Keiser UniversityFIN 3400203082

1) explain the main functions of corporate financial management. Present real examples of the application of these functions.

2-How is corporate value created or is the value of corporate investors' wealth maximized? Present different corporate real-life examples using valid academic bibliographic sources. You can use graphs, charts, or numerical examples.

Question 1

1)Estimation of capital requirements: A finance manager is responsible for estimating the company's capital requirements. This will be determined by a company's predicted costs and profits, as well as its future programs and policies. Estimations must be made in a way that increases the enterprise's earning capacity.
2)Determination of capital composition: After the estimation, the capital structure must be determined. This entails a debt equity analysis for both the short and long term. This will be determined by the amount of equity capital a company has and any additional funds that must be raised from outside sources.
3)Funding sources: A firm has a number of options for obtaining more finances, including: -Issuing shares and debentures
-Loans to be obtained from financial organizations and banks
-Public deposits in the form of bonds to be drawn.
-Factor selection will be based on the relative pros and drawbacks of each source of funding as well as the length of financing.
4)Money allocation: The finance manager must decide to deploy funds to profitable initiatives in order to ensure that the investment is safe and that regular returns are attainable.
5)Surplus disposal: The finance manager is responsible for determining net earnings. This can be accomplished in one of two ways:
Dividend declaration include determining the dividend rate as well as other advantages such as bonuses.
Retained earnings - A volume must be determined, which will be determined by the company's expansion, innovation, and diversification objectives.
6)Cash management: The finance manager is responsible for making cash management decisions. Wages and salaries must be paid, electricity and water bills must be paid, creditors must be paid, current liabilities must be met, adequate stock must be maintained, and raw materials must be purchased, among other things.
7)Financial controls: The finance manager is responsible for not only planning, procuring, and utilizing funds, but also for maintaining financial control. Many strategies, such as ratio analysis, financial forecasting, cost and profit control, and so on, can be used to accomplish this.

Question 2

It's become fashionable to blame corporate America's troubles on the pursuit of shareholder value: management and investors fixated on next quarter's results, a refusal to invest in long-term growth, and even recent accounting scandals. When executives destroy the value they were intended to create, they nearly always blame it on stock market pressure.

The truth is that management has betrayed the shareholder value principle, not the principle has deceived management. Many corporations, for example, implemented stock options as a substantial component of CEO compensation in the 1990s. The goal was to align management's interests with those of shareholders. The generous distribution of options, on the other hand, largely failed to drive value-oriented conduct because their design nearly ensured the opposite outcome. To begin with, executives were incentivized to manage earnings, exercise their options early, and cash out opportunistically due to short vesting periods and the idea that short-term earnings drive stock values. Another incentive to focus on short-term performance was the frequent practice of advancing the vesting date for a CEO's options at retirement.

Of course, for much of that decade, these flaws were hidden, and corporate governance took a back seat as investors saw stock values soar by double digits. Accounting scandals and a rapid stock market downturn produced a series of corporate failures in the new millennium, but the climate improved radically. The resulting loss of public trust prompted fast regulatory action, most notably the enactment of the Sarbanes-Oxley Act (SOX) in 2002, which compels firms to have extensive internal controls and holds corporate executives personally liable for financial statement accuracy. Despite SOX and other regulations, the emphasis on short-term results continues.

Some executives argue that they have no choice but to take a short-term approach because the average holding duration for equities in professionally managed funds has decreased from roughly seven years in the 1960s to less than one year today. When there are no long-term shareholders, why regard their interests? This logic is completely wrong. The market's valuation horizon—the number of years of predicted cash flows required to justify the stock price—is more important than investor holding periods. While investors may be overly focused on short-term objectives and keep shares for a short period of time, stock prices reflect the market's long-term perspective. According to studies, most companies require more than ten years of value-creating cash flows to justify their stock prices. As a result, management's job is to produce those flows—that is, to maximize long-term value regardless of the mix of high- and low-turnover shareholders. And no one can argue that a lack of long-term owners gives management carte blanche to pursue short-term gains at the expense of the company's long-term viability. Business strategies should be shaped by the competitive landscape, not the shareholder list.

b)The most successful businesses recognize that the goal of every business is to produce value for consumers, employees, and investors, and that these three groups' interests are inexorably interwoven. As a result, there can be no sustainable value created for one group unless it is created for all of them. The primary priority should be to provide value to the client, but this can only be done if the right people are hired, trained, and rewarded, and if investors are getting consistently good returns.

What exactly do we mean when we say "value creation"? Making items and providing services that customers find continuously valuable is what it means for the customer. In today's economy, such value creation is often focused on product and process innovation, as well as an ever-increasing speed and precision in identifying individual consumer needs. Companies, on the other hand, can only innovate and provide exceptional service if they tap into their employees' commitment, enthusiasm, and inventiveness. In order to encourage and enable those employees, value must be produced for them. Employees place a high value on being treated with respect and being involved in decision-making. Employees also place a premium on meaningful work, competitive salary, and ongoing training and development. Delivering sustained high returns on their investments is what it takes to create value for investors. This usually necessitates both high sales growth and favorable profit margins. These, in turn, can only be realized if a company provides customers with long-term value.

If the goal of business is to create value, any company's mission should be stated in terms of its major value-adding activities. Simply put, Honda should see itself as primarily a manufacturer and marketer of high-quality vehicles. McDonald's should envision itself as a global provider of consistently high-quality meals served in a clean, welcoming environment, among other things.

While this may seem self-evident, many managers and strategists act as if the day-to-day operations of a company are unimportant. As a result, an oil firm may buy a hotel chain, while a nationwide chain of auto-mobile service facilities is detected billing clients for unneeded repairs on a regular basis. What business philosophy is driving these actions? It's usually a fairly narrow definition of purpose, such as "maximizing shareholder wealth" or "achieving a set of short-term financial goals."

Managers are supposed to focus on shareholder wealth, earnings growth, and return on assets, yet the most successful companies recognize that these are not the core goals of strategic management. Affordable financial performance is the reward for aiming for (and hitting) the genuine target: maximizing the value provided for the firm's key constituents.

Surprisingly, an organization that views itself as a financial engine with the goal of generating attractive financial returns is the least likely to optimize those returns over time. Finance professionals frequently wind up rearranging a portfolio of assets in a self-destructive search for "growing firms" or "better returns," with no grasp of the value-creation dynamics of the companies they buy and sell. Attempts to profit without providing superior value, like in the automobile service industry, result in lost business, long-term consumer alienation, and corporate embarrassment.

Step-by-step explanation

GRAPHICAL DEMOSTRATION OF VALUE CREATION  THROUGH ZERO-SUM VERSUS WIN/WIN THINKING

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