FIN 111 Introductory Principles of finance
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The main goal of a finance manager is
maximizing of wealth rather than maximizing profit--measuring wealth or value
is by cash flows and not accounting profits. This goal must be constantly in
mind when making investments, financing these investments, and funding the
company’s day-to-day operations. The total value of the firm can be increased
by pushing up the price or market value of the existing shareholders’ ordinary
shares. Investors react to poor investment decisions or poor financing
decisions by causing the total value of the firm’s shares to fall, and they
react to good decisions by investing more to increase the market price of these
shares. The market price of the firm’s share at prima facie is an indication
that a company is operating well and as a result it attracts more investments
that increases its total value. The finance manager should also take into
account the complexities and complications of the real world; below are some
difficulties that may affect in the achievement of this goal. 1. Time value of
money - a dollar received today is worth more than a dollar received a year
from now on. This concept may affect the decision of a finance manager in
making investment today or in the future to get better returns. 2. Curse of
competitive markets- in the real world it is really hard to find investments
that are exceptionally beneficial. If an industry is generating large profits,
new entrants are usually attracted. Additional competitions in the same
industry will results of profits to decrease. Conversely, if an industry is
generating low profits, some competitors will drop out from the market,
reducing the competition and in return, prices will tend to increase.
These topices are also helpful for you:
There can be 2 common ways in reducing
competition in the market (1) is cost leadership (producing the product in
least cost possible) and (2)differentiation (if products are differentiated,
consumer choice will no longer be dependent on price alone). 3. Agency
problem-refers to the fact that a firm’s manager will not work to maximize benefits
to the firm’s owner unless it is in their interest to do so. This problem is a
result of the separation of the management and the ownership of the firm.
Issuing stock options (share options) to management is a way that encourages
them to work more closely in maximizing the firm’s share. 4. Taxes – government
use taxes to influence business investment decisions particularly political
goals such as the imposition of resource and mining taxes and environmental
levy that not only affect businesses but the entire community. 5. Ethical
behavior- doing the right thing. Corporate responsibility means that a company
has a responsibility to society beyond the maximization of shareholder wealth.
Every decision should be within a set of rules or laws that prescribe what
‘doing the right thing’ involves.
Large companies tend to choose to raise long term debenture through a private placement rather than through public offering because; * They do not have to be registered with the Securities and Exchange Commission * They do not require many of the disclosure requirements found in public offerings such as information that could prove helpful to competitors or create difficulties with vendors * Securities are offered and sold to a limited number of investors, who are often the current major in the business * More personal market than public offering
* Maintain their private status, which pertains to complex company structure and confidential transactions * Often less expensive and easier than taking the company into the public domain
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