Over the years corporations have aimed to gain huge profits by means of maximizing investments contributed by shareholders. In relation to shareholders value as it relates to corporate finance, the main idea is to maximize shareholders value. This is derived by implementing measures to get competitive advantages in industries of which companies operate. These measures and procedures include the raising of funds, investing, handling perceived risk and anticipating required return. Maximizing shareholders value make sense because this increase the value of a corporation, increases shareholder’s investments, and stabilizes the economy. Firstly, to attain these goals financial managers have to be involved playing key roles to organizations. …show more content…
By offering quality goods and services, corporations tend to earn huge profits thus attracting more investors to invest and expand the organization. When the expansion of an organization occurs, more jobs are provided and which in the long run contribute to the enhancement and stabilization of the economy. Corporations invest in real assets, which generate income. Some of these assets, include plant and machinery, which are tangible; others are brand names and patents, which are intangible. Corporations finance their investments by borrowing, by retaining, and investing cash flow, and by selling additional shares of stock to the corporation’s shareholders thus rotating cash and stabilizing the economy. Financial management assist shareholders in increasing their wealth by issuing stock dividends causing stock value to rise. Therefore, one purpose of why financial managers maximizing shareholders value is to bring together individuals, businesses, and government entities to produce and spend money while stabilizing the …show more content…
Nonetheless, this requires investment decisions which includes the purchase of real assets as well as finance decisions which includes the sale of financial assets. Through capital budgeting corporations do investments in both tangible and intangible assets. These capital investments typically generate future cash returns and corporations typically needs these cash inflows in order to pay the bills, bond holders, and shareholders as well as to sustain other operation expenses. Furthermore, capital investments are made to acquire cash inflows for the corporation’s future. Sometimes these cash inflows last for decades. However, when the investments are unsuccessful, the company faces the risk of losing investments and the potential of not gaining any cash inflows or investment
...urchasing the company's own shares, acquiring new companies and profitable assets, and reinvesting in financial assets (McClure, 2004)
... Capital, Corporation Finance and the Theory of Investment", The American Economic Review, vol. 48, no. 3, pp. 261-297.
Is The Tyranny Of Shareholder Value Finally Ending? N.p., n.d. Web. The Web.
In contrast , the shareholder theory organisations or organisation's decision-makers only have the responsibility to their shareholders by increasing the organisation profits and should only make the decisions to increase as much as possib...
Lazonick, W., & O'Sullivan, M. (2000). Maximizing shareholder value: a new ideology for corporate governance. Economy and Society, 29(1), 13-35. Retrieved from http://www.uml.edu/centers/cic/Research/Lazonick_Research/Older_Research/Business_Institutions/maximizing shareholder value.pdf
Although primary objective for managers is to maximise shareholders’ wealth, but many firms are started to focus on other stakeholders’ interests in recent years. Company can prevent transfer the damage of stakeholders’ wealth to shareholders when focus on stakeholders’ interests. In other words, “social responsibility” for the companies is to maintenance stakeholders’ relations in order to provide long-term interests to shareholders. By this way, conflict, turnover and litigation of stakeholders can be minimise. Obviously, company can achieve their primary objective by cooperation with stakeholders instead of conflict with stakeholders (Smart, Megginson, Gitman, 2002).
Research on the Sources of Finance for a Business Firms sometimes need to raise finance for Working Capital and Capital Expenditure. Explain what each is and give examples. · Working Capital (or Revenue Expenditure) The working capital is made up of the current assets net of the current liabilities. It is vital to a business to have sufficient working capital to meet all its requirements. Many businesses have gone under, not because they were unprofitable, but because they suffered from shortages of working capital.
