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Interest rates :Interest rates have an influence on investment. Most decisions to invest involve borrowing money, so there is an association between the cost of borrowing and the level of investment. Investments usually involve large sums of money. In order to acquire this money firms must take out loans. Interest rates can be defined as the cost of borrowing or the reward for saving. If interest rates are high this will make borrowing more expensive making saving more encouraging. In contrast if interest rates are low this makes borrowing a more attractive offer. Firms are more likely to consider an investment at a low rate of interest. This shows us what kind of impact interest rates has on investment.
Future expectations:Another factor that has a significant effect on investment, are a firms future expectations. However the future is unpredictable, because investment decisions take time to accomplish, there is usually a great deal of uncertainty. What businesses expect to happen in the future is very important. If a business' management is feeling pessimistic about the future, low interest rates will not encourage investment. On the other hand high interest rates will not deter them from making an investment if they are feeling confident and optimistic about the future.
Income: A high level of income is another factor which stimulates investment; high levels of income tend to make businesses feel more optimistic about the future. Furthermore high levels of income could mean high profits. Therefore businesses have more funds with which to invest. Many economists believe that high levels of income occur as a result of high levels of investment. This follows a circular flow pattern. Whichever way you see it income has a clear association with investment.
The acceleration theory:The accelerator principle states that a change in the rate of income or output will vary the level of investment. This is similar to the idea; changes in consumption relate to the level of investment. If the demand for a product is increasing in order for firms to be able to meet the demand increased investment is necessary. The table below gives an example supporting this theory.
Firms however must need to ask them if the increased demand will last or will it be short lived. Firms who feel that the increased demand will be short lived then they would choose to not invest.
Government:The government has a big effect on investment in two different ways. Indirectly through government policies and directly by being the largest investor in the economy. Investment decisions made by firms are influenced by government taxation, which may give either positive or negative incentives (usually negative in order to reduce externalities). Fiscal and monetary policies are the government's tools that deal with tax and interest rates; they both have a significant effect in determining investment.
The governments investments are not always profit orientated, they may be guided by other motives (benefiting society), including the construction of schools, hospitals, roads and old people's homes. Many economists believe that the government aims to stabilize the levels of total investment within the economy. When private investment is low government or public investment will be high and vice versa. Many argue that from time to time they crowd out private investment, which lowers the overall level of private investment
INVESTOR RELATED GOALS OF COMPANY
There are some goals which are investor related objectives which are important for any organization, which help in surviving in the market for longer period of time, these are those factors which make the organization health and help in attracting and retaining them, these are:
The goal of maximization of shareholder wealth:This means maximizing the value of shareholder's capital and maximizing the value of shares of the company in market.
High earning per share:it is the total amount which company gives to its shareholder in return of their investment. It measures the profit available to the equity shareholder i.e. the amount which company pays on each share. It is the portion of a company's profit allocated to each outstanding share. Eps is a widely used technique; it is calculated by dividing the profit available to the equity shareholder by the total number of shares.
High dividend:is a taxable payment declared by a company's board of directors and given to its shareholders out of the company's current or retained earnings. Dividends are usually given as cash (cash dividend), but they can also take the form of stock (stock dividend) or other property. Dividends provide an incentive to own stock in stable companies even if they are not experiencing much growth.
The disposal of the earnings is an issue of fundamental importance in financial management. The dividend policy, particularly the timing of the declaration of dividend, influences the market value of a company's shares. The financial manager, therefore, should be well informed about the capital market trends and the tax policies of the government, besides the rationale behind the investment program of the company.
Transparency: it means making the operational, financial and structural visibility for all the stakeholders who includes shareholders, they are made aware about what is company doing with their investments, where is that capital or funds are allocated, what are companies future expansion plans, dividend distribution policy etc.
Satisfying different needs of investors:differentinvestors have different needs some need early returns, some focus on wealth maximization in long run, some need funds at a particular time and some focus on the welfare and growth prospect of organization, therefore it is very important for any company to understand the need of investor and their motive of investing, so as to retain them.
Getting publicity by existing investors:companies focus on existing investor not only because they have given funds to them but also because they do publicity for the company by word of mouth, a happy and satisfied investor will always say good about the company and company is always profited by this, as the old investors are happy and ready to invest and new investors are also attracted and they are also ready to invest.
EARNING PER SHARE
Eps is the total amount which company gives to its shareholder in return of their investment. It measures the profit available to the equity shareholder i.e. the amount which company pays on each share. It is the portion of a company's profit allocated to each outstanding share. Eps is a widely used technique; it is calculated by dividing the profit available to the equity shareholder by the total number of shares.
