Do Financial Management Decisions Influence Firm Value ?

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“Do financial management decisions influence firm value?”

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Introduction to Financial Management

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Financial management decision-making consists of techniques, tools and procedures that a company or individual uses to gather ideas, evaluate options and select the best outcomes, depending on internal and external factors. A firm's leadership may ask department heads, segment chiefs and accounting managers to provide input in financial decision-making processes. There are three main financial management decisions which are: * Capital budgeting

Capital budgeting is a required managerial tool. According Brunel, R. (2009) one duty of a financial manager is to choose investments with satisfactory cash flows and rates of return. Therefore, a financial manager must be able to decide whether an investment is worth undertaking and be able to choose intelligently between two or more alternatives. To do this, a sound procedure to evaluate, compare, and select projects is needed. * Capital structure

The Modigliani–Miller theorem states that, in the absence of taxes, bankruptcy costs, and asymmetric information, and in an efficient market, a company’s value is unaffected by how it is financed, regardless of whether the company’s capital consists of equities or debt, or a combination of these, or what the dividend policy is. The theorem is also known as the capital structure principle. There are two main questions when looking at the capital structure – 1) How much money do we need to borrow to buy this long-term asset? 2) What are the least expensive sources of funds for the firm? * Working capital management

The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. Any decision undertaken by the firm in one area has its impact on other areas as well. For example acceptance of an investment proposal by a firm affects its capital structure and capital budgeting decision as well. So these decision are inter-related and should be taken jointly so that financial decision is optimal. All the financial decision have ultimately to achieve the firm's goal of maximisation of shareholders wealth. Burberry, one of the famous designer brands in the world was started by a 21 year old draper’s apprentice, Thomas Burberry. This all started with small outfitter’s shop in Basingstoke, Hampshire, England (The Telegraph 2011). Burberry gained popularity during the First World Was when it won the contract to supply trench coats to the British army. Later on, Burberry was also won by Humphrey Bogart in Casablanca, Audrey Hepburn in Breakfast at Tiffany and Peter Sellers in the Pink Panther. Burberry’s main mission was to sell Britishness to the world (Friedman 2011). * 2008/2009/2010 Financial reports

The Annual Report of Burberry for the year of 2008, states that revenue of of £995m, up 18% on an underlying basis, 17 % reported. Exchange rates reduce revenue by £12m. Final dividend of 8.65p per share giving 12.0p for the full year, as the payout ratio is moved progressively towards 40%. The following graph shows the Total Shareholder Return (‘TSR’) for Burberry Group plc compared to the companies in the FTSE 100 Index assuming Ј100 was invested on 31 March 2003. The FTSE 100 Index has been selected because Burberry’s market capitalisation is close to that of companies at the lower end of the FTSE 100 Index.

For the year of 2009 Burberry had a 15 per cent rise in sales to £380m. The company said retail sales were up 17 per cent with strong comparable store sales growth, greater full-price sell through of the winter collection as significantly lower...
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