Corporate Finance
Essay by 24 • November 16, 2010 • 2,936 Words (12 Pages) • 2,061 Views
Introduction:
For the last 20 years, Corporate Finance has showed the ways that companies have found to manage their capital and cash more efficiently. Businesses are now devoting even more of their time to the topics like managing risk, managing capital and, above all, managing cash.
Corporate finance is a part of finance dealing with the financial judgments businesses make and the techniques and analysis used to make these decisions. The most important objective of corporate finance is to make the most of corporate value while minimizing the firm's financial risks. Even though it is in attitude different from managerial finance which focuses the financial judgments of all firms, rather than corporations only, the major concepts in the study of corporate finance are appropriate to the financial problems of all kinds of firms.
The concept can be separated into long-term and short-term decisions and methods. Capital investment decisions are long-term alternatives about which projects are accepted for investment, whether to fund that investment with equity or debt, and when or whether to give dividends to shareholders. On the other hand, the short term decisions also known as "Working capital management" deals with the short-term balance of current assets and current liabilities; the focus here is on managing cash, inventories, and short-term borrowing and lending (such as the terms on credit extended to customers).
Exchange rates:
In finance, the exchange rate between two currencies indicates how much one currency is valued in terms of the other.
It is normal to differentiate nominal exchange rates from real exchange rates. Nominal exchange rates are recognized on currency financial markets commonly known as "forex markets", which are like stock exchange markets. Rates are generally established in uninterrupted quotation, with newspaper reporting daily. Sometimes Central bank may also fix the nominal exchange rate.
Real exchange rates, on the other hand, are nominal rate corrected by inflation actions. For example, if a country A has an inflation rate of 4%, and country B has an inflation of 2%, and no adjustments in the nominal exchange rate took place, then country A has now a currency whose real value is 4%-2%=2% higher than before. In fact, rise in prices mean an appreciation of the real exchange rate (Ross 2002).
There are companies that do not consider themselves as direct exporters or importers, it is highly possible the buyers or sellers of those companies’ products are exporting or importing the product in some form. For that reason, indirectly, the demand for the product can be positively or negatively affected by the exchange rate. The awareness of the role of exchange rates and the requirement to find and use the accurate information in terms of the business is important.
International markets are vital to expansion, and a small number of firms in any layout, including promising markets, give up foreign investment because of exchange rate instability. Exchange rate risk may become important when evaluating market opportunity; but it does not appear to be, in and of itself, a curbing investment, apart from the case of outright currency crises.
Perhaps the most unanticipated finding and the one with the greatest policy proposition is the degree to which businesses do not use their home currency in international transactions. More than 50 percent of non-U.S. companies use the U.S. dollar in pricing. it can be said that businesses, not states, make trade decisions, and they do not appear to be affected by changes in the value of their home country currency, These results are encouraged by the increase in foreign currency deposits in the international commercial banking system.
The survey shows that more than 60% of the companies indicate that fewer currencies account for a important amount of their foreign exchange risk. The use of a reserve” currency like the U.S. dollar or the euro in international business transactions may combine and concentrate FX risk, which can then be more professionally managed using monetary evades (Agmon 1990).
Exchange rate risk refers to the ambiguity inserted into any global financial decision that fallout from adjustments in the price of one country's currency per unit of another country's currency. Since predictions of future inflation rates, interest rates, and government actions are doubtful, exchange rates are also doubtful. And nominal exchange rate and real exchange rate, both affect the companies in one or the other way. Real exchange rate is more of a concern to businesses involved in importing and exporting.
Good information for decision makers
Good decisions are always based on solid information. In today’s world, all the businesses are struggling to survive. There is a cut throat competition in the business sector. The good managements keep themselves very updated of any changes that are taking place in the market and any future move of the competitors. They also need to have good information regarding any technological changes and consumer’s ever changing tastes can not be ignored at any point of time. Other than that businesses also keep track of their own financial assets and flow of money. Because of all the internal and external pressures, the decision makers need to have good and accurate information. Any decision that is based on wrong information can threat the very survival of the business and can also lead to wrong decisions leading to huge financial losses. All the organizations that are well informed enjoy added advantage over their competitors and are in a better position to take the market lead.
And as important as it is to ensure that the employees of a business find the correct and accurate data the first time, it's uniformly important to preserve security of the data and only show users the data they are authorized to see. At the end of the day, it's all about the affect that everyone in the organization can have. Making informed decisions swiftly from a recognizable, single crossing point will advance their work experience and permit them to work more professionally.
Risk management
In current years, risk management has fascinated a great deal of attention from both practitioners and researchers. Usual financial hedging agreements have been used in the area of operation
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