According to the maximization model, there are three types of maximization in a company, which are shareholder maximization, stakeholder-owner maximization and total stakeholder maximization. Shareholder wealth maximization is a particular case of stakeholder-owner maximization, where only the pure owner interest as supplier of risk-capital is considered in the maximization. The stakeholder-owner has particular resources and interests which are important for the commitment of other stakeholders and thus for the economic performance of the venture as a whole and for the distribution of stakeholder benefits. Examples of such stakeholder-owners would include managers within the company who were also shareholders or suppliers who had an interest in the ownership of the company. Total stakeholder maximization includes the advantages for all groups, such as employees, local communities, shareholders, suppliers, customers, investors and partners. Among the three maximization of a company, shareholder wealth maximization plays a significant role and indeed more important than the Continue reading
Financial Concepts
Financial Statement Analysis
Financial performance, as a part of financial management, is the main indicator of the success or failure of the companies. Financial performance analysis can be considered as the heart of the financial decisions. Rational evaluation of the performance of the companies is essential to prepare sound financial policies and to attract potential investors. Shareholders are interested in EPS, dividend, net worth and market value per share. Management is interested in all aspects of financial performance to adopt a good financial management system and for the internal control of the company. The creditors are primarily interested in the liquidity of the company. Government is interested from the regulatory point of view. Besides, other stakeholders such as economists, trade associations, competitors, etc are also interested in the financial performance of the company. Therefore, all the stakeholders are interested in the performance of the companies but their perspective may be different. Financial statement Continue reading
Advantages and Disadvantages of Ratio Analysis
Ratios are an expression of one number in terms of another. This form of analysis facilitates comparison between the financial performances of different businesses or industries. Ratio, vertical and horizontal analysis are commonly used by financial analysts because they are useful tools for planning, controlling and monitoring an organisational performance. A range of financial ratios are there, including: liquidity, solvency, profitability, efficiency and investor ratios. Advantages of ratio analysis include: Ratio analysis enables the users of the financial statement to make comparisons between the financial performances of two or more businesses, even if they are of different sizes or from different industries, by converting financial numbers into standardized form using pre-defined formulas. Ratios are easy to calculate and do not consume significant amount of time. Ratio analysis is a useful tool to monitor and control a business organisation’s performance. The users of the financial statements are often interested in assessing Continue reading
Real Options Method in Capital Budgeting
Real options method is one of the investment appraisal techniques for capital budgeting which can deal with the limitations of the Net Present Value (NPV) method. Real options method is a method of evaluating and managing strategic investments decisions in an uncertain business environment. Using real option methods has been recognized that the application of standard NPV techniques can lead to wrong conclusions in the presence of unrecognized embedded options. The central role of NPV techniques in financial decision making therefore makes it imperative that real option structures in investing opportunities are identified and accounted for. It turns out that real options can be found in most live environments where uncertainty or risk, waiting, investment irreversibility, growth opportunity, asymmetric information, staged investments, competitor response, economies of scale, project switching, suspension, abandonment and start-up are important. In fact, these include the full spectrum of investment decision making, including those concerning capital Continue reading
Ethical Issues in Cost Allocation
A cost is generally understood to be that sacrifice incurred in an economic activity to achieve a specific objective, such as to consume, exchange, or produce. All types of organizations- businesses, not-for-profits, governmental- incur costs. To achieve missions and objectives, an organization acquires resources, transforms them in some manner, and delivers units of product or service to its customers or clients. Costs are incurred to perform these activities. For planning and control, decisions are made about areas such as pricing, program evaluation, product costing, outsourcing, and investment. Different costs are needed for different purposes. In each instance, costs are determined to help management make better decisions. When incurred, costs are initially reviewed and accumulated by some classification system. Costs with one or more characteristics in common may be accumulated into cost pools. Costs are then reassigned, differently for specified purposes, from these cost pools to one or more cost objects. Continue reading
Relationship Between Financial Leverage and Risk
Not to be confused with operating leverage, financial leverage involves the use of debt in the firm’s financial structure. Though it may be operationally defined and measured in a variety of ways, it essentially entails the use of debt to extend the earning power of funds committed by the firm’s shareholders. When used properly financial leverage magnifies returns on committed funds. Because of the nature of financial leverage, it carries within it not only the general types of risk associated with operating leverage, but also two others that have rather specific implications. First, there is the risk of default-the inability to meet debt obligations as they come due. By definition, as financial leverage increases, cash flow requirements necessary to service additional debt increase as well. The risk of inadequate cash flow is, therefore, a primary concern in strategic decisions regarding financial structure. This, of course, suggests that liquidity and leverage Continue reading