Every stock market price depends on:
- projected earnings per share
- period of realization of profits
- projected profit risk
- use of loan funds
- company dividend policy
The objective of a company is to maximize the wealth of the shares and not to maximize profits (microeconomic approach) as the risk of returns and the timing of the implementation of investment programs are not taken into account.
Main project of every company follows these three Financial principles:
- Investment decision: finding, evaluating and selecting investment programs where they will be carried out in the future in risky conditions with the possibility of being different from the expected returns. This is how we set minimum efficiency penalties. The CFO* also makes decisions about the assets as well as to modify and replace them.
- Financing decision: Excellent capital structure where it maximizes the common share price or minimizes the total capital cost. It affects current and future investment program activities by setting a minimum required return.
- Dividend policy: decision to distribute profits as dividend or withholding for investment in investment programs (degree of internal financing). It affects the stock market price and is associated with the excellent capital structure.
*CFO: responsible for raising funds and using them to increase corporate value.
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