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Structuring Corporate Financial Policy: Diagnosis Of Problems And Evaluation Of Strategies

1318 words - 5 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 prescription2. Diagnosis : benchmark perspectives, then one compares the idealized and actual financial structures, looking for opportunities for improvement3. Prescription : action recommendations should spring from the insights gained in description and diagnosisPART I : IDENTIFYING CORPORATE FINANCIAL POLICY : THE ELEMENTS OF ITS DESIGNThe first task for financial advisors and decision makers is to understand the firm's current financial policy. Part I presents an approach for identifying the firm's financial policy.The Concept of Corporate Financial PolicyFinancial policy is a matter of managerial choice. "Corporate financial policy" is a set of broad guidelines or a preferred style to guide the raising of capital and distribution of value.Policies should be set to support the mission and strategy of the firm. Policies are products of managerial choice rather than dictates of an economic model. Policies change over time.The Elements of Financial Policy1. Mix of classes of capital : mix may be analyzed through capitalizations ratios, debt-service coverage ratios, and the firm's sources-and-uses-of-funds statement2. Maturity structure of the firm's capital : to describe the choices made about the maturity of outstanding securities is to be able to infer the judgements the firm made about its priorities. The standard measures of maturity are term to maturity, average life, and duration.3. Basis of the firm's coupon and dividend payments : basis addresses the firm's preference for fixed or floating rates of payment and is a useful tool in fathoming management's judgment regarding the future course of interest rates4. Currency : the global aspect of a firm's financial opportunities (management of the firm's exposure to foreign exchange rate fluctuations and exploitation of unusual financing possibilities in global capital markets)5. Exotica : this element considers management's relative preference for financial innovation6. External control : how management structures control triggers or forestalls discipline can reveal insights about management's fears and expectations7. Distribution : to determine any patterns in (a) the way the firm markets its securities and (b) the way the firm delivers value to its investorsPART II : GENERAL FRAMEWORK FOR DIAGNOSING FINANCIAL POLICY OPPORTUNITIES AND PROBLEMSThe perspectives of competitors, investors, and senior corporate managers :1. Does the financial policy create value?From the standpoint of investors, the best financial structure will (a) maximize shareholder wealth, (b) maximize the value of the entire firm and (c) minimize the firm's weighted-average cost of capital2. Does the financial policy create competitive advantage?In short, this line of thinking...

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