Investment opportunity and business decisions making based on net present value and rate of return. Net Present Value Net present value can be calculated by subtracting the required investment from the present value. NPV = PV – Investment Example 1. The price of a flat is $100,000. But it could be sold out for $130,000 after […]
Payout Policy
Corporations pay back their shareholders in two ways: By paying dividend By repurchasing stocks Paying Dividends A company’s dividend is usually set by the board of directors. They decide how to pay dividends to their shareholders. Dividends can be paid in two ways: Dividends can be paid in cash. For example, a company announced that […]
Capital Structure
A firm is mainly financed by its stocks which it sells to its shareholders and receives cash inflows. When a firm also takes loans to finance it or issue debt securities, for example bonds, it also has to pay regular interest payments to the debt holders. The firm’s mix of debt and equity financing is […]
Goals of a Corporation
Corporate Finance → Corporation → Agency Problem → Goals of a Corporation All shareholders agree on one point and that is to maximize the current profit and overall value of the firm. But, for management there are two questions and decisions to take: A corporation may be able to increase current profit by cutting some investment which could […]
Agency Problem
Corporate Finance → Corporation → Agency Problem Shareholders who owns the company are called principals and management who runs the company on behalf of the shareholders are called shareholder’s agents. Conflicts between shareholders and management’s objectives create agency problem. Because, shareholders’ main priority involves seeking new investments to raise share value, while management may pursue job security, […]
Corporation Financing Decision
Corporate Finance → Definition → Corporation → Investment Decision → Financing Decision The investment decision is the first principal decision a corporation has to take. The second is Financing decision which means how to raise money for this investment. A corporation can raise money from: A. Lenders, and B. Shareholders A. Borrowing Money from Lenders A corporation […]
Corporation Investment Decision
Corporate Finance → Definition → Corporation → Investment Decision The investment decision is one of the two principal decisions a corporation has to take. The investment decisions of a corporation are of two types: 1. Smaller Investment Decisions Corporations make thousands of smaller and simpler investment decisions every year. These investments decisions are for example purchase […]
Corporation
Corporate Finance → Business Structure → Definition → Corporation What is a corporation? How it is formed and what are its main functions? Who own the corporation and who run a corporation? How corporations are formed? Suppose you decide to start a firm to make some goods. To do this you hire managers to buy raw material, […]