Today financial corporate managers are continually asking, “What will today’s investment look like for the future health of the company? Should financial decisions be put on hold until the markets become stronger? Is it more profitable to act now to better position the company’s market share?” These are all questions that could be clearly answered if the managers had a magical financial crystal ball. In lieu of the crystal ball, managers have a way of calculating the financial risks with some certainty to better predict positive financial investment outcomes through the discounted cash flow valuation (DCF). DCF valuation is a realistic approach, a tool used, to “determine the future and present value of investments with multiple cash flows” over a particular period of time which is incurred at the end of each period (Ross, Westerfield, & Jordan, 2011). Solutions Matrix defines DCF as a “cash flow summary adjusted so as to reflect the time value of money (The Meaning of Discounted Cash Flow, 2014).” The valuation of money paid or rec...
Accounting profit can serve as an alternative to intrinsic value. But Buffett states that “...we do not measure the economic significance or performance of Berkshire by its size; we measure by per-share progress.” Accounting reality was conservative, backward looking, and governed by GAAP (measures in terms of net profit), therefore Buffett rejects this alternative. According to the world’s most famous investor, investment decisions should be based on economic reality, not on accounting
The capital structure of a firm is the way in which it decides to finance its operations from various funds, comprising debt, such as bonds and outstanding loans, and equity, including stock and retained earnings. In the long term, firms seek to find the optimal debt-equity ratio. This essay will explore the advantages and disadvantages of different capital structure mixes, and consider whether this has any relevance to firm value in theory and in reality.
There are many techniques used to manage cash including, the nature of asset growth, controlling assets, patterns of financing, the financing decision, a decision process and shifts in asset structure. For any company the growth of asset results in a growth in wealth if managed effectively. The typical firm usually forecast the rate of sales to ensure that the production of goods match sales so there is not an overflow if inventory. As a company expands and produces more items they will acquire permanent current assets. Permanent current assets can be described as a constant inventory of items because it is almost impossible to predict the market and the demands of the consumer.
A consequences of focusing on organization or company’s stakeholder is that the shareholder value itself can be enhanced and improved when a wider stakeholder group-such as employees, provider or credit, customers, suppliers government and the local community is taken into account (Mallin, 2011). This theory also related to the organization management and business ethics that uphold moral and values in managing a company as it will covers the benefits to the society and other external parties as a whole rather than just for the internal parties.
Should financial decisions be put on hold until the markets become stronger? Is it more profitable to act now to better position the company’s market share?” These are all questions that could be clearly answered if the managers had a magical financial crystal ball. In lieu of the crystal ball, managers have a way of calculating the financial risks with some certainty to better predict positive financial investment outcomes through the discounted cash flow valuation (DCF). DCF valuation is a realistic approach, a tool used, to “determine the future and present value of investments with multiple cash flows” over a particular period of time which is incurred at the end of each period (Ross, Westerfield, & Jordan, 2011). Solutions Matrix defines DCF as a “cash flow summary adjusted so as to reflect the time value of money (The Meaning of Discounted Cash Flow, 2014).” The valuation of money paid or received in the future has less monetary value if that same money was to be received or paid today (The Meaning of Discounted Cash Flow, 2014). This cash flow evaluation helps managers in their determination whether or not to invest in research and development, purchase more equipment, enlarge floor space, and increase laborers, or instead, retain net profits. Either way, the DCF valuation gives
The rapid development of media and technology in the world market today has helped companies to sell their products and get in touch with their customers more easily (Rayburn, 2012). However the success of a company depends on many factors, not that only whether it has brilliant advertisement or marketing campaigns. The main aim of a company is to create shareholder’s value which according to Bender and Ward (2008), companies have to manage both well in a trading environment and financial environment in order to do that. Hence, the financial strategy can be seen as one of the most important factors in contributing to the business’s success especially to a large company such as Unilever as it is all about strategic decisions related to raising and manage the funds in the most appropriate manner.
In the past, the company performance was measured by asking ‘how much money the company makes?’ To a certain extent, they are right because gross revenue, profitability, return on capital, etc. are the results that companies must bring to survive. Unfortunately, in today business if the management focuses only on the financial health of the company, numerous unwanted consequences may arise.