Financial Market and Investment Analysis

Financial market and investment analysis
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Financial, Dividend, Investment policy decisions and Firm valuation
In the financial planning of a business, financial objectives are important because they are the set goals and objectives of an organization. Financial objectives are anchors upon which to plan businesses and ensure long term success. In most cases, the objectives are measurable within a time frame and involve increase in cash flows and profits. The need to improve efficiency and coordination in companies informs managers on the decision- making process. It is through setting financial objectives that companies can deal with growth prospects focusing on internal strengths and weakness, while also dealing with external threats and opportunities (Fan 2000, p.1060). It is critical to take into account policy decisions namely: investment, financing and dividends policy and their impact on a company’s value.
Investment in assets and projects is the main focus of investment decisions, and those investments with higher returns that the hurdle rate is preferred. Riskier investments tend to have higher returns and it is the cash flows of projects that determine their viability. Financing entails decisions on using debt -equity finance, and the mix chosen should maximize returns and match with financing of assets under consideration (Mickelsen 2005, p.11). Dividend payout is typically related to a firm’s value and may help to address the agency problem (Ming & Ming 2013). Firms typically seek to maximize value, and as such they should take into consideration the investment, financing and divided policy decisions. The three policy decisions are interlinked because the value of a firm depends on future expected discounted cash flows, taking into effect riskiness of investments and the optimal financial mix.
Investment in projects affects the cash flow of organizations, and in most cases the levels of cash generated internally are different from the anticipated investments (Bierman 2010, p.175). Consequently, a company typically needs adjustments to deal with the mismatch and this happens through using the investment, dividend or financing policy. The cost benefit analysis informs the decision of choosing investment options with the least costly option being the preferred choices in the long term. Even when coping with cash shortages companies are least likely to reduce an already dividend amount as a temporary coping mechanism (Bierman 2010, p.176). Nonetheless, it is possible to result to a onetime special divided in case there are surplus funds
Walter’s model, Gordon Model and the Modigliani and Miller hypothesis explain the influence of divided policy and the value of an enterprise. The dividend policy is the foundation upon which to value a firm, and in the Walter model the investment policy is inseparable from the divided policy, and it also postulates th...