Financial Management Essay

percentage A There are three principal(prenominal) areas of decision qualification for the corporate monetary manager Investment The choice of projects or assets in which to invest fraternity funds. Competing alternatives extradite to be assessed apply a crook of techniques. This type of decision will also be of concern to the reclusive individual when making choices about which destinys to buy.Finance How these investments should be financed. It is necessary to pulse the possible sources, out-of-door and inwrought, and the effect they will have on the capital letter anatomical social system of the comp whatsoever. Dividend Whether corporate earnings should be carry or stipendiary out in the form of dividends, and if the latter, when the dividends should be paid. Otherwise, we will cover the peril management as well as the management of a participations assets and liabilities in its whole caboodle capital cycle. Assets must be managed effectively so that they generate income and mesh, and so that funds are available to hire creditors and take up opportunities for investment.In summary ,therefore, we preempt say that monetary management claims the following areas as investment decisions, financial backing 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 stockholder wealth than profits. However, if the dividend payments are non consistent over a turn out of time, this will non increase confidence in the company shares, and their trade price will reflect the variability of dividend payments. When the shareholder sells their investment, they whitethorn retreat money. The prime objective of the company therefore needs to be adjusted slightly to the maximization of languish- experimental condition shareholder wealth.This will be indicated by maximisation of dividends over time an d reflected in the grocery store value of the ordinary 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 maximises shareholder wealth, and will be in retention with the prime objective of the company, such a decision can involve are using appraisal techniques to assess investment projects and sourcing funding to result for the company the most appropriate capital structure that can be serviced from available funds and paying dividends that the company can afford, while expi dimensionn sufficient retained earnings for investment and managing the risks associated with these decisions.This may leave you with the depressive disorder that the managers of a company will carry out its day to day aims efficiently and effectively on behalf of the owners, constantly asking themselves about the result of the decision maximise shareholder wealth, this is a realistic view becaus e of the focus between ownership and control of company. That is limitations of shareholder wealth maximisation as concern to commission hypothesis.Agency theory is based in the time interval of ownership and control that distinguishes the limited liability company from the other deuce business entities of the sole trader and the partnership. The relationship between shareholders and management is the trader agent relationship, and has given reis to agency theory. Where an agent was defined as a person used to effect a contract between their genius and a third party.The agency problem is that managers may not al ways act in the best interest of the shareholders, to maximise the latters wealth. Offering incentives, such as share options, to managers may reduce this problem. solve 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. focusing goals could include increasing their rewards. It was suggested in an earlier activity that two ways to ensure that management act in shareholders interests are to vote unsufferable directors off the board, or to offer share options. Shareholder could monitor the actions of managers using independently audited accounts, backed up by additional reporting 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 consider as the advantages is kick upstairs managers to maximise shareholder wealth since the option may result in their being able to sell shares at a higher(prenominal) price. yet the disadvantages is the price of shares is influenced by some factors outside the control of management, so the benefits may accrue despite management actions. Managers may also change chronicle polices to improve the performance of the company and influence the share price deliberately.Otherwise, jacket crown structure refers to the way an entity finances 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 greenback its ability to meet its long term obligations. If the entity appears unable to meet its long term obligations, it will be in serious danger of recess 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 railroad train 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 ra tio (preference shares + long term loans) / (shareholders funds + long term loans) X 100 The difficulty is the inclusion of preference shares, since they take galore(postnominal) different forms. If a companys preference shares are of the regulation type, that is, having no voting rights and conveying nothing nevertheless the right to a fixed rate of dividend, they should be included as debt funding.The higher the percentage, the higher the level 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 temperament 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 marketplace price of the companys shares will fall.The more debt, the more risk for ordinary shareholders and ultimately for e genuinelyone, if the company faces liq uidation. 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 decision (NPV) and the finance, or funding, decision. In this part i am concerned with the third area, the dividend decision. The base 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 milling machines 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 opportunity crowing a positive NPV, it should be taken up using retained earnings alternatively 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 utter(a) market, shareholders can create a dividend stream to suit themselves, so it works in reverse 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 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 required for investment externally. If a company had surplus internal funds, there could be distribu ted as dividends.