Organizations use capital finance strategies to ensure that the return on investment is sufficient for shareholders. The following are some ways organizations use capital finance strategies to ensure that the return is sufficient:
Maximizing shareholder value: Shareholder value is the financial worth owners of a business receive for owning shares in the company. An increase in shareholder value is created when a company earns a return on invested capital (ROIC) that is greater than its weighted average cost of capital (WACC). To maximize shareholder value, organizations use strategies such as revenue growth, increasing operating margin, and increasing capital efficiency.
Making strategic decisions: Organizations make strategic decisions that maximize expected value, even at the expense of lowering near-term earnings. Companies that manage earnings are almost bound to fail in creating shareholder value. To deliver superior long-term returns, management must either repeatedly exceed market expectations for its current businesses or develop new value-creating opportunities
Finance at the lowest sustainable after-tax cost: Organizations use capital finance strategies to finance at the lowest sustainable after-tax cost. This helps them to create value by reducing the cost of capital and increasing the return on investment
The economic conditions that most affect shareholder's perception of value are:
Market conditions: The market conditions, such as the state of the economy, interest rates, and inflation, can affect the shareholder's perception of value. For example, if the economy is in a recession, shareholders may be less likely to invest in a company, which can affect the company's value
Industry conditions: The industry conditions, such as competition, technological changes, and regulatory changes, can affect the shareholder's perception of value. For example, if a new competitor enters the market, shareholders may be less likely to invest in a company, which can affect the company's value
Company-specific conditions: The company-specific conditions, such as financial performance, management quality, and corporate governance, can affect the shareholder's perception of value. For example, if a company has a history of poor financial performance, shareholders may be less likely to invest in the company, which can affect the company's value
In summary, organizations use capital finance strategies to ensure that the return on investment is sufficient for shareholders. The economic conditions that most affect shareholder's perception of value are market conditions, industry conditions, and company-specific conditions.