What Are the Most Common Problems in Corporate Finance?

The most common problems in corporate finance involve the allocation and management of assets and risk by a corporation. Placing appropriate value on capital assets, and determining the risks and benefits of expenditures to secure additional capital assets are addressed in corporate finance. Corporate financing through relations with credit markets, equity markets, and shareholders is also important. Relations between firms and other financial actors can pose additional problems, particularly when they involve significant information asymmetry.

All of the most common problems in corporate finance relate in one way or another to promoting the financial health of a corporation. This type of finance seeks the best return on investments, and values both a large overall rate of return and few financial risks. In a corporation that is functioning properly, all of this is done to maximize shareholder value and profits.

The proper valuation of risks and assets is essential. Different models exist for both sorts of pricing, but all seek to allow decisions to be made with the best possible information about real asset values and real financial risks. This information is paired with information about potential rewards from different investment strategies to aid in long-term corporate financial planning and asset allocation, known as capital budgeting.

Other common problems in corporate finance revolve around locating financing to fund different corporate projects. To address these issues, financial planners attempt to determine the best balance between using existing cash on hand, securing financing from credit markets, and securing financing through the sale of stock. Using cash is simple, but limits the ability of firms to grow and invest. The wisdom of using financing from credit markets typically depends on the interest rates charged by those markets. Issuing equity dilutes existing ownership stakes, and in some cases, prevailing market conditions make this approach to financing impractical.

Corporations must choose how much money to pay out to shareholders. Determining dividend policy is less important in the modern financial world, as many firms prefer to provide returns to shareholders through investment decisions that increase the value of corporate stock. Dividends are still commonly paid, however, and setting dividend policy remains one of the important problems in corporate finance.

Dealing with information asymmetry is another of the common problems in corporate finance. Every market exists in parallel with a market in information, as information has value and allows firms to make better economic decisions. In some cases, firms may enjoy a significant advantage in information, and may take advantage of this advantage. Firms with weaker information must, in turn, act to mitigate that weakness.