Business Knowledge

Corporate Finance: Core Concepts

The 3 Big Questions of Corporate Finance

Every company’s financial strategy boils down to these three decisions.

1. What to Invest In? (The Investment Decision)

  • Are you choosing projects where the return is greater than the cost?
  • Are you using NPV as your primary decision rule?
  • Goal: Invest in value-creating projects.

2. How to Pay for It? (The Financing Decision)

  • What’s your mix of debt and equity?
  • Is this mix minimizing your Weighted Average Cost of Capital (WACC)?
  • Goal: Fund your investments as cheaply as possible.

3. What to Do with the Profits? (The Dividend Decision)

  • Should you reinvest profits back into the business for growth?
  • Or should you return cash to your shareholders (dividends, buybacks)?
  • Goal: Balance current returns to shareholders with future growth.

The Loop: Your Investment choices determine how much money you need. How you Finance them determines your cost of capital, which sets the bar for future investments. What’s left over is your Dividend decision. It’s all connected!