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Corporate investments implies an effective decision-making process in regard to finance that aim at the improvement of the financial position of a company. in this regard, capital investment decisions are particularly significant because they define the strategic direction in the development of a company because capital investment decisions define the potential return on investments as well as the further development of a company. In fact, effective investment decisions can maximize not only the corporate value but also the overall profitability and marketing value of a company.
a. The investment decision
The investment decision is probably the most important and the most difficult decision to take because, while assessing potential return on investments, investors should take into consideration existing risks and threats which may lead to the failure of the project and low return on investments and substantial financial losses. In this regard, corporate finance focuses on the analysis of the investment potential and expected return on investments. As a rule, the investment decision is not taken until the detailed, in-depth analysis of a project or target company is conducted. Often investors attract independent specialists, who conduct the analysis and assessment of the project or target company. In such a way, investors attempt to obtain a reliable and objective conclusion of experts on whether to take a positive investment decision or, on the contrary, to refuse from investments at all.
At the same time, the investment decision comprises an integral part of corporate finance. Therefore, it is hardly possible to underestimate the significance of corporate finance for the business development. In fact, corporate finance allows taking adequate investment decisions. The latter in their turn allow companies to develop their business as well as change or develop business strategy respectively to the investment decision and its effectiveness.
b. Project valuation
Furthermore, another important element of corporate finance in regard to capital investment decisions is the project valuation. The project valuation is an essential step in the course of the investment decision-making process because before taking a decision on investments, a company needs to evaluate the project it is supposed to invest money in. The evaluation of the project involves a complex study and analysis of the project using both quantitative and qualitative methods, which allow obtaining reliable results and outcomes of the analysis. At this point, it is worth mentioning the fact that the project valuation lays the foundation to the investment decision-making process because it is on the basis of the project valuation further calculations and analysis are made to take the final investment decision.
The project valuation is an important element of corporate finance. At the same time, it is necessary to take into consideration the fact that the project valuation affects consistently the development and implementation of business strategy and business plan. What is meant here is the fact that the development of a business strategy and business plan often includes the development and implementation of investment projects and other projects that affect consistently the organizational performance of modern companies. Therefore, when a project is included in the business plan of a company, the company needs to evaluate the project to define clearly the volume of investments and the overall efforts needed from the part of the company to be undertaken to carry out the project successfully. In such a way, the company can not just implement a project successfully but also it can improve its marketing position and corporate value. What is more, the project valuation is essential for the development of financial plans for the implementation of certain projects. In fact, the project valuation can lead to the proper financial decision-making. For instance, a company can take a decision whether to fund a project or not, or whether to invest money into another company or not.
c. Valuing flexibility
On conducting project evaluation, it is important to remember about the potential risks and threats as well as possible changes that can be introduced into the project. In this regard, corporate finance involve valuing flexibility in the course of taking the investment decision. What is meant here is the fact that today companies cannot succeed or take an effective and successful investment decision using their business strategy or experience of their professionals solely (Bloxham, 2002). In this regard, they need corporate finance and valuing flexibility as an integral element of corporate finance which is used in the course of the investment decision-making process. Valuing flexibility implies that companies need to take into consideration factors that can influence the investment decision being taken as well as affect the return on investments. In such a way, while taking into consideration multiple factors, companies can develop different business strategies respectively to different scenarios. In such a way, corporate finance helps to take an adequate and reliable investment decision.
In actuality, valuing flexibility is of the utmost importance for companies and their marketing performance. In the contemporary business environment, the flexibility is a crucial concept because the business environment is changing rapidly under the impact of various factors. For instance, the rapid development of technologies leads to the fast introduction of innovations (Schueler and Krotter 2008). Innovations, in their turn, can affect consistently the organizational performance and lead to the consistent improvement of the marketing position of companies that introduce innovations successfully. As a result, companies need to be able to adapt innovations fast and develop new products and services. Obviously, adequate responses to such changes in the contemporary business environment affect consistently the organizational performance and need the high level of flexibility not only in the business strategy of a company but also in terms of corporate finance. The latter implies that companies have to be flexible in regard to funding projects and development of long-run business strategy.
