Financial Management Essay

Part A in that respect be three main atomic number 18as of finis devising for the corporate mo last-placeary private instructor Investment The choice of projects or assets in which to invest caller gold. Competing alternatives have to be assessed development a number of techniques. This cause of finality allow besides be of concern to the private individual when fashioning choices ab tabu which divides to buy.Finance How these enthronizations should be financed. It is essential to evaluate the possible sources, outside(a) and upcountry, and the offspring they ordain have on the great organize of the conjunction. 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 pass on cover the risk management as well as the management of a callers assets and liabilities in its working metropolis cycle. Assets must be managed effectively so that they generate income and profits, and so that money are available to pay creditors and stockpile up opportunities for coronation.In summary ,therefore, we merchant ship aver that financial management involves the hobby areas as investment findings, backup decisions, including the corking coordinate of the corpoproportionn, dividend decisions, risk management.This implies that dividend payments and gains made when commercialiseing a shareholding are better indicators of stockholder riches than profits. However, if the dividend payments are non uniform over a period of time, this testament non increase confidence in the party shares, and their market charge entrust reflect the variability of dividend payments. When the stockholder sells their investment, they whitethorn lose money. The point objective of the phoner therefore necessitys to be familiarized slightly to the maximization of great- status shareholder wealth.This will be indicated by maximisation of dividends ove r time and reflected in the market grade of the ordinary shares.If the share set reflects shareholder wealth, then we net presuppose that any financial decision interpreted to increase the repute of shares will be a decision that maximises shareholder wealth, and will be in keeping with the prime objective of the attach to, much(prenominal) a decision shag involve are exploitation appraisal techniques to assess investment projects and sourcing funding to provide for the company the most distinguish capital structure that can be serviced from available bills and paid dividends that the company can afford, while leaving enough retained earnings for investment and managing the risks associated with these decisions.This whitethorn leave you with the impression that the managers of a company will carry out its daylight to day give outs efficiently and effectively on behalf of the owners, constantly asking themselves about the reply of the decision maximise shareholder we alth, this is a realistic view because of the tension in the midst of ownership and sustain of company. That is limitations of shareholder wealth maximisation as concern to style surmise.Agency theory is based in the separation of ownership and control that distinguishes the particular liability company from the other devil business entities of the sole trader and the partnership. The kind mingled with shareholders and management is the principal divisor relationship, and has given reis to situation theory. Where an agent was delineate as a person utilise to effect a contract between their principal and a third party.The agency difficulty is that managers whitethorn not always act in the top hat lodge in of the shareholders, to maximise the latters wealth. go incentives, such as share options, to managers whitethorn reduce this problem.Solving the agency problem When the agency problem exits, therefore, when managers or directors do not act in the take up interest of the shareholders to maxmise the latters wealth. charge goals could include increasing their rewards. It was suggested in an prior activity that two ways to assure that management act in shareholders interests are to vote unacceptable directors off the board, or to offer share options. Shareholder could admonisher the actions of managers using independently audited accounts, backed up by additional reporting requirements and external analysts.The managers whitethorn not act in the best interest of the shareholders, so they may be offering other such as share options. However, the share options also have more or less things to consider as the advantages is encourage managers to maximise shareholder wealth since the option may result in their being able to sell shares at a utmost value. But the disadvantages is the price of shares is influenced by some factors outside the control of management, so the benefits may accrue contempt management actions. Managers may also coun terchange accounting polices to improve the performance of the company and influence the share price deliberately.Otherwise, great structure refers to the way an entity finances its assets with a combination of equity and debt. An entitys capital structure is then the formation or structure of its liabilities. heavy(p) structure ratios show an entitys capital structure and account its ability to meet its extensive marches obligations. If the entity appears unable to meet its long status obligations, it will be in serious danger of collapse or takeover. Further, long term financial assign depends much on an entitys positivity since, in the long run, the entity will not be able to repay its debts un little it is profitable.The capital string ratio is a measure of the financial risk of an entity because of the prior pack that debt capital has on the profits and assets of the entity in the event of liquidation. Also, if the profits are low, the entity may not have sufficient funds available to make dividend payments to the ordinary shareholders.Capital gearing ratio ( discernment shares + long term loans) / (shareholders funds + long term loans) X 100 The difficulty is the comprehension of preference shares, since they take many assorted forms. If a companys preference shares are of the standard type, that is, having no take make ups and conveying nothing but the right to a fixed rate of dividend, they should be included as debt funding.The higher the percentage, the higher the aim of gearing. It is advisable to include niggling term debt such as overdraft if it is employ to fund long term investments and is not, therefore, of a temporary nature and bears a financial risk.A highly geared company may also experience difficulties in attracting funds from investors, who are not attracted by the risks involved in a high geared company. In this event, the market price of the companys shares will fall.The more than debt, the more risk for ordinary sha reholders and at long last for everyone, if the company faces liquidation. However, the more debt, the lower the WACC because debt is cheaper than equity. At very high levels of debt, however, the WACC will tramp because of the higher levels of risk involved.Reference Notes of the University of Sunderland APC308 pecuniary Management Conclusion The areas of corporate financial management are the decisions concerning investment, funding, dividend and working capital. And the company will use the gearing ratio to express the debt funding as a percentage of the total funding, because the high gearing ratio also brings problems associated with the interest range and the main objective in financial management is the maximisation of long term shareholder wealth that is the market value of the ordinary shares, because it is related to the how many dividends will pay to shareholders. However, the agency problem is a main problem on the managers may not act in the best interest of the sha reholders, so they may be offering other such as share options.Part B In Part A, i have explored two of three main areas of decision making for corporate financial managers the investment decision (NPV) and the finance, or funding, decision. In this part i am concerned with the third area, the dividend decision. The seat for the discussion in this part is the need for dividend policy and the relevance of dividend policies to investors.NPV is a net present value is the present value of the future recipts from a project less any investment made in the project.Modigliani and Millers theory dividends are irrelevant but almost is not quite. MMs theory of dividend irrelevancy refers not to the payment of the dividends but to the measure of their payment.According to MM, if a company has an investment opportunity giving a decreed NPV, it should be taken up using retained earnings rather than paying out a dividend. The companys value will go up, since share value is a function of the le vel of earnings, which reflect a companys investment policy, rather than a function of dividend payments.Similarly, in their theory of dividend irrelevancy they say that shareholders can create their own dividend, if they motivation to, by selling some of their theory of dividend, if they want to, by selling some of their shares. In a perfect market, shareholders can create a dividend stream to equip themselves, so it works in tip over too if the company does pay a dividend and the shareholder does not want one, they can reinvest by buying more shares.Otherwise, MMs view is that it is not the company but the individual shareholder who should judge dividend policy. Therefore, there is no such thing as an optimal dividend policy for a company, only an optimal investment policy. This would be a policy of investing in all projects with a positive NPV. In a perfect capital market, a company with insufficient internal funds could raise the funds required for investment externally. If a company had surplus internal funds, there could be distributed as dividends.