Structuring Corporate Financial Policy: Diagnosis of Problems and Evaluation of Strategies

1258 WordsApr 16, 20066 Pages
Successful diagnosis and prescription depend heavily on thoughtful creativity and careful judgment. Three basic stages in that process: 1. Description : the ability to describe a firm's financial policies is an essential foundation of diagnosis and prescription 2. Diagnosis : benchmark perspectives, then one compares the idealized and actual financial structures, looking for opportunities for improvement 3. Prescription : action recommendations should spring from the insights gained in description and diagnosis PART I : IDENTIFYING CORPORATE FINANCIAL POLICY : THE ELEMENTS OF ITS DESIGN The first task for financial advisors and decision makers is to understand the firm's current financial policy. Part I presents an approach for…show more content…
Careful analysis does not rest with a final number, but rather considers a range of elements: 1. Cost of debt : the analysis focuses on yields to maturity and the spreads of those yields over the treasury yield curve 2. Cost of Equity : uses many approaches, including the capital-asset pricing model, the dividend-discount model, the financial-leverage equation, etc 3. Debt/Equity Mix : the relative proportions of types of capital in the capital structure are important factors in computing the weighted-average cost of capital. 4. Price/Earnings Ratio, Market/Book Ratio EBIT Multiple : comparing these values to average levels of the entire capital market or an industry group can provide an alternative check on the valuation of the firm 5. Bond Rating : simple ratio analysis can reveal a firm's likely rating category and its current cost of debt 6. Ownership : the relative mix of individual and institusional owners and the presence of block holders with potentially hostile intentions can help shed light on the current pricing of a firm's securities 7. Short Position : short-sale position on the firm's stock can indicate that some traders believe a decline in share price is imminent PART IV : ANALYZING FINANCIAL POLICY FROM A COMPETITIVE PERSPECTIVE The competitive perspective matters to senior executives for two important reasons. First, it gives an indication about (1) "standard practice" in the industry and (2) the

More about Structuring Corporate Financial Policy: Diagnosis of Problems and Evaluation of Strategies

Open Document