d. Quantifying uncertainty
Uncertainty is always present in the investment decision-making. In this regard, corporate finance can help companies to minimize the uncertainty through quantifying uncertainty. Quantifying uncertainty means the use of accurate mathematic formulas that help investors to assess and to take into consideration diverse factors that raise uncertainty concerning the return on investments and effectiveness of the investment decision (Ratnatunga and Montali 2008). On quantifying uncertainty companies can take a reliable investment decision because, if the uncertainty level is high, companies are not likely to take a positive investment decision because such a decision is uncertain and, therefore, the decision raises numerous risks. On the contrary, if the uncertainty level is low, companies can invest money being certain in return on investments (Emblemsvag, 2004). In such a way, business development occurs due to effective quantifying uncertainty as an integral element of corporate finance.
In actuality, quantifying uncertainty is essential for the development of adequate and reliable forecasts concerning the financial development of companies and industries. At the same time, quantifying uncertainty can affect not only the financial position but also business development of a company. In this respect, it is important to understand the fact that through adequate assessment of uncertainty companies can make the right investment decision. What is meant here is the fact that the high level of uncertainty implies high risks that may lead to the loss of investments and, therefore, to a consistent deterioration of the marketing position of a company. In contrast, the low level of uncertainty implies that a company can develop a reliable forecast which minimizes potential risks. In other words, in case of a low uncertainty level, a company can have a reliable forecasts concerning its investments. For instance, the low level uncertainty increases the probability of the implementation of the forecast made by analysts of a company. Therefore, on the ground of the quantifying uncertainty a company takes a decision whether to invest money, if risks are low, or not, if risks are high. In case of high uncertainty, the company still cannot be certain in the adequacy and reliability of the forecast concerning risks associated with investments in a project.
e. The financing decision
The financing of projects and taking the financing decision is another crucial element of corporate finance, which apparently affects substantially the business strategy and business development of any company. The use of funds and financing decisions affect consistently the organizational performance because funds should be used effectively to maximize revenues of a company and to minimize potential losses. At the same time, the shortage of financial resources puts under a threat the survival of a company as well as a successful implementation of its business strategy. It proves beyond a doubt that without financing even the perfect business strategy will never be successful (O’Hanlon and Peasnell 2002). Similarly, even the best professionals will not work at a company which suffers from the permanent shortage of funds or if the financial position of a company is not stable.
The financing decision is a crucial element of the investment decision-making. In actuality, the financing decision is grounded on the in-depth analysis and evaluation of a project and all of the decision-making elements mentioned above. Companies pay a lot of attention to the process of taking financing decisions because it is financing decisions that are the first step toward actual beginning of investments when money is invested into certain projects or companies. Therefore, the financing decision is probably the most difficult and challengeable part of the decision-making process, which affects not only the financial position of a company but also its marketing position. In this respect, it is important to lay emphasis on the fact that the financing decision defines the further business development because it limits opportunities of the company to use its funds. The investment of funds in certain project after the financing decision means that the company will focus its efforts on this project and it will not be able to use funds destined for this project for other purposes, such as training of the personnel for instance, or introduction of new technologies, and so on.
f. The dividend decision
The dividend decision is also of the utmost importance for corporate but this decision may seem to be insignificant in terms of the organization performance and functioning of a company. However, the role of the dividend decision in functioning of a company and its business development can hardly be underestimated. To put it more precisely, the dividend decision affects stakeholders, who own shares of a company and, who naturally count for certain profits and return on their investments into the company. Therefore, the dividend decision can either attract new investors or stimulate existing ones to invest more that is apparently beneficial for the business development and allows a company to develop a long-run business strategy based on the steady investments or, on the contrary, it can distract investors if shareholders do not receive dividends from the company. For instance, CEOs as well as many well-qualified professionals have their own share in the companies they work at. Naturally, if they do not receive dividends, they grow uncertain in their future in the company and look for other options of employment that may lead to job redundancy and loss of well-qualified professionals. The latter naturally leads to the consistent deterioration of the organizational performance of any company. In such a way, the dividend decision influences consistently the organizational performance and it is not just a part of corporate finance but also an important element that affects functioning of the entire organization and business development at large.