Maximising Market Value of Company & Financial Management Decisions

Maximising market value of company securities is important to investors due to the risk and return relationship involve in the decision making on the investment. The return of a security price is the change in the price of the security. If the price of the security increases, the investors would need to secure more of the securities and likewise when the price reduces.

From the company point of view, company must also understand market efficiency because any decision making made by the company will result in information to the market. In financial management, there are three important decisions namely the financing decision, investment decision and the dividend decision.

Financing Decision

In financing decision, the choice between equity and debt will affect the overall cost of capital of the company. The cost of capital constitutes the cost of making use of capital from the market i.e. shareholders and lenders. If the market perceives the choice made by the company is less than desired it will increase their risk and as such news about the financing will be made available in the market. This will in turn affect the demand for the shares to reduce and likewise for the share price. A fall in a share price if not desired and the market being efficient will reduce the capitalization of the company.

Investment Decision

An investment decision will affect cash flow of the company. As such investors will perceive a risk because of their potential dividend receivable or interest receivable. The perception whether good or bad, in addition to market being efficient will be translated as market information that will affect again the share price of the company.

Financing decision has an impact on investment decision and so is investment decision on dividend decision.

Dividend Decision

Dividend decision or policy i.e. how much being paid out and retained will send a signal to the market in respect to the affairs of the company such as cash flow availability, future projects potential or future commitment of the company. This will directly affect the demand for the share and the capitalization.

Therefore, the understand of market efficiency is important to company’s financial managers because to maximise the value of the company security, the manager needs to make sure the above three decision are made correctly.