Corporate finance models are formulas or processes a company goes through to measure various financial parts. Common models include dividend, financing, or current assets, among others. A model offers a company a repeatable process by which to compute information for budgets, project valuation, and capital structure. Corporate finance models also provide measurements for sensitivity and scenario planning. The use of spreadsheets or computer programs can help companies complete these activities quickly.
A spreadsheet requires data entry in order for corporate finance models to provide usable data. For example, a company may need to evaluate multiple projects. Entering data associated with each one into a spreadsheet allows the internal spreadsheet formulas to calculate an expected output. The output provides specific data that managers use to assess each potential project. Computer programs work in a similar manner, except they may have more detailed outputs for analysis.
Dividend corporate finance models allow a company to determine the amount of dividends to pay from profits. Dividends are often small payments a company makes to common stock shareholders. This finance model accounts for dividends as part of the cost associated with equity financing. Companies need to understand this figure as it is a cost that does not necessarily bring value. The finance model often computes the total dividends paid, how to pay them, and the frequency for payments made to shareholders.
Project valuation corporate finance models provide specific information for the selection of added-value projects. These models often compare the costs needed to start the project with the potential financial returns. The two compared together can provide a company with the profitability for each project. Companies can then select the project that is most profitable, achieving higher gains and increased wealth for the business. Each model usually requires the same information for the model inputs.
Capital structure corporate finance models are secondary and often work in tandem with project valuation models. These models compare the cost of each possible project and create an analytical structure for financing each one, primarily through debt or equity financing. For example, a company that needs external funds often looks to banks for loans, bonds issued to investors, or stock sold to investors that will finance the project. The capital structure model allows a company to determine what mix is necessary to maximize the external funds used for projects.
