Corporate finance

Corporate finance is the area of finance dealing with the sources of funding and the
capital structure of corporations and the actions that managers take to increase the value
of the firm to the shareholders, as well as the tools and analysis used to allocate financial
resources.
The primary goal of corporate finance is to maximize or increase shareholder
value.Although it is in principle different from managerial finance which studies the
financial management of all firms, rather than corporations alone, the main concepts in
the study of corporate finance are applicable to the financial problems of all kinds of
firms.
Types of Financial Decisions
Managerial Finance Functions Or The Functions Of Financial
Manager
Managerial finance functions are functions that reuire managerial skills in their
planning, execution and control. The managerial finance functions are as follows!
1. Investment Decision
"nvesting decision is the managerial decision regarding investment in long#term
proposals. "t includes the decision concerned with acuisition, modification and
replacement of long#term assets such as plant, machinery, euipment, land and buildings.
$ong term assets reuire huge amount of capital outlay at the beginning but the benefits
are derived over several periods in the future. %ecause the future benefits are not known
with certainty, long#term investment proposals involve risks.The financial manager
should estimate the expected risk and return of the long#term investment and then should
evaluate the investment proposals in terms of both expected returns and risk. The
financial manager accepts the proposal only if the investment maximizes the shareholders
wealth.
2. Financing Decision
&inancing decision which is also known as capital structure decision, is concerned with
determining the sources of funds and deciding upon the proportionate mix of funds from
different sources. "t calls for raising of funds from different sources maintaining
appropriate mix of capital. The sources of long#term funds include euity capital and debt
capital. A particular combination of debt and euity may be more beneficial to the firm
than any others. The financial manager should decide an optimal structure of debt and
euity capital.
3. Dividend Decision
'ividend decision is the decision about the allocation of earnings to common
shareholders. "t is concerned with deciding the portion of earnings to be allocated to
common shareholders. The net income after paying preference dividends belongs to
common shareholders. The financial manager has three alternatives regarding dividend
decision!
* Pay all earnings as dividend
* Retain all earnings for reinvestment
* Pay certain percentage of earning and retain the rest for reinvestment.
The financial manager must choose among the above alternatives. The choice should be
optimum in the sense that it should maximize the shareholders wealth. (hile taking
dividend decisions, the financial manager should consider the preference of shareholders
as well as the investment opportunities available to the firm.
Goal of the financial manager

The ultimate goal of any financial manager )as well as the firm* is make the most of
shareholders+ wealth. A good financial manager therefore should carefully consider and
weigh the risk of undertaking a certain pro,ect against the profits associated with
undertaking such a pro,ect. Capital %udgeting techniues enable the manager to make
such decisions.

The financial manager+s ma,or goal of an organization+s " have classified the three )-.*
categories that is below

)/* Make the most of profits
)0* 1educe costs
).* Make best use of market


(1) a!e the most of profits"

possibly the first thing that comes to mind, the goal of any administration to finance in
any organization is to make the most of profit, but the expression of the ob,ective of
financial manager is to make the most of profit term is inaccurate. &or case, 'o you mean
this! to make the most of profits of that a year2 "f so, this may lead to some activities,
others favor the long#term in order to make the most of profit this year, such as reduced
maintenance expenses, reduce inventory and other things that lead to the reduction of
expenses This year alone, leading to increased profits with the presence of future damage

3ossibly expressed by some that the goal of financial manager is to make the most of
long#term profits, this is also an inaccurate, it make the most of profits of the company
accounts and on paper in the long run, but we are surprised that the profit owners have
decreased

4econd, since net income is calculated for each of a possibly infinite stream of multiple
periods, when you say that you want to make the most of profits, which profit)s* are you
talking about2 Make the most of near#term profits often involves less#than#optimal far#
term profits,

(2) #ed$ce costs"

&inancial manager+s ma,or goal of reduce costs is an inappropriate goal because there is a
perceptibly bad way to finish this stop doing business. Although The financial manager
main tasks of a &inance Manager includes setting up financial goals, planning strategies
to reach these goals, keeping a high check on profits and loss, preparing financial reports,
investing funds, monitoring cash flows, advising the rest of on mergers and acuisitions,
accounting and auditing, developing certain kind of measures in order to reduce financial
risk and establishing lending criteria. "n short, financial managers handle all the financial
dealings and accounts of the company.

The whole lingo is to add value to the company by setting the right financial goals. They
handle all the financial accounts with rigorous auditing. They decide on how much of the
company5s profits should be returned into investment and also how much should be
reinvested into the organization. &inancial managers are pillars to your new organization
or a step to the growth of your organization.





(3) a!e %est $se of mar!et


The main mission of a financial manager is to supply investment advice along with
financial planning services. Make best use of market share is an inappropriate goal
because there is also a perceptibly bad method to complete this give your invention away
for free.

%asically the financial manager helps the consumer to make best use of their net worth
through correct asset distribution.

&inancial managers freuently use stocks, bonds, mutual funds and insurance products to
execute the necessities of a client. 4ilence a few financial managers accept a commission
compensation for the dissimilar types of financial harvest which they consult for,
although 6fee#based6 growth is fast reputation in the market.

7ne of the essential services which financial managers supply is the leaving planning.
The financial managers have high level data in the field of budgeting, forecasting,
taxation, asset allocation, etc. &inancial managers may even help their client in investing
for both long term as well as short term basis.

Concl$sion& The ma,or goal of an organization5s financial manager should be to realize
that there is always a transaction between risk and return, he should always make use of
the tools available to him in considering any new pro,ects such as capital budgeting
techniues )8et 3resent 9alue, "nternal 1ate of 1eturn,* as well as simulations and
sensitivity analysis to arrive at the most accurate decision. :e also needs to know how
shareholders perceive risk and how they measure it so as to avoid organization problems
and turn up at the ultimate goal of the firm# make the most of shareholders+ wealth
Efficient Capital Markets
Introduction
&irms can create value from financing decisions in the following ways!
/. &ool investors.
0. 1educe costs or increase subsidies; i.e. adopt 839 < - pro,ects and choose an
optimal capital structure and dividend policy.
.. create a new security that satisfies a market need.
&inancial "nnovation is a difficult and high#risk strategy for value creation; which leaves
us the first two strategies.
=mpirical evidence suggests that the capital markets are informationally efficient, which
rules out alternative one, leaving only alternative two as a potential source of value.
What is market efficiency?
An efficient market is a market in which securities are priced according to their value
given all publicly available information.
Conseuently, a manager cannot usually hope to manipulate the market value of a firm.
:owever, the fact that all relevant information is not available publicly means that the
manager may be able to use his private information to choose financing strategies that do
indeed dispossess the outside investor )e.g. selling overvalued stock*. :owever, this
generates agency costs, and hence does not work as a long term strategy.
(ith the above ualification, capital market efficiency implies!
&inancial Managers cannot time issues of bonds and stocks.
A firm can sell as many shares of stocks or bonds as it wants without fear of
depressing price )except in the very short run*.
4tock and bond markets cannot be affected by firms artificially increasing
earnings )that is, cooking the books*.
An announcement of an accounting method change should not affect stock prices
if enough information was available previously to enable individual investors to
independently construct the accounting numbers generated under the new method.
4tock prices may change when an accounting change is announced, if new
information is revealed.