Overview of Activities in Corporate Finance

Running Head: CORPORATE FINANCIAL MANAGEMENT
CORPORATE FINANCIAL MANAGEMENT
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1CORPORATE FINANCIAL MANAGEMENT
Table of Contents
Introduction................................................................................................................................2
Discussion..................................................................................................................................2
SML Different from CML.....................................................................................................2
Capital Market Line...........................................................................................................2
Graphical Representation of CML.....................................................................................3
Capital Market Theory.......................................................................................................3
Security Market Line..........................................................................................................4
Graphical Representation of SML.....................................................................................5
Minimum Variance Portfolios Importance............................................................................5
CAPM Equation Relevancy...................................................................................................7
Corporate Decision Making...................................................................................................9
Conclusion..................................................................................................................................9
Reference..................................................................................................................................11

2CORPORATE FINANCIAL MANAGEMENT
Introduction
Financial management of corporate is practice or the act of developing the plans &
strategies and making decisions of investment that positively affects business operations. It
involves setting of goals, making plans for achieving them and deciding best way for paying
them. Further, capital budgeting is formal process used by entity for evaluation of the
potential investment or expenditures, which are important in the amount. This involves
decisions for investing current funds. In this concern, efficient frontier helps in setting out
optimal portfolios, which offers expected return that is highest for the defined risk level or
lowest risk for given expected return (Hong and Sraer 2016). Hence, this assignment includes
the discussion on the way SML is different from CML. Further, discussion will be on
importance of the MVP. Lastly, discussion will be on relevancy of the equation of CAPM
than the other equations.
Discussion
SML Different from CML
Capital Market Line
CML is graphical line, which helps in representing linear relationship in between
expected return and total risk for the efficient portfolios of riskless and risky securities. When
borrowing and lending possibilities are being considered, capital market line becomes
efficient frontier that starts from riskless rate for point of tangency on efficient frontier of the
portfolios (Eser and Schwaab 2016). It is graph of required risk md return of portfolios of
risk-free asset and bag of the risky asset, which helps in offering best trade off of risk return.
This is the important case of the capital allocation line, which is tangent towards efficient
frontier and capital allocation line slope representing ratio of Sharpe. When the portfolio of
the risky assets is well-diversified then it has zero level of unsystematic risk. Further, point

3CORPORATE FINANCIAL MANAGEMENT
on the efficient frontier having lower risk is known as global MVP. If the investor is having
the option for lending and borrowing at the rate that is risk-free, asset allocation can be
created, which is mixture of the risk-free asset as well as portfolio of the risky portfolios
(Christensen, Hail and Leuz 2016). Following is CML equation:
Graphical Representation of CML
Capital Market Theory
Capital market theory explains movement of the capital market over time by using
one of various models of mathematics. The commonly used models in the theory of capital
market is CAPM. The theory of Capital market seeks for pricing assets in the market.