Chapter 14, Problem 1CQ

Summary Introduction

To discuss: The rules to follow while making financing decisions and the ways to create valuable financing opportunities

Introduction:

Financial decision mainly depends on maximizing the wealth of the value of shareholders.

Explanation of Solution

The main rule to follow while making financing decisions is that the firm should accept financial proposals only when it has positive net present values. The financing decision includes the quantum of debt and equity to be sold, dividend decision, and the time for sales of debts and equity.

The ways to create value through financing opportunities:

Fool investors:

Many theories suggest that it is difficult to fool the investors on a consistent basis.

Increase the subsidies and reduce the costs:

To increase the value of the firm, the firm can use securities. The usage of securities tends to reduce the firm’s tax burden. Irrespective of tax burdens, the firms incurs more costs like bankers, lawyers, and accountants. Packing securities helps to reduce these costs and helps to increase the value of the firm.

Creation of new security:

The firm can create new securities as it is beneficial to the unsatisfied investors. This is because creating a new security at a favorable price will increase more number of investors.

Conclusion

Thus, the financial decision and financing opportunities play a vital role in the market. The managers of the company must concentrate on the creating the value of the firm, rather than trying to fool the investors.