Financial Management
Contents
Executive Summary ........................................................................................................................ 3
Introduction ..................................................................................................................................... 3
Main Body ...................................................................................................................................... 4
ANS-a) ............................................................................................................................................ 4
ANS-b) ............................................................................................................................................ 7
ANS-C) ......................................................................................................................................... 10
Conclusion .................................................................................................................................... 12
Bibliography ................................................................................................................................. 13
Executive Summary
The main perspective of this assignment is also relates to one of the major functions of the
finance department as a whole. The company which has been chosen for this assignment is
basically a hypothetical company with the name of “XX Chemicals”. XX Chemical is basically a
medium sized company and the directors of the company are considering expanding and running
the operations of the company in abroad. From the entire analysis, it is found that companies
have to use capital budgeting stance is extremely important from the standpoint of the company
and it would be equally beneficial from the viewpoint of the XX chemical. All the answers
discussed in the above sections have been answered accordingly. The company should undertake
the provisions mentioned and described in this particular assignment in order to raise capital and
undertake all the sufficient provision for capital budgeting.
Introduction
Finance department plays a dominant role as far as the productivity of an organization is
concerned (Andrew, 2001). Inevitably, the definition is not yet derived. According to
management officials, organization is basically a place that surrounds with different departments
in total and every department is intending to give its cent percent effort for the productivity of
the company as a whole (Ackerman, 2002).
Likewise other departments, the value of finance department is very much in the favor of the
company as a whole as it leads to organizational productivity through the utilizations of available
funds. Among different decisions, that specifically take by the finance department of a company,
decisions relate to share issuance and shareholder’s management are some of them which have
their own importance and significance.
There are three different issues identified by the company during its operations and every issue
needs to be cleared in the assignment and the same are mentioned below simultaneously.
Main Body
ANS-a)
XX Chemical, according to the case defined, is in the consideration of raising the funds required
for the project through the issuance of right shares. In this part, it is required to critically examine
the services of an investment banker could provide to the XX Chemical as far as rising of
additional funds is concerned.
Right shares which also known as bonus shares is one of the most important mediums from the
standpoint of the shareholders which the companies issue predominantly in order to raise the
funds. It is basically a medium cum strategy to raise additional funds from the existing
shareholders of the company.
XX Chemical’s directors are intending to raise the financial capital required for the project
through the issuance of right shares for the external stakeholders. In order to accomplish the
same, the company first has to register itself in the listed primary market and then move towards
the secondary financial market.
Financial markets, which have been categorizes as primary market and secondary market have
two different aspects from the viewpoint of a country. A new company, which only has funds
capital in its treasury, has to approach the primary market first merely for the capital. XX
Chemical is basically a newly established company with a major aim to flourish in the Chemical
Industry (Borodovsky & Gogarten, 2010).
It is also suppose that the company has already issued some of its shares in the financial markets
in order to raise the financial capital. Right issues basically works as a bonus for the
shareholders, issued by the companies in order to satisfy the needs of the external stakeholders of
the company (Borodovsky & Gogarten, 2010). The strategy to issue right share for the XX
chemical will certainly benefited the company as far as raising additional funds for the project is
concerned. Issuance of right issues would not be so easy for the company, as XX chemical has to
sort out the best available shareholders from the list of different stakeholders. The company then
has to solicit the highest paid shareholders.
Right shares would be issued according to the capital allotment from a single party, like if a
stakeholders has a high proportion in terms of capital in the company, then they would be
obliged with the highest amount of dividend or right issues (Borodovsky & Gogarten, 2010).
Right issues are basically an alternative of dividend and it would be rewarded to the stakeholder
which has the highest amount of share in the overall share capital. Usually companies issue right
issues, when the company is not intending to give dividends to the shareholders. This particular
act would be initiated at the time of economic crisis and hardship. XX Chemical can also issue
the same in order to facilitate its external shareholders perfectly (Borodovsky & Gogarten,
2010).
In order to accomplish the same task, the company has to approach an investment banking firm
of the country because they are the only one who can help the company in this particular regards.
The main theme of the investment bankers is to enable the investors to meet with the companies.
The line of services which an investment banker can provide to the XX Chemical as far as
raising the funds for project is as follows,
Enable the company to meet with the external shareholders: Investment banking firm always has
certain personal relationship with number of external stakeholders and corporations, who want to
invest their money in the stocks of a company (Borodovsky & Gogarten, 2010). Investment
banking firms work as an intermediary or underwriter, or specifically works as an agent, who
would usually charge some sort of money to render the services of arranging an external investor
for the company. In the situation and scenario of XX Chemicals, investment banking firms can
help out the company in the same way in total, which would be equally beneficial for the
company as a whole (Borodovsky & Gogarten, 2010).
It helps the companies to accumulate funds: Funds as well as their availability are extremely
important from the standpoint of an organization because it is the only thing from which the
entire organization operates. Investment banking firms certainly help out the companies to
increase the level of funds of an organization by brining number of external as well as internal
stakeholders. Apart from that, investment banking firms also take the responsibility to counsel
the companies to act accordingly, in order to accumulate funds. XX Chemicals also has to adopt
the same strategy in total, and has to make sure the company that the company will surely
increase its funds in total (Blaxter & Hughes, 2006).
It helps the companies to meet with their financial targets: Inevitably, it is essential for the
companies to comply with all the financial as well as strategic targets altogether in order to
enable the companies to meet with their financial targets. Investment banking firms always adopt
such strategies, specifically count for such purpose in total. XX Chemical has to approach the
investment banking firms for the same purpose.
