Question

The goal of financial management in a for-profit business is to make decisions that increase the value of the stock or, more generally, increase the market value of the equity (‘shareholder value’). We also learn that book values on an accounting balance sheet can be very different from market values, and that a goal of financial management is to maximize the market value of the firm’s stock, not its book value, and that corporate finance has three main areas of concern:

QUESTION:

Capital budgeting: What long-term investments should the firm take?

Capital structure: Where will the firm get the long-term financing to pay for its investments? In other words, what mixture of debt and equity should the firm use to fund operations?

Working capital management: How should the firm manage its everyday financial activities?

Answer 1

Capital Budgeting: Capital budgeting is the process in which a business determines and evaluates potential expenses or investments that are large/ heavy in nature.
There are various long term investments like purchasing of building, land, machinery, expansion plan of business, initiation of any project or closing down the same etc.

Capital Structure: The capital structure is how a firm finances its overall operations and growth by using different sources of funds. Capital structure of a corporation basically consist of Debt and Equity. There must of Optimal mix of debt and equity in a capital structure. Debt financing can be raised from banks, financial institutions & Equity can be raised from stork market.

Working capital management: Working capital management means monitoring cash flow, assets, and liabilities through the ratio analysis of key elements of operating expenses, including the working capital ratio, collection ratio, and the inventory turnover ratio. Efficient working capital management helps maintain the smooth operation of the operating cycle.