Corporate finance

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Corporate finance
Corporate finance encompasses all the undertakings of a business. It looks into how
businesses finance their transactions and business events, invest their resources and finally,
evaluate the results. Corporate finance is relevant to both large and small businesses. Three
fundamental principles that underline corporate finance include investment, financing and the
relevant dividend principles (Castle, 2008). Incorporating corporate finance principle into
business model, the companies aim to achieve their objectives and value maximization.
Corporate finance deals with the businesses investing in assets and projects. Choosing
investment assets and projects, the company aims at yielding investment returns over and above
the minimum hurdle rate. The investment decisions are based on the hurdle rates, the evaluation
of advantages and disadvantages of the projects and finally, the cash flows, which are generated
in the result of project implementation. The cash flows are also necessary for calculating the net
present value of the project (NPV), which is one of most important indicators for investment
decision – making.
In addition, the financing mix (debt and equity) also requires informed choosing. The
chosen financing mix aims at maximizing the value of the investments made (Jones, 2011; Castle
2008).The financed assets should match the financing mix.
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This applies if there are not enough investments that merit hurdle rate, the cash goes back
to owners of the business in the form of dividends. Some stockholders, however, prefer stock
buybacks.
Consideration of the capital structure, the combination of equity and debt, is important
for the smooth management of the firm. Evaluating capital structure is the most basic step for the
valuation of assets and identification of risks. The firm has to consider its capital structure before
any major decision; this includes valuation of inventories, debt to equity ratio and debt to value
ratio. The essence of corporate finance is its internal consistency. Therefore, corporate finance
has to be considered an integrated whole instead of a collection of choices and decisions.
Hypothesis:
In this paper we will test the hypothesis: No relationship exist between companies' capital
structure and the shareholders' value maximization.
Petrochemical Industries:
Petrochemical industries primarily include manufacturing companies that produces
chemicals using oil and natural gas as the major raw materials (Petrochemical Industry, 2012).
Considering that the oil is one of the major resources in Saudi Arabia, the petrochemical
industries count 45% of total GDP of the country (The World Factbook. Middle East: Saudi
Arabia, 2012). In addition, approximately 6 million foreign workers are employed by
petrochemical companies. Therefore, considering the importance of petrochemical industry in
the Kingdom of Saudi Arabia, it is reasonable to study the petrochemical companies.
Companies selected:
SABIC:
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SABIC was founded in September 1976 with the initial goal to expert the production of
by-products of oil extraction. The company produces value added commodities, such as
chemicals, polymers and fertilizers. Today, SABIC is ranked as the world largest petrochemicals
manufacturer, and it is part of the listed public companies based in Riyadh, Saudi Arabia with
70% of its shares owned by the Saudi Government and the rest are held by private investors from
the GCC region.
Petro Rabigh Company:
Petro Rabigh is a Saudi Arabia-based refining company that produces and sells
petrochemicals. Jones (2011) explained that it was initially a joint venture between Sumimoto
Chemical and Saudi Aramco. The company went public in 2008. The public owns twenty-five
percent of the company, and the founding owners share the remaining percentage the company
now trades on the Saudi Stock Exchange.
SAFCO:
SAFCO was established in 1965 with a beginning capital of 100 million Saudi Riyals. In
March, 1970, the company started the commercial production. The capital of the company was
increased in several times and its current capital is S.R 2500 million.
The company produces, processes, manufactures and markets all kinds of fertilizers, as
well as ammonia, sulfur and their derivatives and by-products for the local and international
market. The company also establishes, acquires and operates both chemical and non-chemical
products.
Sahara Petrochemicals:
“SAHARA Petrochemicals” was formed in 2004 in Riyadh, the capital of KSA. The
company performs participation, supervises foundation and establishes several limited liability 
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companies in Al Jubail Industrial City with the participation of Saudi and foreign companies to
produce and market its chemical and petrochemical products, such as propylene, polypropylene,
ethylene and polyethylene.
“SAHARA