Essay on Corporate Finance

4993 Words Jun 21st, 2010 20 Pages
1.0 Introduction
Capital markets are a major source of finance for large companies engaging in investment projects. Successful investment projects can bring tremendous returns to shareholders in the form of dividend payment and increased share value. However, the source of finance affects a company’s overall cost of capital and by extension its dividends to shareholders. This report addresses the importance of the capital market and the efficient market hypothesis theories. The various source of finance available to large companies and the related cost. As well as the importance of the dividend decision and its possible affect on the company’s share price.

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2.0 The role and importance of capital markets and efficient market
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Additionally, companies can reduce their cost of capital by accessing the bond market for debt financing or by issuing new shares via the equity market. ▪ Reduced systemic risk. Without capital markets the banking system would tend to be larger than it otherwise should be, resulting in a concentration of credit risk in one sector. The co-existence of capital markets and the banking system reduces this risk. This also mean that capital markets provide a variety of financial instruments that facilitate long term stable saving for investors and companies which are spread throughout the market[2].

Capital markets are also considered barometers of the strength of a country’s economy. This means because of the interconnected of the world economies, capital markets place an important role in the global business sector and economies. Upheavals in the capital market can cause major havoc on a national and an international scale (as is evident by the 2008 financial crisis) and result in following: ▪ Limited credit or funding for investments. Based on the principles of demand and supply this could lead to higher interest cost and hence increase cost of capital for companies. ▪ The value of stocks could decrease, resulting in investors losing substantial sum of money. Investor with funds would be hesitant to invest in these markets.

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