Corporate financial policy essay
With corporate financial policies, corporations have to deal with various aspects of corporate finance including corporate governance, management of risks, strategies, financial distress, mergers and acquisitions among other aspects to be discussed in this paper. This paper also discusses the interrelationship that occurs between the various aspects of corporate finance as most of these aspects need to be implemented together. Over the past decade, the trends to set corporate financial policies have been on change whereby the investors together with the company shareholders need to have their available capital insured so as to help in the growth of their businesses, as the shareholders are comfortably increasing debts to insure their businesses (Damodaran, 1996). But because the marketplace is always changing nowadays, managers and investors of various corporations are looking for strategies to achieve short term gains instead of having the strategies for long term gains (Mayer, 1988).
In assessing the company’s financial fitness, the balance sheet is mostly used. Strategic risks are those risks that relate to the operating changes in the environment and the ability of the company to manage its debts. The company needs to take care of both its external and internal risks. External risks include those that may come from the changes in technology, laws, competitors, and customer’s behavior in consumption among other external changes. Internal risks are related to the choices of the strategies of the company like decisions for mergers and acquisitions or decisions to totally change the operations of the company (Williamson, 1988). Company managers should therefore take the initiative to assess these external and internal risks and thus they should strategize on what they are able to manage.
There is the maximum level of risks that companies can take so as to pursue their objectives. To tolerate these levels of risks, resources in terms of finances should be considered so as to determine which risks to be taken and those which to be put away. This is where strategy in corporate financial policy comes in as strategies help companies to make decisions on which projects to invest on and how to control the company’s expenditure. With a good strategy, a company will have the ability to manage all their risk types to achieve their objectives. Corporate governance plays a very key role in facilitating effective management and entrepreneurial management so as to help the company deliver its long term success.
Apart from the three mentioned above, other topics include the capital structure, dividend policy, and management of cash, distress of finances and mergers and acquisitions. Corporate financial policy involves other aspects in association with how to plan and implement a financial policy. In order to determine the company’s financial policy, long term and short term plans have to be considered. It has been noted that investors tend to favor those companies with a balance sheet which is strong. How to finance and make them grow is the corporation’s major decisions and in order to make excellent decisions on the same, corporations need to ask themselves 3 questions which include what to do with excess cash, whether to continue borrowing to increase debt cases when they know that debt’s interest is deductible and finally whether to use the cash in financing the company or to return it to the shareholders.
This situation of holding a lot of cash within the company caused lower returns on investments because the company was not largely investing on other products or restocking the company or paying good money for dividends. Dividends should be paid according to the dividend policy. This situation may be good for the company because too much cash cover the company’s opportunities in future but may also mean lower investment returns. Therefore, to strengthen the cash flow, Apple Company should look forward to a higher investment return as a plan for long term opportunities. Corporate governance, risk management and strategy all go hand in hand for success of every company. Corporate financial policy entails two aspects which is the capital budget and the working capital for the company.
Capital budget and the working capital for the company. Capital budget deals with the determination of which projects should receive investment funds and whether the project should receive equity or capital debt. The working capital of a company is concerned with the management of both current assets and liabilities. Corporate financial policy helps companies to be able to make the right decisions on which policy to apply in order to have a greater investment policy. Therefore, this is why the three are interrelated. The corporate in various corporations have seen the need to incorporate the appropriate risk management and strategy. The process of risk taking encourages corporations to move ahead to making gains that are steep. It is obvious that shareholders in every corporation are happy where the risks taken yield to profits or pay off.
Consequently, for these risks to pay off or make profit there has to be a strategy that was being followed faithfully so as to achieve desired results. For an investor to get attracted to invest in a company, he or she is typically attracted by the balance sheet of the company. Therefore, investors first of all look at the balance sheet of the company to see whether it indicates that it can be fit for finances. A balance sheet of a company indicates the company’s capital structure that in other terms denotes the ratio of debt-to-equity of that particular company. This ratio is the one that investors consider as it indicates the image of the company in terms of debts.
Managing the structure of capital is the responsibility of the board of directors who in other terms make corporate governance. It is therefore going to merge with Valspar which is also a manufacturing store that sells in retail stores. After they have merged they will thus continue acquiring other companies so as to achieve a higher growth and increase the shareholder value as it has always been the purpose of corporate financial policy. A merger refers to two companies combining to form one while acquisition is when a company is bought by another company like in the case discussed here. For corporations or companies to be involved in mergers and acquisitions, they do make deals which dictate the companies’ fortunes. These combined companies in total require good corporate governance that can incorporate both risk management and strategy to achieve the best of the shareholder value.
Taking an example of the case of the National truck which is a company involved in production of truck parts. This company is caught up by a situation when their sales went low and they are required to pay their lenders or creditors. Since they do not have enough cash flow to pay for their deals, they had to negotiate again on the deal. To relieve some of financial distress, sometimes having the debt restructure can be of help like in the case of National truck topes. Again this is the responsibility of the board of directors of every company to make such decisions and allow the company to run smoothly (Guthmann, 1955). E. Corporate finance and corporate governance. The journal of finance, 43(3), 567-591.
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