Financial objectives and corporate
governance
Two principle financial decisions that corporations face
Investment decision
The investment decision of a corporation is due with the purchase of real
assets and involves managerial accounting. Investment decisions are often
referred to as capital budgeting or capital expenditure decisions, because
most large corporations prepare an annual capital budget listing the major
projects approved for investment. A firm might invest more when the cash
flow is high for three reasons:
Internal funds may be less costly than external funds
Managers may overspend internally available funds
Cash flow may simply be correlated with investment opportunities
Financing decision
The financing decision of a corporation is due with the sale of financial
assets and involves treasury. The choice between equity and debt
financing is called the capital structure decision. With debt financing you
have to pay back the debt and an additional fixed rate of interest. With
equity financing, one issues new shares or stocks to shareholders and as a
result one can reinvest cash (flow) in new assets.
Market capitalisation (overall market value) = total outstanding shares x
stock value
governance
Two principle financial decisions that corporations face
Investment decision
The investment decision of a corporation is due with the purchase of real
assets and involves managerial accounting. Investment decisions are often
referred to as capital budgeting or capital expenditure decisions, because
most large corporations prepare an annual capital budget listing the major
projects approved for investment. A firm might invest more when the cash
flow is high for three reasons:
Internal funds may be less costly than external funds
Managers may overspend internally available funds
Cash flow may simply be correlated with investment opportunities
Financing decision
The financing decision of a corporation is due with the sale of financial
assets and involves treasury. The choice between equity and debt
financing is called the capital structure decision. With debt financing you
have to pay back the debt and an additional fixed rate of interest. With
equity financing, one issues new shares or stocks to shareholders and as a
result one can reinvest cash (flow) in new assets.
Market capitalisation (overall market value) = total outstanding shares x
stock value
