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Individuals are capable of managing their finances on their own, be it salaried persons, small business owners or even housewives. This sort of financial management is on a micro level. However, when the scenario magnifies and a big organization is concerned, then financial manager is in charge of making the investments decisions of their company, providing advice on the proper apportionment of funds, composition of current and fixed assets in addition to the resultant risk profile chosen. These managers are also accountable for the financing decisions of the organization i.e. choosing the right source of finance from the assortment of lending institutions present in the market. This choice becomes even more confusing as every lending establishment in the market offers different features regarding maturity, cost, risk and availability (Watson and Head, 2007).
The most crucial concern of financial managers is risk when they have to take decisions relating to apportionment of investment among several projects
In general, financial theory is based on the premise that the ultimate aim of a company is to augment value and therefore companies form balance sheets to accomplish this objective. The capital structure selected by a firm decides the risk that can accrue to it. The Capital Market Theory which suggests the Capital Asset Pricing Model proposed by Sharpe (1964) clearly states the appropriate measures of risk of a security issued by a company.
Two distinct, however consistent researches attempted at providing financial managers, information related to the prime determinants of organized risk. The first research experimentally studies the correlation between accounting as well as market determined risks (Gonedes, 1973) and the link between beta and the macroeconomic factors (Robicheck and Cohon, 1974). The never ending debate about risk and return is still on with the main argument point being the impact of riskiness of a company on its value, i.e. will it be positive or negative.
Below mentioned are the objectives of the research:
In the process of attaining the above mentioned objectives, the research will try to get answers to the following research questions:
The current investigation will create a new paradigm of thought into the subject of study for the purpose of developing the current knowledge base. This research is also essential in the partial completion of the requirement for the award of a Master of Science degree. It will also serve as a guide to investment for investors both institutional and individuals who desire to invest in the listed organizations of Ghana.
According to Hyke (1960) and Friedman (1970), who have put forth the classical economic perspective of a firm, firms must be driven by managers in such a way that its economic revenues are maximized. If a company is unable to raise and allocate finance effectively, then its ability to choose sought after projects will be badly impacted. In addition to this, the profitability and effectiveness of its current investments might also suffer adversely. The purpose of effective financing and investment is to raise adequate funds and invest them as and when required at the minimum plausible cost. There exists an apparent linkage between financing and investment decisions of the financial manager of the company and the firm value. However, if the companies want their investment decision to be effective then it needs to have awareness regarding the different available sources of finance and the associated risk with each of them. It was argued by Miller and Modigliani (1963) that value of a company is determined on the basis of its fundamental earning power plus the risk of its business.
The customary wisdom asserts that companies having greater vulnerability towards risk ought to have higher returns but low market values and are closer to a default situation. As a consequence company’s probability of defaulting is directly related with the market based risk features like book-to-market, earnings price and dividend price ratios.
As per Ernest (2002), the dearth of a proper financial plan is among the most normal reasons behind business failures. Earlier works by Myres (1984) indicated that financial leverage has an effect on cost of capital which eventually influences the profitability of a company’s investments and its stock prices. Another research by Sunder and Myres (1999) on organization’s debt also puts forwards that the determinants of capital structure are usually dependent on trade-offs between financial stress cost and the tax shields on interest. As per the trade-off theory on capital structure, the finest leverage extent strikes a balance between the cost of debt and its benefits (Gu, 1993). The more the leverage level of a company the less tax it has to pay but the greater is its business risk. Elgonemy (2000) cited in his study that business owners should take into account the four main components of using debt as the source of finance – tax considerations, business risk, the extent of risk avoidance and requirement for financial flexibility.
The current research will use data already published and available in form of publications and the statistics available on the publicly listed firms on Ghana Stock Exchange Fact Books plus the audited annual reports of different organizations. This is very relevant source of data as it will give details about the data and statistics already available which might furnish facts related to financing structure, sales, age and share prices of listed firms on Ghana Stock Exchange. The research will also utilize data statistics retrieved from the Bank of Ghana pertaining to the interest rates, rates of Treasury bills and inflation rate.
One of the main concerns of this project which needs to be addressed is that whether the selected sample size and research precincts i.e. restricting the investigation to the economy of Ghana would authenticate the consistency and generalization of research outcomes or not. According to Yin (1994), using a single case let in a research is normally acceptable. Nonetheless, generalization of the research findings of a sole case study may have certain limitations. Hence, limiting the research to the economy of Ghana might not furnish a sample that can represent the entire universe and the findings cannot be generalized on the issues of company value and risk. Nevertheless, this approach makes things easier and provides sufficient control over the elements and the data required to be analyzed and evaluated.
The entire research will follow a sequential pattern which is as follows:
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