CLA 2 Paper & PPT - Financial Management

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Week #1 VCS Alternative Assignment (VCSA)

Miku Anraku

Westcliff University

BUS 550 – SU6-209-C

Dr. John Knight

July 7, 2021

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Week #1 VCSA Assignment

Corporate finance majorly deals with how corporations deal with funding sources, capital

structuring, and investment decisions. There are different types of financial management

decisions. It also involves the different actions taken by the management in increasing the value

of the company. This also involves the tools and the analysis that is utilized in the distribution of

the financial resources.

Main Class Content Review

Professor talked about the different types of financial management decisions. They

include investing decisions, financing, and dividend decision. Finance can help in determining

the long-term investment, where a company may get the long-term financing to pay for the

investments, and how we can manage the everyday financial activities of the company. There are

different investments or projects that the business may decide to take on. According to the

professor, capital management is the everyday finances in the firm with the current assets and

liabilities (Cloyne et al., 2018).

There are different goals of financial management, however, the main goal of the

corporation is maximizing the current value of the company stock which is shareholder

maximization. According to the professors, increasing the value of the stock will help in

maximizing profits, minimizing costs and maximizing the market share, and protecting the

environment as this also reflects on how the corporation treats its employees (Yogasnumurti et

al., 2021). Increasing the value of the firm makes a positive contribution to society which

increases the stock price as the firm may now hire more employees and spend more money on

disaster relief. Most of the American companies hire more people like Amazon, which reduces

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unemployment, increases more money in the economy, and improves technology as all these are

part of financial management.

Total value = Stock value+ debts

Tesla has more cash bonds outstanding that can be turned into cash profits. As much as

they are not making any profits currently, but they are borrowing money on account of their

credits and their future cash flows.

If you look at an organization, the more they borrow, the riskier they get, if the debt

increases, the total values will also increase as borrowing too much also increases the credit price

increases as these costs a higher percentage of borrowing money. Company borrowing too much

will make investors nervous, price of debt increases, costs increase, and the stock price falls. The

agency relationship occurs where the principal hires an agent in representing their interests,

stockholders hire managers to help in running the company. An agent problem occurs when there

exists a conflict of interest between principal and agent (Michiels & Molly, 2017).

Responses to Professor Questions

On the question of what the course is all about, I think corporate finance deals with the

capital structure of an organization including the funding and the different actions that the

management takes to increase the value of the company (Handriani & Robiyanto, 2018). The

major concept is understanding how to maximize the value of a business by utilizing different

resources.

With the example of Tesla, the company makes some losses as this is evident that their

major goal is not making profits as their market value in the recent period has been lowering.

The company however has a better market, customers love Tesla due to the products that they

produce. According to the professor, the company is overvalued but however the value is based

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on future cash flows and speculations as most of the shareholders base this information on their

basis of success, this is why the company is in the position that they are currently. However in

the future, the company would face stiff competition from other company and their products, this

would affect Tesla negatively as it may decrease its market share

On the question of how much we borrow, I guess we look at the risks that are involved in

borrowing. On this aspect, we may have to understand different aspects such as the debt ratio and

the competitors. This may involve analyzing the company financials and understand the stock

prices and the risks that are involved, for instance, the more you borrow, the riskier you get.

If the debt increases, the total value will also increase, however, borrowing too many

increases the cost of credit as the creditors would start feeling nervous. Most firms have about a

40% debt ratio and the other percentage is equity. Borrowing more leads to a fall in stock prices.

This means that the cost of borrowing also increases. However, most borrowing is always the

best option as debt is the cheapest way of financing the firm (Michiels & Molly, 2017).

Future Use

The different types of financial management include the following: investment decisions

which are concerned with the way an organization's firm funds are invested in the different assets

known as the investment decisions. The second one is financing decisions as this concerns the

amount of finance that should be raised from different long-term sources of funds such as equity

shares, preference shares, debentures, and bank loans. The third one is the dividend decision as

this is a financial decision that determines the profit earned by an organization that should be

distributed among shareholders (Seru & Sufi, 2021).

Just as noted, as much as the organization aims at maximizing its profits and minimizing

the costs involved, the major aim is maximizing the current value of the company stock. This is

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the same way just as the United States follows corporate management or the shareholder value in

attaining shareholder maximization.

Increasing the value of the stock will increase the company profits, minimize the costs

and maximize the market share at the same time and also protect the environment as the

company would have a better reputation such better treatment of the employees which helps in

maintaining the stock value of the company. Some companies try to maximize their profits by

dumping their wastes in the river which is pollution to the environment. Doing the right thing by

increasing the value of the firm would increase the stock price of the firm and impact society

positively this would also increase the number of employees in the firm, the organization should

also spend some money on disastrous relief.

Increasing the company value has different advantages as this increases more money in

the economy, just as Amazon, more people would be employed as this also helps in decreasing

the rate of unemployment in the society and improve technology. This shows that the major aim

of financial management is far beyond making profits and also it includes making the right

decisions (Seru & Sufi, 2021).

Conclusion

In conclusion, corporate finance entails the capital structure and the funding of the

organization. This information is useful for the management in making some decisions. The

major aim of organizations is generating profits reason why an organization gets funding to

increase its pool of resources reason why management should consider the risks involved in

different funding before making that decision.

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References

Cloyne, J., Ferreira, C., Froemel, M., & Surico, P. (2018). Monetary policy, corporate finance

and investment (No. w25366). National Bureau of Economic Research.

Handriani, E., & Robiyanto, R. (2018). Corporate finance and firm value in the Indonesian

manufacturing companies. International Research Journal of Business Studies, 11(2),

113-127.

Michiels, A., & Molly, V. (2017). Financing decisions in family businesses: A review and

suggestions for developing the field. Family Business Review, 30(4), 369-399.

Seru, A., & Sufi, A. (2021). Corporate finance (pp. 617-623). University of Chicago Press.

Yogasnumurti, R. R., Sadalia, I., & Irawati, N. (2021). The Effect of Financial, Attitude, and

Financial Knowledge on the Personal Finance Management of College Collage Students.