What is Capital Budgeting / Capital Expenditure (CAPEX)?
capital budgeting or capital expenditure (CAPEX) decisions
because most large corporations prepare an annual capital budget, listing the major projects approved for investment.
Why are Investments are recognized as assets in the Statement of Financial Position?
Today’s capital investments generate future returns.
Once the investment is made, it is recognized as an asset on the company´s books.
Why are Assets need to be financed?
A corporation needs an almost endless variety of assets.
Corporation can raise money from lenders or from shareholders.
What is Debt financed by lenders?
lenders contribute the cash
corporation promises to pay back the debt plus a fixed rate of interest.
What is Equity financing by investors?
If (new or existing) shareholders put up the cash they hold shares of stock
fraction of future profits and cash flow.
What is Capital structure – mix of debt / equity financing?
The choice between debt and equity financing is called the capital structure decision.
Impact on the company value and solvency
What are the “ingredients” of a corporation
Legal entity: contracts, carry on a business, borrow or lend money, sue or be sued, and pays taxes
Board of Directors choose and advise top management
Corporations are owned by its shareholders but are legally distinct
Depending on the degree of the traded shares corporations are privately held, closely held or public companies
separation of ownership and control
Today’s stockholders can sell all their shares without disrupting the operations
What is called maximizing shareholder value?
Corporations increase value by accepting all investment projects that earn more than the opportunity cost of capital.
Which three things want all stockholder?
maximize his or her current wealth.
To transform that wealth into the most desirable time pattern
To manage the risk characteristics of that investment by leveraging or hedging.
What is meant by the agency problem?
Agency Problems result from the separation of ownership and control.
The owners (shareholders) cannot directly control what the managers do.
Managers may be tempted to pursue their own objectives.
shy away from attractive but risky projects
They may work just to maximize their own bonuses:
What are the Legal and Regulatory Requirements for Corporations?
Managers have a legal duty to act responsibly and in the interests of investors.
U.S. Securities and Exchange Commission (SEC) sets accounting and reporting standards
It also prohibits insider trading, that is, the purchase or sale of shares based on information that is not available to public investors.
What are compensations plans?
Managers are spurred on by incentive schemes that produce big returns if shareholders gain
Managers should have a huge personal stake in the success of the firm
interests of shareholders and managers are aligned better.
What means monitoring?
The company’s directors are not the only ones to be scrutinizing management’s actions.
Managers are also monitored by security analysts, who advise investors to buy, hold, or sell the company’s shares
What are takeovers?
Companies that consistently fail to maximize value are natural targets for takeovers by another company, corporate raiders.
“Raiders” are private investment funds that specialize in buying out and restructuring poorly performing companies.
What means shareholder pressure?
If shareholders believe that the corporation is underperforming and that the board of directors is not holding managers accountable, they can attempt to elect representatives to the board
What is meant by the Stock price?
Disgruntled selling out and moving on to other investments.
If enough shareholders bail out, the stock price tumbles.
This damages top management’s reputation and compensation.
A rising stock price, on the other hand, is good for managers as well as stockholders.
Last changeda year ago