Financial Management Essay

Part A There are three chief countries of determination devising for the corporate fiscal director: Investing: The pick of undertakings or assets in which to put company financess. Competing options have to be assessed utilizing a figure of techniques. This type of determination will besides be of concern to the private person when doing picks about which portions to purchase.

Finance: How these investings should be financed. It is necessary to measure the possible beginnings. external and internal. and the consequence they will hold on the capital construction of the company. Dividend: Whether corporate net incomes should be retained or paid out in the signifier of dividends. and if the latter. when the dividends should be paid. Otherwise. we will cover the hazard direction every bit good as the direction of a company’s assets and liabilities in its on the job capital rhythm. Assetss must be managed efficaciously so that they generate income and net incomes. and so that financess are available to pay creditors and take up chances for investing.

In drumhead. hence. we can state that fiscal direction involves the following countries as investing determinations. support determinations. including the capital construction of the company. dividend determinations. hazard direction.

This implies that dividend payments and additions made when selling a shareholding are better indexs of stockholder wealth than net incomes. However. if the dividend payments are non consistent over a period of clip. this will non increase assurance in the company portions. and their market monetary value will reflect the variableness of dividend payments. When the stockholder sells their investing. they may lose money. The premier aim of the company hence needs to be adjusted somewhat to the maximization of long-run stockholder wealth.

This will be indicated by maximization of dividends over clip and reflected in the market value of the ordinary portions.

If the portion monetary value reflects stockholder wealth. so we can state that any fiscal determination taken to increase the value of portions will be a determination that maximises stockholder wealth. and will be in maintaining with the premier aim of the company. such a determination can affect are utilizing assessment techniques to measure investing undertakings and sourcing support to supply for the company the most appropriate capital construction that can be serviced from available financess and paying dividends that the company can afford. while go forthing sufficient retained net incomes for investing and pull offing the hazards associated with these determinations.

This may go forth you with the feeling that the directors of a company will transport out its twenty-four hours to twenty-four hours maps expeditiously and efficaciously on behalf of the proprietors. ever inquiring themselves about the consequence of the determination maximise stockholder wealth. this is a realistic position because of the tenseness between ownership and control of company. That is restrictions of stockholder wealth maximization as concern to bureau theory.

Agency theory is based in the separation of ownership and control that distinguishes the limited liability company from the other two concern entities of the exclusive bargainer and the partnership. The relationship between stockholders and direction is the chief agent relationship. and has given reis to bureau theory. Where an agent was defined as a individual used to consequence a contract between their principal and a 3rd party.

The bureau job is that directors may non ever move in the best involvement of the stockholders. to maximize the latter’s wealth. Offering inducements. such as portion options. to directors may cut down this job.

Solving the bureau job When the bureau job issues. hence. when directors or managers do non move in the best involvement of the stockholders to maxmise the latter’s wealth. Management ends could include increasing their wagess. It was suggested in an earlier activity that two ways to guarantee that direction act in stockholders involvements are to vote unacceptable managers off the board. or to offer portion options. Shareholder could supervise the actions of directors utilizing independently audited histories. backed up by extra coverage demands and external analysts.

The directors may non move in the best involvement of the stockholders. so they may be offering other such as portion options. However. the portion options besides have some things to see as the advantages is encourage directors to maximize stockholder wealth since the option may ensue in their being able to sell portions at a higher monetary value. But the disadvantages is the monetary value of portions is influenced by some factors outside the control of direction. so the benefits may accrue despite direction actions. Directors may besides alter accounting constabularies to better the public presentation of the company and influence the portion monetary value intentionally.

Otherwise. Capital construction refers to the manner an entity finances its assets through a combination of equity and debt. An entity’s capital construction is so the composing or construction of its liabilities.

Capital construction ratios show an entity’s capital construction and step its ability to run into its long term duties. If the entity appears unable to run into its long term duties. it will be in serious danger of prostration or coup d’etat. Further. long term fiscal place depends much on an entity’s profitableness since. in the long tally. the entity will non be able to refund its debts unless it is profitable.

The capital geartrain ratio is a step of the fiscal hazard of an entity because of the anterior claim that debt capital has on the net incomes and assets of the entity in the event of settlement. Besides. if the net incomes are low. the entity may non hold sufficient financess available to do dividend payments to the ordinary stockholders.

Capital pitching ratio: ( penchant portions + long term loans ) / ( shareholder’s financess + long term loans ) X 100 The trouble is the inclusion of penchant portions. since they take many different signifiers. If a company’s penchant portions are of the standard type. that is. holding no vote rights and conveying nil but the right to a fixed rate of dividend. they should be included as debt support.

The higher the per centum. the higher the degree of pitching. It is advisable to include short term debt such as overdraft if it is used to fund long term investings and is non. hence. of a impermanent nature and bears a fiscal hazard.

A extremely geared company may besides see troubles in pulling financess from investors. who are non attracted by the hazards involved in a high geared company. In this event. the market monetary value of the company’s portions will fall.

The more debt. the more hazard for ordinary stockholders and finally for everyone. if the company faces settlement. However. the more debt. the lower the WACC because debt is cheaper than equity. At really high degrees of debt. nevertheless. the WACC will lift because of the higher degrees of hazard involved.

Mention: Notes of the University of Sunderland APC308 Financial Management Conclusion The countries of corporate fiscal direction are the determinations refering investing. support. dividend and on the job capital. And the company will utilize the geartrain ratio to show the debt support as a per centum of the entire support. because the high geartrain ratio besides brings jobs associated with the involvement rates and the chief aim in fiscal direction is the maximization of long term stockholder wealth that is the market value of the ordinary portions. because it is related to the how many dividends will pay to stockholders. However. the bureau job is a chief job on the directors may non move in the best involvement of the stockholders. so they may be offering other such as portion options.

Part B In Part A. I have explored two of three chief countries of determination devising for corporate fiscal directors: the investing determination ( NPV ) and the finance. or funding. determination. In this portion i am concerned with the 3rd country. the dividend determination. The footing for the treatment in this portion is the demand for dividend policy and the relevancy of dividend policies to investors.

NPV is a net nowadays value is the present value of the hereafter recipts from a undertaking less any investing made in the undertaking.

Modigliani and Miller’s theory: dividends are irrelevant but about is non rather. MM’s theory of dividend irrelevance refers non to the payment of the dividends but to the timing of their payment.

Harmonizing to MM. if a company has an investing chance giving a positive NPV. it should be taken up utilizing retained net incomes instead than paying out a dividend. The company’s value will travel up. since portion value is a map of the degree of net incomes. which reflect a company’s investing policy. instead than a map of dividend payments.

Similarly. in their theory of dividend irrelevance they say that stockholders can make their ain dividend. if they want to. by selling some of their theory of dividend. if they want to. by selling some of their portions. In a perfect market. stockholders can make a dividend watercourse to accommodate themselves. so it works in contrary excessively: if the company does pay a dividend and the stockholder does non desire 1. they can reinvest by purchasing more portions.

Otherwise. MM’s position is that it is non the company but the single stockholder who should make up one’s mind dividend policy. Therefore. there is no such thing as an optimum dividend policy for a company. merely an optimum investing policy. This would be a policy of puting in all undertakings with a positive NPV. In a perfect capital market. a company with deficient internal financess could raise the financess required for investing externally. If a company had surplus internal financess. there could be distributed as dividends.