Why the basics are crucial
Finance managers focus on the share price because they care about the market value of the company. But satisfying external stakeholders in itself is not enough to guarantee success. For example, the cars of Saturn, a subsidiary of General Motors, received consistently high ratings in customer satisfaction and their employees had excellent working conditions. Yet still this company was too costly for General Motors. Sound financial management is key, according to an article on the website of the INSEAD business school.
Basics of corporate finance
Calculating the cost of capital tends to be difficult. There is borrowed money and equity capital (which is money invested by company owners). The cost of debt is the interest rate of the loan; the cost of equity, however, is more challenging. It involves either dividends or an increase in the share price which is demanded by shareholders for their investment. The calculation is based on risk. Thus when a shift in business conditions (both inside and outside the company) occurs, the risk exposure changes and the cost of equity changes accordingly. The effect of this is that the cost of equity capital must be regularly revised.
You need to have a system in place that keeps track of the cost of capital fluctuations. From a value creation perspective, structuring financing is as important as relentless lowering of operational costs.
Knowledge of corporate finance is necessary for making optimal financial decisions. Ultimately, it is about the cost of capital (financing) and the return on investments. The difference between these is precisely the value which is created or, on the contrary, destroyed.
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