There are three main areas of decision making for the corporate financial manager: Investment: The choice of projects or assets in which to invest company funds. Competing alternatives have to be assessed using a number of techniques. This type of decision will also be of concern to the private individual when making choices about which shares to buy.
Finance: How these investments should be financed. It is necessary to evaluate the possible sources, external and internal, and the effect they will have on the capital structure of the company. Dividend: Whether corporate earnings should be retained or paid out in the form of dividends, and if the latter, when the dividends should be paid. Otherwise, we will cover the risk management as well as the management of a company's assets and liabilities in its working capital cycle. Assets must be managed effectively so that they generate income and profits, and so that funds are available to pay creditors and take up opportunities for investment.
In summary ,therefore, we can say that financial management involves the following areas as investment decisions, funding decisions, including the capital structure of the company, dividend decisions, risk management.
This implies that dividend payments and gains made when selling a shareholding are better indicators of shareholder wealth than profits. However, if the dividend payments are not consistent over a period of time, this will not increase confidence in the company shares, and their market price will reflect the variability of dividend payments. When the shareholder sells their investment, they may lose money. The prime objective of the company therefore needs to be adjusted slightly to the maximization of long-term shareholder wealth.
This will be indicated by maximisation of dividends over time and reflected in the market value of the ordinary shares.
If the share price reflects shareholder wealth, then we can say that any financial decision taken to increase the value of shares will be a decision that maximises shareholder wealth, and will be in keeping with the prime objective of the company, such a decision can involve are using appraisal techniques to assess investment projects and sourcing funding to provide for the company the most appropriate capital structure that can be serviced from available funds and paying dividends that the company can afford, while leaving sufficient retained earnings for investment and managing the risks associated with these decisions. This may leave you with the impression that the managers of a company will carry out its day to day functions efficiently and effectively on behalf of the owners, always asking themselves about the result of the decision maximise shareholder wealth, this is a realistic view because of the tension between ownership and control of company. That is limitations of shareholder wealth maximisation as concern to agency theory.
Agency theory is based in the separation of ownership and control that distinguishes the limited liability company from the other two business entities of the sole trader and the partnership. The relationship between shareholders and management is the principal agent relationship, and has given reis to agency theory. Where an agent was defined as a person used to effect a contract between their principal and a third party.
The agency problem is that managers may not always act in the best interest of the shareholders, to maximise the latter's wealth. Offering incentives, such as share options, to managers may reduce this problem.
Solving the agency problem
When the agency problem exits, therefore, when managers or directors do not act in the best interest of the shareholders to maxmise the latter's wealth. Management goals could include increasing their rewards. It was suggested in an earlier activity that two ways to ensure that management act in shareholders interests are to vote unacceptable directors off the...
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