Corporate Finance
Corporate finance is the area of finance dealing with the sources of funding and the capital structure of corporations and the actions that managers take to increase the value of the firm to the shareholders, as well as the tools and analysis used to allocate financial resources. The primary goal of corporate finance is to maximize shareholder value. Although it is in principle different from managerial finance which studies the financial management of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms.
The major objectives of corporate finance by Indian corporate are summarized as follows;
- The two most important objectives of management decision making in corporate finance in India are;
- maximization of earnings before interest and tax (EBIT) and earnings per share (EPS) (85 percent) and
- maximization of the spread between return on assets (ROA) and weighted average cost of capital (WACC), that is, economic value added (EVA) (76 percent).
- Large firms (on the basis of sales, assets and market capitalization), high growth firms and firms with high exports significantly focus on maximizing EVA than small, low growth and low exports firms respectively.
- There is no significant difference in the EVA as a corporate finance objective followed by the firms in public and private sectors.
- The spread between cash flow return on investment (CFROI) and the WACC, that is, cash value added (CVA) is the third most important objective (54 percent) of corporate finance management for large firms based on market capitalization.
- Yet another important objective is the maximization of market capitalization. The MVA (market value added) objective is more likely to be followed by public sector units than by private sector firms.
- The overwhelming majority of corporate (70 percent) consider maximizing percent return on investment in assets as the most important.
- Another preferred goal is desired growth rate in EPS/maximizes aggregate earnings.
- Wealth maximization/maximization of share prices is the least preferred goal of the sample corporate.
International Diversification definition
The attempt to reduce risk by investing in more than one nation. By diversifying across nations whose economic cycles are not perfectly correlated, investors can typically reduce the variability of their returns.
Investment of one's portfolio in securities that are traded in various countries this is done to reduce risk, often political risk. For example, if one country's government announces a larger than normal budget deficit, or the central bank raises interest rates, this may affect security prices in one country, but not necessarily in other countries that did not take equivalent steps. Likewise, if a whole industry fails in one country but thrives in another, investing in the same industry in both countries hedges one's risk. Some analysts argue that international diversification is less effective in an era of globalization, but other analysts dispute that. It is also argued that since difference exist in levels of economic growth and timing of business cycle among various countries, international portfolio diversification can be used as a means of reducing risk.
In fact, the 1990’s witness an explosion of international diversification, especially among emerging market mutual fund companies such as Janus and temple ton achieved phenomenal rates of return on their investments during the mid to late 1990.
- Development of global and multinational companies and organization.
- Advance in information technology.
- Deregulation of the financial systems of the major industrialized countries.
- Explosive growth in international capital flows.
- Abolishment of foreign exchange control.
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