The paper 'Principles of Corporate Finance" is a good example of finance and accounting coursework. Generally and in a broad sense, investment signifies the use or employment of capital for purposes of gain. However, from a strictly financial standpoint, modern investment is the surrendering of purchasing power to another with a view to obtaining a profit in addition to the return of the amount surrendered. There are two fundamental considerations entering into the making of the investment. The security of the principal and the security of income. Accordingly, nothing constitutes investment which does not imply the recovery of both the principal sum and also an additional amount or amounts representing income or profit (Sakolski 2009, p. 7) The Financing Principle One of the principles of financing, whether to start a company, maintains its operations, or advances its growth, is to make a proper match between the assets and their associated forms of financing.
The general principle is to finance current (short-term) assets with short-term financing and long-term assets with long-term or permanent financing. For instance, a shoe-store owner matched sixty-day financing against an asset expected to be sold within that period.
Similarly, companies finance their infrastructure of office space, systems, and equipment with either long-term debt or capital supplied by shareholders, a more permanent form of financing. This principle is important because for instance, if one tried to finance the purchase of a new home (a long-term asset) with an 8 percent, non-amortizing $200,000 loan that came due in only three years. Under the terms of the loan, one should pay $16,000 in annual interest and then would be obligated to repay the $ 200,000 at the end of the third year.
This would be feasible if one could negotiate another loan at the end of the three years to replace that one that’ s due and if interest rates were still affordable. However, money might become so tight that one could not locate a new lender or the lender one found might want 10 or 12 percent. In either case, foreclosure would be likely. One could not operate with such a situation, and neither can a business enterprise (Luecke 2004, p. 107) The Dividend Principle As a principle, a firm should return cash to the owners if there are not enough investments that earn the hurdle rate (Baker & Power 2005, p. 458). “ Dividends are share of profits paid to shareholders” (Yalden et al.
2008, p. 367). It is a portion of the company’ s earnings or profits distributed pro-rata to its shareholders. A corporation can distribute its profits to shareholders by paying a dividend. Cash dividends are usually paid in cash while dividends in specie can be paid by distributing property other than cash to shareholders. A stock dividend is sometimes used to pay a shareholder.
Instead of cash, shareholders are being paid by issuing more of the corporation’ s share. Capital Investment decisions The Investment Decision Project Valuation Generally, the valuation process takes place to determine the current worth of an asset or project. The key to successfully investing in and managing assets lies in understanding not only what the value is, but the sources of value. The value obtained from any valuation model is affected by firm-specific as well as marketwide information. Therefore, the value will change as new information is revealed (Damodaran p. 3).
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