| Compared with the concept of maximization of profit, the concept of maximization of enterprise value is a new and dynamic one. Since early 19th century, the former has been an important financial object of the entity of micro ecomomy, while the latter is gaining recognition and support as a fresh enterprise financial object.Enterprise value is the funtion of cash flow obtained in the future operation period of an enterprise. The more the cash flow is, the bigger the value, and vice versa. It reflects the ability of an enterprise to obtain cash flow in its future operation and the extent of risks involved, and its realization takes a long and continual process. This concept implies that an enterprise needs to be concerned with its cash flow, its level of risk and the continuity of its development. It is the phylosophy of this concept that makes it popular and accepted by more and more global avanced companies.The realization of maximization of enterprise value depends on scientific and effective financial decisons. The basic financial decisions of an enterprise are about investment, financing and dividend policy. Different quality of financial decisions would bring different cash flows and risks, and hence different enterprise values. In the context of an efficient stock exchange, the adoption of a highly profitable investment would spur the stock surge. A scientific financial decision is mainly charaterized by the fact it can put into full play all the traits that helps maximize the enterprise value, and dispose of all the possible negatives to a maximum extent. Besides, scientific financial decisions should be facilitating the control of the process of execution. Investment decisions enable the enterprise to put its funds into most efficient uses, they are fundamentals of management and the core of financial decisions. Through financing decisions, the enterprise use effective means to raise the funds it needs for investment and operation. And the stock divident policy enable the management to strike a balance between retaining the net profit for reinvestment and allocating it to shareholders, for the purpose of benifiting the development of the enterprise and catering for the shareholders' needs for cash flow at the same time. From the perspective of discounted cash flow, enterprise value is the currunt value of future cash flow, thus there are two factors that determine the enterprise value, namely, future cash flow and discount rate. The cash flow created by operations is the deep root of an enterprise's cash flow, and the decisive factor of the enterprise value. In the basic financial decisions, it is investment decision that solely determines the cash flow of future manufacturing and operations, while the tax-shield effect that financing decisions may bring about can have partial corrective effect on the cash flow. The weighted average capital costs are the main factors determining the discount rate, andfinancing decisions and divident policy in their coordination may affect the capital costs. As the cash flow created by operations is the sole origin of enterprise value, the fundamental factor that determines the enterprise value is so only one thing, that is, investment decision. Scientific investment decisions can bring about a large amount of prospective cash flow in any phases of enterprise development, and so ensure the continued growth of enterprise value. Other financial decisions must sageguard the smoothness of investment decision and the realization of the investment object. For instance, in a financing decision, its mode, timing and portfolio are to a large degree dependent on the nature and features of investment decision. Divident policy should also be adapted to investment decision and financing decision. The cost of financing depends basically on the eventual application of the funds. Without investment decision, its subordinate financial decisions are hard to define in term of quality. Through scientific investment decisions, an enterprise can create an ideal cash f... |
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