1. Investments and Capital Budgeting
Investing and capital budgeting includes planning where to place the company's long-term capital assets in order to generate the highest risk-adjusted returns. This mainly consists of deciding whether or not to pursue an investment opportunity through extensive financial analysis.
By using financial accounting tools, a company identifies capital expenditures, estimates cash flows from proposed capital projects, compares planned investments with projected income, and decides which projects to include in the capital budget.
Financial modeling is used to estimate the economic impact of an investment opportunity and compare alternative projects. An analyst will often use the internal rate of return (IRR) in conjunction with net present value (NPV) to compare projects and pick the optimal one.
2. Capital Financing
This core activity includes decisions on how to optimally finance the capital investments through the business' equity, debt, or a mix of both. Long-term funding for major capital expenditures or investments may be obtained from selling company stocks or issuing debt securities in the market through investment banks.
Balancing the two sources of funding (equity and debt) should be closely managed because having too much debt may increase the risk of default in repayment, while depending too heavily on equity may dilute earnings and value for original investors.
Ultimately, it's the job of corporate finance professionals to optimize the company's capital structure by lowering its weighted average cost of capital (WACC) as much as possible.
3. Dividends and Return of Capital
This activity requires corporate managers to decide whether to retain a business's excess earnings for future investments and operational requirements or to distribute the earnings to shareholders in the form of dividends or share buybacks.
Retained earnings that are not distributed back to shareholders may be used to fund a business' expansion. This can often be the best source of funds, as it does not incur additional debts nor dilute the value of equity by issuing more shares.
At the end of the day, if corporate managers believe they can earn a rate of return on a capital investment that's greater than the company's cost of capital, they should pursue it. Otherwise, they should return excess capital to shareholders via dividends or share buybacks.
At Altius, we provide strategic guidance across all three pillars of corporate finance—from capital budgeting and investment analysis to financing strategy and shareholder value optimization. Our advisory approach ensures every financial decision is aligned with your long-term objectives.
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