Capital Structure
Financial decision-makers must find answers to important questions, including;
What long-term investments should the firm undertake (capital budgeting) and how will investment and finance decisions affect the firm 's value (valuation)?
How can cash be raised for the required investments? This is known as the financing decision ' (cost of capital, capital structure and leasing).
How will the firm manage its day-to-day cash and financial affairs (short-term financing and net working capital)?
The Capital Budgeting Mini Case presents a financial decision of acquiring another corporation. Two choices are available; Corporation A and Corporation B, the cost of each choice is $250,000, and acquiring both corporations is not an option. The primary goal of any company is to create value for its shareholders and as such, the most important job of the financial manager is to create value from the company 's capital budgeting, Financial managers must be particularly aware of the timing of cash flows (the time value of money ') and associated risks. This financial decision-maker will use projected cash flows to determine whether acquiring Corporation A or Corporation B (i.e. NPV and IRR) is the best choice. If acquisition does not generate positive cash flow, the company is effectively providing finance for the acquired corporation.
Capital Budgeting Decisions
Many business opportunities involve sacrificing current earnings for future profits (opportunity cost). For the acquisition to be worth pursuing, it must generate a higher rate of return than what could be earned in the capital markets (Jaffe et al., 2002:200). When assessing capital budgeting projects, financial decision makers typically use discounted cash flow methods such as Net Present Value (NPV) or Internal Rate of Return (IRR).
Net Present Value (NPV)
The most commonly used technique for financial decision making is Net Present Value (NPV) analysis. NPV is the present value of
What long-term investments should the firm undertake (capital budgeting) and how will investment and finance decisions affect the firm 's value (valuation)?
How can cash be raised for the required investments? This is known as the financing decision ' (cost of capital, capital structure and leasing).
How will the firm manage its day-to-day cash and financial affairs (short-term financing and net working capital)?
The Capital Budgeting Mini Case presents a financial decision of acquiring another corporation. Two choices are available; Corporation A and Corporation B, the cost of each choice is $250,000, and acquiring both corporations is not an option. The primary goal of any company is to create value for its shareholders and as such, the most important job of the financial manager is to create value from the company 's capital budgeting, Financial managers must be particularly aware of the timing of cash flows (the time value of money ') and associated risks. This financial decision-maker will use projected cash flows to determine whether acquiring Corporation A or Corporation B (i.e. NPV and IRR) is the best choice. If acquisition does not generate positive cash flow, the company is effectively providing finance for the acquired corporation.
Capital Budgeting Decisions
Many business opportunities involve sacrificing current earnings for future profits (opportunity cost). For the acquisition to be worth pursuing, it must generate a higher rate of return than what could be earned in the capital markets (Jaffe et al., 2002:200). When assessing capital budgeting projects, financial decision makers typically use discounted cash flow methods such as Net Present Value (NPV) or Internal Rate of Return (IRR).
Net Present Value (NPV)
The most commonly used technique for financial decision making is Net Present Value (NPV) analysis. NPV is the present value of
References: Cooper, C. & Argyris, C., eds. (1998) Encyclopedia of Management. Blackwell business: Oxford. Jaffe, Jeffrey; Ross, Stephen A.; and Westerfield, Randolph (2001). Corporate Finance: Fifth edition, Custom Electronic Text for the University of Phoenix, McGraw- Hill. Unknown (2002). Smith, C. (1986). The theory of corporate finance: A historical overview. In, The modern theory corporate finance, eds Jensen & Smith. McGraw Hill: Sydney.