What are the primary considerations for corporate financial decision-making?
Suggestion guideline
Corporate financial decisions depend on guidelines that aim at maximizing the value of the firm. Such guidelines concentrate on investment, dividends, and financing principles.
At the center of every corporate theory for a decision is an objective to maximize the value of the firm. Corporate decision-making involves fundamental principles of corporate finance that include investment, financing, and dividend; this is the framework on which a company runs.
Corporate financial decisions depend on guidelines that aim at maximizing the value of the firm. Such guidelines concentrate on investment, dividends, and financing principles.
Investment law requires investing in assets and projects whose return is greater than the minimum acceptable hurdle rate and the management should concentrate on decisions aimed at maximizing the value of the firm. It is important to consider the financial mix that maximizes returns of the project in relation to the assets being financed when making a financial decision.
For efficient and informed corporate financial decision-making, factors such as the objective of the firm, the investment principle of the company, the financing policy, and dividend principles are crucial.
The financial theory is essential for maximizing the value of the firm. A decision that increases the value of the firm is right as opposed to that decreases the company value. Many stakeholders and managers get differences in financial decisions because of a lack of ability to reorganize the primary objective of the business. Before deciding it is important critically to examine the significance of the objective, its concerns, and criticisms and consider the stakeholders.
Effective decision-making should also involve a critical consideration of the investment principle. Proper decisions should examine the available resources form of assets and share capital available for various needs. Through this theory, investment decisions such as inventory and customer-supplier relationships are observed. Here it is important to consider customers and suppliers of the firm before making a sound decision. Explicit and implicit contracts govern the relationship between a company and the supply chain. In making corporate financial decisions, considerations should involve the firm’s debt level in relation to the investment decision and also the bargaining power of its suppliers and customers. Risk management is imperative, and the liquidity risk of a company should be measured and considered when making a decision. It tells whether the firm is likely to run out of money in the short or long term. Banks commonly use current ratios in finding the credit risk of the company. It involves evaluating the assets of the business and the ability at a time with which various assets can turn into cash.
In a possible financial downfall of Movie Flex, the corporate valuation on the company’s portfolio would respond through evaluating the financing principle. Funding is through different sources that include borrowing money and shareholders’ funds. It is important in decision-making to find out whether the existing mix of financing is right. By looking at a variety of choices that exist we can determine the financing mix that is optimal considering the objective of maximizing firm value. The company here may sell some of its tangible assets and reinvestment of shares. Looking at their profit margins, options for acquiring loans may hit the financial status of the firm since the profit margin to pay the loan is low accompanied by high financial leverage.
The value of the firm may also be affected by changes in the investment principle. Decide if the current financial merge differs from the desired one and attention should turn to the type of funding a business should use. It may be, long-Term or short-term, variable or fixed terms of payment for investment and best practices for minimizing risk. Considerations relating to external monitors and taxes are necessary for an effective conclusion.
Looking at the balance sheet, and other income statements, the total revenue, assets, and return per share gradually increase. It means more profit and, for this reason, to maximize profits; the profits are re-invested other than selling more shares. It protects the liquidity of the company and builds on the compound interests of the shareholders. The company should, as a result, use the income to buy out the company shares. However, the financial leverage and the profit margin are small, and, as a consequence, to improve on this the firm shall efficiently use its available assets to get money for the necessary funding and investment.
All firms desire to have more investment opportunities with returns above their hurdle rate. However, for every investment opportunity, the principle of dividends is crucial and should be considered. All businesses grow and mature and at this point, the cash flow generated from sales and premiums is greater than the finance required purchasing investments.
While making decisions, it is important to figure out ways to return the excess funds to the owners through paying dividends and buying back stocks
At every end of the trading season, it is always important to discuss various options for spending the profit and to consider whether to pay as dividends or to re-invest the money.
Explain the importance of DuPont analysis in financial decision-making?
DuPont analysis is crucial since it determines what drives the company’s return on equity. It is important because it establishes how efficiently the assets of the firm can be used to generate revenue.
The diagram below shows the profitability of flex movie.
DuPont analysis of movie flex for the period of 2002-2012.
The percentage return on equity for flex movies is strong and is increasing with the highest as 65.75% in 2010. The net margin is slightly lower. It may probably be due to competition from other online service providers, and, for this reason, fewer premiums in relation to sales are charged.
The asset turnover is significantly high. It is good considering a fundamental rule that at least either the profit margin or asset turnover is high and would lead to looking for the reason the profit margin is small.
However, the financial leverage is high above 5%, and, as a result; this will make the company unstable to compete with others. This high financial leverage not only makes the company hit hard in times of a bad economy, but the company does not have the brand power to keep its customers
Flex movie is a low-cost producer that aims at becoming a commodity and there are no differences between their product and its competitors. It means that the firm cannot charge a premium. The company, for this reason, needs to use its assets efficiently. As a result, Shareholders and investors may look for other options of investment.