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Aarav Learns Corporate Finance

 📖 Aarav Learns Corporate Finance

Aarav had recently completed his course in financial management and joined his uncle’s manufacturing business. On the very first day, his uncle asked him, “Can you explain what corporate finance really means for us?” Aarav replied, “Corporate finance is the area of finance that deals with how companies manage money, make investment decisions, and plan for long-term growth.”

His uncle smiled and said, “So what is its role in business?” Aarav explained that corporate finance ensures businesses raise funds, allocate them efficiently, and maximize the value of the company for its shareholders. He added that the primary objective of financial management is to maximize wealth and not just short-term profit.

Next, they discussed sources of corporate finance. Aarav explained that funds can be raised internally from retained earnings or externally through two major methods: debt financing and equity financing. Debt financing involves borrowing money, such as taking loans or issuing bonds, while equity financing means raising money by issuing shares.

His uncle asked, “But how do we decide the right mix between debt and equity?” Aarav introduced him to the concept of capital structure, the combination of debt and equity in financing. He explained that businesses aim for an optimal capital structure where the cost of capital is lowest, and the company’s value is maximized. This requires a trade-off between debt and equity – debt is cheaper but risky due to fixed obligations, while equity is safer but may dilute ownership.

Finally, Aarav brought up dividend policy. He explained that once profits are earned, management must decide how much to distribute to shareholders as dividends and how much to reinvest in the business. Dividends can be in the form of cash, bonus shares, or stock splits. The policy depends on several factors such as profitability, cash flow, taxation, investor expectations, and future expansion plans.

By the end of the day, his uncle said, “Now I understand why corporate finance is the backbone of business decisions. It is not just about raising money, but about using it wisely.” Aarav smiled, realizing that the principles of corporate finance were guiding not only large corporations but also his family’s business.

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