23 Pages Posted: 16 May 2016
Date Written: May 14, 2016
In this Breadth component, an analysis of capital budgeting, portfolio investments, risk management, optimization, financial planning, mergers, acquisitions, and corporate governance is put forth. A compare and contrast is performed for each of the mentioned theories in corporate finance. This component will include a discussion of how these theories contribute to better performance from a corporate financial perspective. Influential writers from each theory, as to the role that contemporary corporate finance plays in promoting performance, is part of the analysis.
Capital budgeting is important for corporations due to the many project choices that managers have to choose from. Stowe and Gagne (2009) proposed six basic principles that decision makers should consider when evaluating projects for their firms to invest into. In the context of portfolio investments Monk and Lajoux (2011) is explored to investigate the three types of valuation models, nine types of assets, and how to assess asset quality. Risk management is an important theory in reducing sensitivity to volatile financial markets. Risk management is probed based on research from Gregoriou, Hoppe, and Wehn (2010) pertaining to wavelet analysis and the credit default swaps. In the study of wavelets a researcher can decouple a dataset between high and low frequency components, allowing for understanding of system dynamics. Regarding credit default swaps and carry trades, a portfolio manager can use these indicators to understand global system risks. Value-at-Risk models by Gregoriou, Hoppe, and Wehn (2010) is put forward to determine the usefulness of such risk metrics and some of the pitfalls that a portfolio might encounter.
Optimizing investments, especially portfolios susceptible to interest rate risk, is very important to manage. This can be accomplished by models proposed in Zenios (1993) using factoring hedging. With any survey of corporate finance theory a discussion on the history of merger and acquisitions is important to explore and this is accomplished via the research from Gaughan (2011). When analyzing corporate governance Tirole (2008) is cited to discuss some of the contemporary problems at firms and how those problems can result into systemic risks.
In the conclusion section an important question was examined: Why do fundamental analysis, risk management strategies, and knowledge of agency problem still lead to system failure? It’s within the intent of this Breadth component to answer this important question by using different theories of corporate finance pertaining to the categories of capital budgeting, portfolio investments, risk management, optimization, financial planning, mergers, acquisitions, and corporate governance.
Keywords: Corporate Finance, Capital Budgeting, Portfolio Investments, Risk Management, CDS and Carry Trades, Value-At-Risk, Interest Rates, Mergers and Acquisitions, Corporate Governance
JEL Classification: C10, C49, C5, C53, C63, E17, E30, F47
Suggested Citation: Suggested Citation