IMPORTANCE OF EPS:
Eps allows the investor to compare different companies' operational efficiency. I.e. by comparing Eps investors are able to know about the efficiency of organization.
Eps helps in determining the cost of share.eps helps the companies to decide what should be the price of their shares.
Eps is an important determinant of company's profitability. A company's profitability is checked by Eps if Eps is high then the company is in good state and if the earning per share is low then the company is not profitable situation.
Eps is also used to attract investors. High earnings per share of a company are one of the major factors that influence the investor's investing decision.
Eps is also important to calculate the price to earning valuation ratio.
Eps shows sound financial health of company. It shows profit and gives a healthy position of the company.
DETERMINANTS OF EPS:
Objectives of the company; Eps is determined by what is company is willing to give.
Investor's requirements: company also focuses on what the investors accept from them.
Earnings of the company: ultimately companies give to the investor which is affordable for them and what the company actually earns.
Competitors in market: The Eps is also depended on the Eps of other companies, which the competitor is giving to their shareholders.
Division of profit: Eps is calculated on net profit after tax and all other expenses, now it is the company who allot funds to different accounts, and whatever left is the profit for shareholders.
Financial environment: The economic and social background of a country is a major influence on a firm, on its structure and on its objectives and operations.
Corporate objectives:Generally we assume that a company's objective is to increase the value of the shareholders' investment in the firm. We also assume that all managers act to further that objective. Shareholder wealth maximization is the normative objective of a company that underlies financial management theory. In practice, a company has many stakeholders, employees.
Financial management and taxation: Virtually all decisions taken by financial managers have tax effects. In the UK, for example, the tax treatment of loan interest is different from that of dividends paid to shareholders. Therefore the decision between raising funds from shareholders and from lenders has tax implications. Returns from investments made by the business (i.e. profits) are taxed.
SHAREHOLDER'S WEALTH MAXIMAISATION
Earlier profit maximization was given high priority, but these days we have understood that if you want to continue in the market the prime focus shall be in maximizing returns of its stake holders. Which means, maximizing the price of the stock/shares, paying back healthy dividends, issuing bonus shares when necessary etc.
The shareholders are the real owners of a business. Officers (CEO's, Presidents, CFO's and VP's) may control day to day operations but unless they too are shareholders, they have no right to claim any company profits or assets. They are all just "employees". If any profitable company could elect to stop doing business. After the bills are paid any all non-liquid assets liquidated, the money would be distributed to the shareholders (via priority) by the company buying back its shares. "Maximizing shareholder wealth" would therefore mean that upon liquidation, the value of cash shares held for repurchase by the shareholder (and by the company after all assets were sold) would be LESS on a per share basis than what the public market would pay for those same shares at the present moment. For a public company, increasing shareholder value may mean driving the stock price as high as possible and also increasing dividends.
The goal of maximization of shareholder wealth is meant by; first, "enlightened management" is aware that the only way to maintain its position over the long run is to be sensitive to shareholder concerns. Poor stock price performance relative to other companies often leads to undesirable takeovers and proxy fights for control. Second, management often has sufficient stock option incentives that motivate it to achieve market value maximization for its own benefit. Third, powerful institutional investors are making management more responsive to shareholders. Stock holders wealth maximization is a long term goal as stockholders are investing in a company expecting good-future-returns.
IMPORTANCE OF MAXIMISATION OF SHAREHOLDER'S WEALTH
Existing investors invest again:when shareholder's wealth is maximize then the satisfied investor is motivated to again invest in the same company, it is very easy for the company to motivate the existing investor rather than to attract new investor and create trust for the company.
Investors do not withdraw funds:when company take care of the needs of shareholders than the shareholders do not withdraw their funds from company and let them be invested for a long time.
Helps in future expansions of the organization:when company gives transparency to the investors about their future growth and expansion plans and if the investors are being treated with honesty then the investor allows the company to invest their dividend in business.
Helps in attracting new investors:A positive attitude of the company towards their investor not only retains the investors but also help in attracting new for the future need for funds in the market.
Maintains the interest of the investors in the company:it is very important to maintain the investor's interest in the company so that they also get some benefits and shall be with the company for a longer period.
Shareholder Value is the value of the company (firm) minus the Future claims (debts). The value of the company can be calculated as the Net Present Value of all future cash flows plus the value of the non operating assets of the company.Economic Shareholder Value is created by earning a Rate of Return on invested capital that exceeds the firm's Weighted Average Cost of Capital.
