Essay on Decision Making and Capital Structure

Submitted By sz101
Words: 765
Pages: 4

What are the three types of financial management decisions? Why are they important for business?
1. Capital budgeting: it is a kind of decisions that can help to analyze long-term investments or projects. It mainly considers the plans of capital expenditure and arranges the source of funds. Also, it is the important things that a company needs to have a consideration before making a decision. For example, when a company want to buy some new machines or set up new subsidiary, they need to do a capital budgeting analysis. “The process in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing. Oftentimes, a prospective project's lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target benchmark. Also known as ‘investment appraisal.’ " (Capital budgeting, 2015) In general, company should provide shareholders with best profits, as a result of it, management needs to use capital budgeting techniques to decide those projects yield most return in a limited time. Capital structure: it focuses on consider the proportion of debt or equity. The term capital structure refers to the percentage of capital (money) at work in a business by type. (Kennon, 2010) Capital structure plays a crucial role in company’s financial management decision making. “You often hear corporate officers, professional investors, and analysts discuss a company's capital structure. You may not know what a capital structure is or why you should even concern yourself with it, but the concept is extremely important because it can influence not only the return a company earns for its shareholders, but whether or not a firm survives in a recession or depression.” (Kennon, 2010) Both debt and equity have their own advantages and disadvantages. An important part of enterprise management is trying to find the perfect capital structure of risk/return to shareholders.
Working capital management: it mainly about day-to-day finances management of the firm. For example, the consideration of who should we sell to on credit (Ross, Westerfield & Jaffe, 2010). Companies with effective cash flow management practices not only got more cash from their businesses, but also have more flexibility to take advantage of opportunities as they arise. “Through effective working capital management, top performing organizations are able to free up $2.9 billion more in working capital than the typical Global 1000 organization.” (The Hackett Group, Inc, 2015) it can easily been seen that the working capital management help a lot to the development of enterprises.

What are agency problems ? What are the costs of agency problems? Why may stock-based compensation alleviate the problems? What concerns have been arisen?
1.Agency problem: the conflict of interest between principal and agent. A classic conflict of interest is when the agent is paid on commission, so they may be less willing to let the buyer know that a lower price might be accepted or they may elect to only show the buyer homes that are listed at the high end of the