Top 10 facts about the world There is a degree of risk associated with both corporate finance and project finance. Those risk factors can be higher in project finance because this form of financing relies on revenues that have not yet been generated for the repayment of debt. Corporate finance also introduces an element of risk. Another difference between corporate finance and project finance surrounds the frequency in which companies turn to either option.
Corporate finance deals with the strategic financial issues associated with achieving this goal, such as how the corporation should raise and manage its capital, what investments the firm should make, what portion of profits should be returned to shareholders in the form of dividends, and whether it makes sense to merge with or acquire another firm.
Balance Sheet Approach to Valuation If the role of management is to increase the shareholder value, then managers can make better decisions if they can predict the impact of those decisions on the firm's value.
By observing the difference in the firm's equity value at different points in time, one can better evaluate the effectiveness of financial decisions.
A rudimentary way of valuing the equity of a company is simply to take its balance sheet and subtract liabilities from assets to arrive at the equity value. However, this book value has little resemblance to the real value of the company.
First, the assets are recorded at historical costs, which may be much greater than or much less their present market values. Second, assets such as patents, trademarks, loyal customers, and talented managers do not appear on the balance sheet but may have a significant impact on the firm's ability to generate future profits.
So while the balance sheet method is simple, it is not accurate; there are better ways of accomplishing the task of valuation. Profits Another way to value the firm is to consider the future flow of cash.
Since cash today is worth more than the same amount of cash tomorrow, a valuation model based on cash flow can discount the value of cash received in future years, thus providing a more accurate picture of the true impact of financial decisions. Decisions about finances affect operations and vice versa; a company's finances and operations are interrelated.
The firm's working capital flows in a cycle, beginning with cash that may be converted into equipment and raw materials. Additional cash is used to convert the raw materials into inventory, which then is converted into accounts receivable and eventually back to cash, completing the cycle.
The goal is to have more cash at the end of the cycle than at the beginning. The change in cash is different from accounting profits. A company can report consistent profits but still become insolvent. For example, if the firm extends customers increasingly longer periods of time to settle their accounts, even though the reported earnings do not change, the cash flow will decrease.
As another example, take the case of a firm that produces more product than it sells, a situation that results in the accumulation of inventory. In such a situation, the inventory will appear as an asset on the balance sheet, but does not result in profit or loss. Even though the inventory was not sold, cash nonetheless was consumed in producing it.
Note also the distinction between cash and equity. Shareholders' equity is the sum of common stock at par value, additional paid-in capital, and retained earnings.
Some people have been known to picture retained earnings as money sitting in a shoe box or bank account. But shareholders' equity is on the opposite side of the balance sheet from cash. In fact, retained earnings represent shareholders' claims on the assets of the firm, and do not represent cash that can be used if the cash balance gets too low.
In this regard, one can say that retained earnings represent cash that already has been spent. Shareholder equity changes due to three things: Changes in cash are reported by the cash flow statement, which organizes the sources and uses of cash into three categories: Cash Cycle The duration of the cash cycle is the time between the date the inventory or raw materials is paid for and the date the cash is collected from the sale of the inventory.
A company's cash cycle is important because it affects the need for financing. The cash cycle is calculated as: Sales increase while the cash cycle remains fixed in duration.
Increased sales increase the value of assets in the cycle. Sales remain flat but the cash cycle increases in duration.
While financially it makes sense to reduce the length of the cash cycle, such a reduction should not be done without considering the impact on operations.
For example, one must consider the impact on customer and supplier relations as well as the impact on order fill rates.
Revenue, Expenses, and Inventory A firm's income is calculated by subtracting its expenses from its revenue. However, not all costs are considered expenses; accounting standards and tax laws prohibit the expensing of costs incurred in the production of inventory.
Rather, these costs must be allocated to inventory accounts and appear as assets on the balance sheet. Once the finished goods are drawn from inventory and sold, these costs are reported on the income statement as the cost of goods sold COGS.
If one wishes to know how much product the firm actually produced, the cost of goods produced in an accounting period is determined by adding the change in inventory to the COGS.
Assets Assets can be classified as current assets and long-term assets.Since Project Finance company are first and leading debt economics (Esty, ), we implant the choice Of Project Finance versus Corporate Finance in a reproduction of debt financing comparable to that in Hart ().
Corporate finance covers the financing and investing activities of a company. Financial management is the process that corporations use to manage and direct resources. Corporate finance and financial management are intertwined. Many people do not understand the principles of, and the differences between, NGO and Non-profit organizations, even though they are well-known terms in the 21st century.
First of all, to clarify, NGO stands for a non-governmental organization, and a non-profit organization can also be referred to. Points of difference: Corporate Finance: Project Finance: Stage: In the early stage of the company, corporate finance is being introduced.
When an organization is just starting up, corporate finance is what suits the company to finance through. Corporate Finance Interview Questions and Answers. Preparing for a Corporate Finance Interview? This list contains the top 20 corporate finance interview questions that are .
Project finance is the long-term financing of infrastructure and industrial projects based upon the projected cash flows of the or other traditional corporate finance structures.
Project financing in the developing world peaked around the time of the offtaker pays the difference to the project company, and vice versa if it is above an.