What are the three types of financial management decision? For each type of decision, give an example of a business transaction that would be relevant.
What long-term investments to make?
Capital Budgeting: Evaluating the size, time and risk of future cash flows as well as the process of planning and managing a firm’s long-term investments. The goal is to achieve a hugher value of cash flow generated by assets than the cost of it. The example would be a new restaurant (e.g. Tri-Con Global Restaurants, Inc.) which makes an investment when it opens a new Pizza Hut restaurant. Where will we get the money for those investments from?
Capital Structure:Specific mixture of long-term debt and equity the firm uses to finance its operations; also how and when to raise the money. The financial manager has two concerns: Firstly, he needs to decide the amount of money the firm should borrow and secondly, what the least expensive sources of funds are for the firm. The ‘gearing-ratio’ calculates the mixture of long-term debt and equity.
“Gearing ratio” = long-term debt / (long-term debt + equity)
As an example you could make use of the “Barneys New York” who made an agreement with its lenders and sponsors to reduce the Company’s debt and improve its capital structure. assures the Company a significant financial flexibility to prioritize its investment in its operations and grow the business. How will we manage everyday financial activities?
Working Capital: Refers to firms short-term assets, such as inventory and liabilities. Some important questions that have to be answered are: -How much cash and inventory should be kept on hand?
-Should we sell on credit?
-Will be any short-term financing obtained?
For example, the ENK PLC (a Philippines-focused nickel miner) sold a stake in Toledo Mining Corp. PLC for cash and also signed a conditional deal to sell its interest in Berong Nickel Corporation. Selling these non-core assets strengthens their working capital.
2.(Q8 , page 12 )
Would our goal of maximizing equity value be different if we were thinking about financial management in a foreign country? Why or why not?
The main goal of financial management is to “maximize the current value per share of the existing equity. “ Shareholders are residual owners, which mean that they only get dividends after all operations costs were paid for. It does not matter what country we are talking about, the interests of the shareholders are mainly the same, namely to maximize the current value per share. The only part that differs in different countries is the way how to achieve that goal, because of different social, political and economic institutions.
3.(Q1 , page 30 )
What are the four primary disadvantages of the sole proprietorship and partnership forms of business organization? What benefits are there to these types of business organization as opposed to the corporate form?
Four disadvantages of sole proprietorship and partnership:
1.)Unlimited liabilities for business debts on the part of the owners 2.)Limited life of the business
3.)Limited ability to grow (equity is limited)
4.)Difficulty of transferring ownership
Benefits of sole proprietorship and partnership opposed to the corporate form: 1.)Easier to set up and inexpensive to form
2.)Owner keeps all the profits
3.)Few formal business requirements
4.)Income taxed as personal taxes (corporations are taxed twice)
4.(Q5 , page 30 )
Corporate ownership varies around the world. Historically, individuals have owned the majority of shares in public corporations in the United States. In Germany and Japan, however, banks and other large financial institutions own most of the equity in public corporations. Do you think agency problems are likely to be more or less severe in Germany and Japan than in the United States? Why? In recent years, large financial institutions such as mutual funds and pension funds...