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 all

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 require managerial skills in their planning, execution and control. The managerial finance functions are as follows:

1. Investment DecisionInvesting decision is the managerial decision regarding investment in long-term proposals. It includes the decision concerned with acquisition, modification and replacement of long-term assets such as plant, machinery, equipment, land and buildings. Long term assets require huge amount of capital outlay at the beginning but the benefits are derived over several periods in the future. Because 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 DecisionFinancing 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. It calls for raising of funds from different sources maintaining appropriate mix of capital. The sources of long-term funds include equity capital and debt capital. A particular combination of debt and equity may be more beneficial to the firm than any others. The financial manager should decide an optimal structure of debt and equity capital.

3. Dividend DecisionDividend decision is the decision about the allocation of earnings to common shareholders. It 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. While 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 managerThe 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 project against the profits associated with undertaking such a project. Capital Budgeting techniques enable the manager to make such decisions.

The financial managers major goal of an organizations I have classified the three (03) categories that is below

(1) Make the most of profits

(2) Reduce costs

(3) Make best use of market

(1) Make 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 objective of financial manager is to make the most of profit term is inaccurate. For case, Do you mean this: to make the most of profits of that a year? If 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

Possibly 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

Second, 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 about? Make the most of near-term profits often involves less-than-optimal far-term profits,

(2) Reduce costs:

Financial managers major 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 Finance 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 acquisitions, accounting and auditing, developing certain kind of measures in order to reduce financial risk and establishing lending criteria. In 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 company's profits should be returned into investment and also how much should be reinvested into the organization. Financial managers are pillars to your new organization or a step to the growth of your organization.

(3) Make best use of market

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.

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

Financial managers frequently use stocks, bonds, mutual funds and insurance products to execute the necessities of a client. Silence a few financial managers accept a commission compensation for the dissimilar types of financial harvest which they consult for, although "fee-based" growth is fast reputation in the market.

One 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. Financial managers may even help their client in investing for both long term as well as short term basis.

Conclusion, The major goal of an organization's 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 projects such as capital budgeting techniques (Net Present Value, Internal Rate of Return,) as well as simulations and sensitivity analysis to arrive at the most accurate decision. He 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

Firms can create value from financing decisions in the following ways:

1. Fool investors.

2. Reduce costs or increase subsidies; i.e. adopt NPV > 0 projects and choose an optimal capital structure and dividend policy.

3. create a new security that satisfies a market need.

Financial Innovation is a difficult and high-risk strategy for value creation; which leaves us the first two strategies.

Empirical 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.

Consequently, a manager cannot usually hope to manipulate the market value of a firm. However, 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). However, this generates agency costs, and hence does not work as a long term strategy.

With the above qualification, capital market efficiency implies:

Financial 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).

Stock 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. Stock prices may change when an accounting change is announced, if new information is revealed.