I'm really interested in business. Business opportunity in Indonesia is wide open. There are so many business sectors we can choose. But, before I go too far talking about this, I actually need to understand about it by reading some references and books about basic theory of business opportunities.
Corporate Ownership
It is small businesses may be owned by a single individual, but major corporations are far too large to be owned in this way. Instead corporations are owned by many people, called shareholders, who own shares of stock. Investors purchase stock because it allows them to share in the company's profits, although there are no guarantees that the company will be successful. Each share of stock represents ownership of a portion of the firm and its possessions, or assets. Shareholders who possess a large number of shares own a larger portion of the company than those who possess only a few shares. Although a corporation's shareholders own the company, they do not manage it. Instead they elect a board of directors who hire key company executives and review their job performance.
Investments
Corporate investment decisions often involve substantial amounts of money. Many investment decisions are also difficult to reverse and can affect the company's business far into the future. A business regards an investment as successful if it increases the wealth of the shareholders who own the company. This is accomplished when the firm earns profits and passes them back to the shareholders either in the form of dividends or as increases in the value or price of the stock. Dividends are a share of profits paid to shareholders as cash or as additional shares of stock. Profits or earnings that are not distributed to shareholders stay with the firm and are called retained earnings. These earnings influence the value of the stock because they increase the total asset value, or total amount of assets, of the firm. Investment decisions is deciding what projects to invest in, are based on two criteria: the expected rate of return and the risk or uncertainty of achieving the expected rate of return. The project's rate of return, or simply its return, is a measurement of its profit. A financial manager estimates the return based on forecasts of potential sales, expenses, and profits that might occur from an investment.
In addition to investing in projects, firms also buy and sell entire businesses. Sometimes this takes place with a mutual agreement to merge or combine two companies into one. In other cases one firm, the buying firm, goes against the wishes of another firm's management, the target firm, and attempts a takeover. For example, a company can appeal directly to the target firm's shareholders by offering to buy their stock. If the buying firm acquires enough of the target firm's stock, it can control the target firm's activities.
Raising Money for Investment
Investments require cash. There are three common ways a corporation may be able to raise this cash: (1) by paying smaller dividends, (2) by borrowing, or (3) by selling more stock. Each method has advantages and disadvantages. A firm can finance projects by paying smaller dividends. By paying out less of its profits in dividends, the company can keep more of its profits as retained earnings and use them to fund its investments. Using retained earnings to finance projects appeals to managers because they can avoid paying interest. However, the shareholders may not like it if their dividend becomes smaller. Also, sometimes the firm needs more money for a particular project than it has available in retained earnings. A company can also choose to borrow money to fund its projects. A firm can either borrow from a bank or directly from investors by issuing bonds. Although a firm must pay interest if it borrows money, it can deduct the interest from its profits and therefore pay less in taxes. However, there are limits to how much a firm can borrow, and too much borrowing could lead to bankruptcy.
Selling stock is a third way companies can raise funds. Unlike a loan, the funds received from the sale of stock belong to the company and do not have to be repaid. As a consequence, the firm does not have the expense of paying interest. However, the firm must still earn a certain return on its investment to obtain the cash to pay dividends or devote to retained earnings. Businesses also may not want to issue stock because the costs of issuing stock, such as fees for legal and banking services, are usually higher than for issuing bonds. A financial manager must consider factors other than cost when deciding how to raise money. For example, if a firm tries to raise new funds, the public will speculate about the company's plans. If investors think the plans are a bad idea the company's stock price could fall. Events outside the control of a corporation can affect the firm and its financing decisions. Many economic factors, such as changes in the price of oil or the price of foreign currency, can affect businesses as well.
Corporate financial managers need to make sure that potential economic fluctuations do not threaten the firm. A variety of tools, known as derivatives, help manage the risk of such events occurring. Four important kinds of derivatives include (1) futures, (2) forwards, (3) options, and (4) swaps. Futures are promises to buy or sell something in the future at a price that is agreed upon today. Options give a firm the right to buy or sell something in the future at a price that is agreed upon today.
Methods of corporate finance continually evolve as financial managers invent new ways to raise money and avoid risk. Smart investment and financing decisions are crucial to a firm's success.
Reference:
Redmond, WA. 2006. "Corporate Finance." Microsoft Corporation,
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