Technical / Capital
Corporate Finance: The Three Big Decisions
Corporate finance explained: capital allocation, financing, and dividend decisions. Core framework for investment banking technical interviews.
"The three most important words in investing are margin of safety." — Warren Buffett
Concept
Corporate finance is the study of how companies make financial decisions. It covers three core areas: investment decisions (what assets to buy), financing decisions (how to fund those assets), and dividend decisions (what to return to investors). Every M&A deal, IPO, and restructuring traces back to these three pillars.
Intuition
Corporate finance exists because capital is scarce. Every dollar a company spends has an opportunity cost—it could have been invested elsewhere or returned to shareholders. The framework forces discipline: invest only where returns exceed the cost of capital. Finance with the cheapest sources adjusted for risk. Return excess cash when you've run out of good projects. Breaking any of these rules destroys shareholder value.
Components
The Investment Decision
What It Is
Deciding which projects or assets the firm should invest in. Also called capital budgeting. The goal: accept projects that create value (positive NPV) and reject those that destroy it.
How to Evaluate It
Use discounted cash flow analysis:
- NPV: Accept if NPV > 0
- IRR: Accept if IRR > cost of capital
- Payback Period: Simpler metric, but ignores time value of money
Interview Script
Corporate finance is the study of how companies make financial decisions across three core areas: investment decisions, which is what assets to buy; financing decisions, which is how to fund those assets; and dividend decisions, which is what to return to investors. The underlying principle is that capital is scarce, so companies should only invest where returns exceed the cost of capital, finance with the cheapest risk-adjusted sources, and return excess cash when there aren't enough good projects—breaking any of these rules destroys shareholder value.