Shareholder Value = Corporate Value (Firm Value) - Future claims (Debts)
Shareholder Value = (NPV of all future free cash flows + value of non operating assets) - Future claims (Debts)
Non-operating assets include:
marketable securities (stocks),
excess real estate,
Over funded pension plans.
Future claims include:
interest-bearing debt (long-term and short-term),
capital lease obligations,
underfunded pension plans,
REASONS FOR THE INCREASE OF MUTUAL FUNDS FROM PAST FIVE YEARS
Cost-effectiveness of investing in mutual funds:The main advantage of investing in mutual funds is the efficient management of your finances. Investors buy funds because they lack the competence and time to manage their own portfolio. It is a cost effective method, especially for a small investor because it is expensive to get a manager to manage individual investments
Diversification:Compared to individual stocks or bonds, mutual funds diversify the risk of bearing loss. The basic intention being to invest in a diverse number of assets in order to overcome the negatives of loss making stocks or bonds by the profits reaped by others.
Economy of Scale:The transaction expenses are relatively low as a mutual fund is bought and sold in large amounts of credits
Liquidity:Mutual funds provide the opportunity of converting shares into cash at any point of time with not much legal formalities.
Simplicity:It is easy to buy a mutual fund. Most companies have their own automatic purchase plans, and the minimum investment rates are very small.
CHANGING TRENDS OF THE INVESTMENT INDUSTRY:
In past 10 years the investment industry has undergone a number of changes, there are many factors which influence the nature of investment sector and its working. The investment industry shows different phases and this are the new looks of it:
Corporate strategy or Strategy for Success:
Among the companies that have maintained a track record of success over time, certain characteristics are evident:
Superior customer service and innovative products
Ability to respond to shifts in the market
Getting the product to market faster (time-to-market)
Staff and cost reduction
Increased employee satisfaction
Return on investment (ROI)
Creating ease and convenience of business transactions (e-business)
Internally, a company can achieve some of these goals by streamlining operations through reorganization and elimination of inefficiencies. Moreover, companies should take advantage of technology's offerings.
Companies must also focus on retaining and building lasting relationships by adapting a shareholder oriented culture. Stakeholders demands for greater convenience in transactions, online support, and call centers should be addressed. Companies will gain the loyalty and support of satisfied shareholders.
Customer Relationship Management (CRM):
Now investors are also and equally important for the company as customers and investor must be taken proper care and importance. An important trend in the new economy is the necessity to focus on the customer and investors. To build loyalty, companies must strive to accommodate the expanding needs for personalized services and greater convenience. As mounting global competition customer relationships have become one of the most important assets for anyone who is related to the company . Using value and needs-based segmentation, we work out the right strategy to access, gain and retain investors in the most efficient and effective way possible.
Political challenges:The political and economic case for a seamless, integrated European financial services market is as strong as ever. The internal benefits of a fully integrated pan- European financial sector, anchored on the Euro, remain huge, notably a significant increase of the EU's financial markets. The stronger, internally, Europe's financial sector is, the stronger Europe will stand externally on global markets and in global trade negotiations.
Ethical Issues in the Industry. the investment industry is a industry which require to be trust worth for investor but initially no company was concerned for this but now companies are focusing on the ethical side and assure people about their investment in safer hands, in this industry there is much requirement of ethics because this industry is quite large. It encompasses banks, securities firms, insurance companies, mutual fund organizations, investment banks, pensions funds, mortgage lenders-any company doing business in the financial arena. Because of its vast size, the industry tends to garner lots of headlines, many of which tout its ethical lapses.
High competition:from past ten years the competition in attracting new investors has gone to the heights, companies are now much goal oriented for which they need funds and for funds they need investor so it is very important to attract the investor and companies now are focusing on this aspect also.
Investment support agencies:these days there are investment advising agencies which provide information and help in decision making to the investor so as where to invest the money so the companies also needs to focus on them and have to make their goodwill in the market as now the investor are more knowledgeable and understands the market movement and company performance.
Financial restructuring:now For the companies in crisis, financial restructuring is often provided, on the basis of the experience, actions are necessary for reaching long-term financial stability. Now govt is also taking measures to support companies in crises there are some agencies which focus on the growth and overall changing the structure and they charge commissions.
E-business and Universal Banking:Business activity is being conducted through online banking and transactions. E-business capability is quickly becoming a requirement to compete in the marketplace. For aggressive firms, it presents unrivaled opportunities for profit and growth. E-business capability provides companies with essential agility and holds the key to differentiation through internet-based customer services and sharing of information and resources.