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Main concepts in the
study of corporate finance are applicable to the financial problems
of all kinds of firms. |
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Current assets and current liabilities.. |
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The
goal of Working capital management is to ensure that the
firm is able to continue its operations and that it has
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Cash flow to satisfy both maturing short-term debt and
upcoming operational expenses. |
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These
involve managing the relationship between a firm's
short-term assets and its short-term liabilities. |
| Managerial finance which studies the financial decisions of all
firms, rather than corporations alone, the main concepts in the
study of corporate finance are applicable to the financial problems
of all kinds of firms. |
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One of the main theories of how firms make their financing
decisions is the Pecking Order Theory, which suggests that
firms avoid external financing while they have internal
financing available and avoid new equity financing while
they can engage in new debt financing at reasonably low
interest rates. Another major theory is the Trade-Off Theory
in which firms are assumed to trade-off the Tax Benefits of
debt with the Bankruptcy Costs of debt when making their
decisions.
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The sources of
financing will, generically, comprise some combination of debt and
equity. Financing a project through debt results in a liability that
must be serviced—and hence there are cash flow implications
regardless of the project's success. Equity financing is less risky
in the sense of cash flow commitments, but results in a dilution of
ownership and earnings.
The cost of equity is also typically
higher than the cost of debt and so equity financing may result in an increased
hurdle rate which may offset any reduction in cash flow risk.Management
must also attempt to match the financing mix to the asset being financed as
closely as possible, in terms of both timing and cash flows. |
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 Another
major theory is the Trade-Off Theory in which firms are assumed to
trade-off the Tax Benefits of debt with the Bankruptcy Costs of debt
when making their decisions. An emerging area in finance theory is
Right-financing whereby investment banks and corporations can
enhance investment return and company value over time by determining
the right investment objectives, policy framework, institutional
structure, source of financing debt or equity and expenditure
framework within a given economy and under given market conditions.
One last theory about this decision is the Market timing hypothesis
which states that firms look for the cheaper type of financing
regardless of their current levels of internal resources, debt and
equity.
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There are various considerations: where shareholders pay tax on
dividends, companies may elect to retain earnings, or to perform a stock
buyback, in both cases increasing the value of shares outstanding; some
companies will pay "dividends" from stock rather than in cash. (See
Corporate action.) Today it is generally accepted that dividend policy is
value neutral.
One of the main theories of how firms make their financing decisions is
the Pecking Order Theory, which suggests that firms avoid external financing
while they have internal financing available and avoid new equity financing
while they can engage in new debt financing at reasonably low interest
rates.
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