Structuring Corporate Financial Policy: Diagnosis of Problems and Evaluation of Strategies

Essay by cahyoUniversity, Master'sF, April 2006

download word file, 5 pages 1.0

Downloaded 173 times

Successful diagnosis and prescription depend heavily on thoughtful creativity and careful judgment. Three basic stages in that process:

1. Description : the ability to describe a firm's financial policies is an essential foundation of diagnosis and prescription

2. Diagnosis : benchmark perspectives, then one compares the idealized and actual financial structures, looking for opportunities for improvement

3. Prescription : action recommendations should spring from the insights gained in description and diagnosis


The first task for financial advisors and decision makers is to understand the firm's current financial policy. Part I presents an approach for identifying the firm's financial policy.

The Concept of Corporate Financial Policy

Financial policy is a matter of managerial choice. "Corporate financial policy" is a set of broad guidelines or a preferred style to guide the raising of capital and distribution of value.

Policies should be set to support the mission and strategy of the firm.

Policies are products of managerial choice rather than dictates of an economic model. Policies change over time.

The Elements of Financial Policy

1. Mix of classes of capital : mix may be analyzed through capitalizations ratios, debt-service coverage ratios, and the firm's sources-and-uses-of-funds statement

2. Maturity structure of the firm's capital : to describe the choices made about the maturity of outstanding securities is to be able to infer the judgements the firm made about its priorities. The standard measures of maturity are term to maturity, average life, and duration.

3. Basis of the firm's coupon and dividend payments : basis addresses the firm's preference for fixed or floating rates of payment and is a useful tool in fathoming management's judgment regarding the future course of interest rates

4. Currency : the global aspect of a firm's financial...