Apc 308 financial management Dissertation Example | Topics and Well Written Essays - 2250 words

Apc 308 financial management - Dissertation Example .. The secret of success in financial management is to increase value." (Aswath) According to Copeland & Weston: â€Å"The most important theme is that the objective of the firm is to maximize the wealth of its stockholders.† (Aswath) Thus, it has been very aptly defined that the main objective of an organization is to maximize the wealth of its shareholders and thus, capital structure is an important factor constituting towards this development. Objectives of Capital Structure Planning The importance of the capital structure planning can be summarized in the following diagram. Source: http://www.svtuition.org/2010/05/importance-of-capital-structure.html To reduce the overall risk of the organization The capital structure of an organization needs to be devised in such a manner that the overall risk is minimized. The acquisition of debt in the capital structure sets up an added liability of interest payments. Contrarily, equity financing means a rate of return in the form of di vidends to be paid to the shareholders. Thus, debt raises the â€Å"risk† for the shareholders. Adjustment according to business environment The concept of â€Å"maneuverability† is applicable in this regards. ... Thus, they need to raise capital either through external or internal finance. Therefore, a risk lowering and a profit maximizing capital structure would help finance manager to raise capital easily and efficiently (Capital Structure Planning, 2010). Capital Budgeting Capital budgeting refers to investment in projects that pay a rate of return in the long-run. The asset acquired is evaluated by various techniques so as to reach the decision of whether or not to purchase them. This is of utmost importance in financial management and thus, the technique was used by General Motors to overcome their losses in 2002. There are five techniques to rank whether a project should be included in the capital budget or not. Source: http://assets.cambridge.org/97805218/17820/excerpt/9780521817820_excerpt.pdf Payback Period This technique is simple and shows the time frame for the investment’s net revenues to cover its costs. Discounted Payback Period This methodology also provides the time fr ame but the calculation procedure is different. The cash flows are discounted at the rate of the investment’s cost of capital to achieve the length of time that would cover the cost of investment. Net Present Value (NPV) Future values of the cash flows are discounted at the cost of capital to obtain the NPV of the cash flows (Brigham & Houston, 2003). The investment venture is than ranked according to the NPV of the cash flows. This technique makes the use of discounted cash flows and is quite advantageous. A positive NPV demonstrates that the investment not only covers the cost of investment but also earns a profit. Whereas, a 0 NPV means that cash flows generate an enough amount only to cover the cost of the capital. Internal Rate of Return