Strategies

The Finance Function: Objectives and Funding

The finance function is responsible for the administration and control of financial resources used by a company. It aims to achieve the following key objectives:

• Obtain the necessary financial resources for the company's productive activities at minimum cost.
• Determine the most appropriate financial structure for the company.
• Select the types of investments necessary to support the company's productive activities.

Classification of Funding Sources

Funding sources can be classified in several ways:

By Ownership

• Equity Financing (Own Sources): These funds originate from the company's operations and resources contributed by owners. Repayment is not required.
• Debt Financing (External Sources): These are funds obtained by the company from investors or financial intermediaries, where ownership is not transferred to the company. They represent various forms of debt and are considered liabilities.

By Origin

• External Sources: Funds raised from outside the company. This includes contributions from owners and various forms of funding granted by others.
• Internal or Self-Financing Sources: These are funds generated by the company through its operations, including depreciation funds and retained profits.

Specific Funding Methods and Concepts

Leasing

A financing option that allows companies to acquire capital assets for a specified period by paying a fee. At the end of this period, the lessee may return the asset to the lessor, purchase it at a residual price, or renew the contract.

Borrowing and Obligations

Large businesses often require significant capital, and it can be challenging to find financial institutions willing to lend such substantial amounts.

Issuance and Redemption of Securities (Titles)

Key values associated with securities include:

• Nominal Value: The face value stated on the security, representing the principal amount of the loan granted to the company.
• Issue Value: The price an investor pays to acquire the security upon issuance. The issue value may differ from the nominal value; sometimes a premium is added to encourage investment.
• Redemption Value: The amount paid to the security holder at the time of amortization (repayment). The redemption value may sometimes exceed the nominal value to enhance investment attractiveness.

Reserves

Funds derived from the company's accumulated profits that are not distributed to owners.

Investment

The allocation of financial resources for the purchase, renovation, or improvement of property, plant, and equipment, aimed at increasing the company's productive capacity.