Financial Management Essay

disassemble A There are three master(prenominal)(prenominal) areas of ending making for the corporate financial manager investiture The choice of projects or assets in which to invest phoner funds. Competing alternatives have to be assessed using a tote up of techniques. This type of decision testament also be of concern to the private individual when making choices or so which deals to buy.Finance How these coronations should be financed. It is necessary to evaluate the possible sources, external and internal, and the effect they impart have on the capital mental synthesis of the company. Dividend Whether corporate earnings should be contain or paid bring out in the form of dividends, and if the latter, when the dividends should be paid. Otherwise, we will cover the risk caution as well as the focal point of a companys assets and liabilities in its working capital cycle. Assets must be managed effectively so that they generate income and scratch, and so that funds are in stock(predicate) to pay creditors and take up opportunities for investment.In compend , in that locationfore, we gutter 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 shareowner wealth than profits. However, if the dividend payments are not consistent over a period of time, this will not sum up confidence in the company shares, and their trade price will reflect the variability of dividend payments. When the shareholder sells their investment, they whitethorn lose money. The prime objective of the company therefore needs to be adjusted slightly to the maximization of broad- experimental condition shareholder wealth.This will be indicated by maximisation of dividends over time and reflected in the market apprize of the ordinar y 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 taps shareholder wealth, and will be in tutelage with the prime objective of the company, such a decision can involve are using idea 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, alship canal 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 self-confidence possibleness.Agency theory is based in the detachment of ownership and control that distinguishes the limited liability company from the other two business entities of the sole monger 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 troika party.The agency problem is that managers may not always act in the best elicit of the shareholders, to maximise the latters 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 latters wealth. Management goals could include increasing their rewards. It was suggested in an earlier activity th at two ways to ensure that management act in shareholders interests are to vote unacceptable directors off the board, or to put up share options. Shareholder could monitor the actions of managers using independently audited accounts, backed up by additional account requirements and external analysts.The managers may 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 some things to rent as the advantages is encourage managers to maximise shareholder wealth since the option may result in their beingness able to sell shares at a higher price. But the disadvantages is the price of shares is influenced by some factors alfresco the control of management, so the benefits may accrue despite management actions. Managers may also change be polices to improve the performance of the company and influence the share price deliberately.Otherwise, Capital structure refers to the way an entity pecuniary r esource its assets through a combination of equity and debt. An entitys capital structure is then the composition or structure of its liabilities.Capital structure ratios show an entitys capital structure and measure its ability to pucker its long term obligations. If the entity appears unable to meet its long term obligations, it will be in terrible danger of collapse or takeover. Further, long term financial position depends much on an entitys profitability since, in the long run, the entity will not be able to repay its debts unless it is profitable.The capital gear ratio is a measure of the financial risk of an entity because of the prior claim 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 (preference shares + long term loans) / (shareholders funds + long term loans) X 100 The difficulty is the inclusion of preference shares, since they take many different forms. If a companys preference shares are of the standard type, that is, having no voting rights and conveying nothing just now the right to a fixed rate of dividend, they should be included as debt funding.The higher the percentage, the higher the take of gearing. It is advisable to include short term debt such as overdraft if it is used 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(prenominal) debt, the more risk for ordinary shareholders and ultimately 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 rise because of the higher levels of risk involved.Reference Notes of the University of Sunderland APC308 Financial 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 rates 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 shareholders, 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 d ecision (NPV) and the finance, or funding, decision. In this part i am concerned with the third area, the dividend decision. The basis for the discussion in this part is the need for dividend policy and the relevance of dividend policies to investors.NPV is a net toast 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 timing of their payment.According to MM, if a company has an investment chance giving a positive 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 level 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 want to, by selling some of their theory of dividend, if they want to, by selling some of their shares. In a meliorate market, shareholders can create a dividend stream to suit themselves, so it works in reverse as well 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 decide 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 involve for investment externally. If a company had surplus internal funds, there could be distributed as dividends.