EssayClub.com - Free College Essays and Term Papers

Financial Decision Making

FINANCIAL DECISION MAKING

1. Defining objectives

Dillemas:

• Maximization of the profit   OR maximization of the   shareholders’ wealth …?

• Long-term growth of the company OR short-term gains (i.e. increase of the shares prices) …?

• Expansion (with higher risk of failure) OR survival (with lower risk) …?
Identifying possible courses of action

• Spotting new investment opportunities

• Choosing appropriate financial planning horizons

• Analysis of any restrictions (eg. legal or political)

2. Assembling data relevant to the decision

• Identification of the types of data important from the point of view of financial decisions

• Data availability

3. Assessing the data and reaching a decision

• Choice of the correct method of analysis

• Comparison of different variants of the decision results

4. Implementing and monitoring the effects of the decision

• Control the results (many projects last 10, 20 or more years …)

• Assess the reliability of the forecasts on which the decision was based

• If the initial assumptions change, re-evaluate and modify the decision (if necessary …)

BUSINESS OBJECTIVES

(a) Maximisation of profit

When do profits matter for the shareholders ….?

Is the profit itself an ultimate objective …?

When the shareholders care about the profit …?

Dividends ….!

(b1)       Maximisation of the return on the capital employed

What is the profit relative to the size of the business …?

(b) Survival

(c) Long-term stability

(d) Growth

Growth implies that the short-term profit will not be pursued at the cost of long-term stability …

(e) Satisficing

Business can be perceived as the coalition of suppliers of capital, suppliers of managerial skills, suppliers of labour, suppliers of goods and services and customers.

Satisficing means satisfactory return for all those participants of the given business (rather than maximization of the return to any one of them)


(f)...