ANS-b)
Organizations always strive hard to accomplish both of their financial as well as strategic goals
in total. Without doubt, organizations work extremely hard to accomplish all of its economical as
well as non economical targets in total. In order to accomplish the targets and goals,
organizations have to undertake many decisions that lead to their ad hoc productivity and
efficacy. Among such decisions, the name of capital budgeting is one of them (Umit & Carrier,
1998).
XX Chemical, the hypothetical company selected for this assignment, has found that their
computed capital budgeting has now overspends the actual expenses of the company, and now
the company is intending to change the organizational structure by separating the finance
department with the finance department. The difference of both of these departments from the
viewpoint of the selected company would be analyzed here along with their major roles and
responsibilities (Ansari, 2002).
Capital budgeting could be defined as a process in which a business determines whether projects
such as building a new plant or investing in a long-term venture are worth pursuing. Most times,
a prospective project’s lifetime cash inflow and outflows are assessed in order to determine
whether the returns generated meet a sufficient target benchmark (Bierman, 2008). Capital
budgeting is also known as investment appraisal. Ideally, businesses should pursue all projects
and opportunities that enhance shareholder value. Generally, businesses prefer to intricately
study a project before taking it on, as it has a great impact on the organization’s financial
performance. Capital budgeting is an essential managerial tool. One important duty of a financial
manager is to choose investments with satisfactory cash flows and rates of return.
In essence a financial manager should be able to decide if an investment is worth undertaking
and should also have the ability to choose intelligently given other alternatives. Capital
budgeting is primarily concerned with sizable investments in long-term assets. Capital budgeting
is the process that companies use for decision
making on capital projects-those projects with a
life of a year or more. This is a fundamental area of knowledge for financial analysts for many
reasons.
Organizational structure depends upon the Weighted Average Cost of Capital (WACC) which
includes debt and equity proportion. Organizational structure is the only thing that analyzes and
identified that how much proportion or debt and equity has been presented in the overall
structure or productivity of an organization (Charles & Jones, 2007).
In order to change the organizational structure, organizations have to undertake such decisions
that will not hurt the organization as a whole. It is not possible to have everything financed
through the shareholder’s equity, but it is important to have some proportion of debt as well. XX
Chemical identified that same thing, that there is some problem occurs with the organizational
structure of the company, hence the company has decided to separate the departments of treasury
and finance.
Analyzing the Responsibilities of the Treasury Department
Treasury department is one of the most important departments of an organization. Usually, this
particular department could not be found in every organization of the world, but there are some
specific organizations in which the department of treasury would have been found (Charles &
Jones, 2007).
The main responsibilities of the treasury department vary from organization to organization, like
it is totally different when it lies with a bank while its operations totally changes when it is
operating with a corporation. In a broad nutshell, treasury department is held responsible for
investing the money and funds of the company at a place from where the likelihood of earning
would be on a higher side (Charles & Jones, 2007)
Capital budgeting is a function, basically not totally associated with the treasury department of a
company, but its computation has a high involvement of organizational structure as a whole.
Debt and equity proportion has could increase or decrease the WACC of the company, which
means that the company has to adopt the funds at a place from which the earning potential would
be on a higher side, specifically as high as the WACC of the company. It is the only way that the
companies can prevent the capital budgets to be supersedes from the actual expense.
For XX Chemical, the treasury department has to change its organization structure and should
analyze the best possible capital structure for the entity, in order to decrease the rate of WACC
and also decrease the chance of Capital Budgeting superseding (Charles & Jones, 2008).
Analyzing the Responsibilities of the Finance Department
Likewise treasury department, finance department has also its recognition as far as long run
productivity of an organization is concerned. Some people referred accounting and finance
department are similar, but both of the department are totally different from each other, as
accounting department is held responsible for recording the day to day transactions, while
finance department has been formed and made for somewhat different aspect (Charles & Jones,
2007).
In a broad nutshell, the function of the treasury department is somewhat identical to the finance
department as it also depends upon the availability of funds of the company as a whole. The
investment decision took by the companies, usually analyzes and computed by the finance
department. It means that the whole brainchild behind all the investment decisions is the finance
department on which the entire decisions regarding the company would be taken into
consideration.
In this particular scenario, in which the XX Chemical’s capital budgeting figure always
supersede from its actual earnings, it is the possibility that the finance department has lagged
behind the worthwhile working in terms of telling and apprising the treasury department
regarding the best timing for investment.
XX Chemical now should separate the finance department and has to strengthen the personnel of
the company to act in the best way to increase the financial potential of the company as a whole.
Apart from that, as new responsibility, the head headers of the department should also empower
the lower management personnel to compute the necessary and relevant things for the treasury
department with efficacy (Charles & Jones, 2007).
ANS-C)
Economics is one of the largest field’s lies in the earth which has numerous things under its
heads. It is quite undisputed that there is no single definition of the term “Economics” exist in
this world as every author has had defined the concept in its own manner. Adam Smith, known
as the Father of Economics (FOE) and according to him, “Economics is the name of earning and
consuming money”
The field of economics has been comprises on two different sub heads which particularly are
microeconomics and macroeconomics. As clear by the name, the economical activity deals with
the economics of individuals is known as microeconomics while the economics deals with the
country as a whole is known as macroeconomics (Charles & Jones, 2007).
There are numerous concepts that come under the umbrella of economics, as this is the only
subject which has its recognition in almost every walk of life both in long and short term
analysis. Concepts like Gross Domestic Product (GDP), Consumer Price Index (CPI), Balance of
Payment (BOP) and others are some of the most basic and primary concepts lies in economics
and economical management (Dess & Lumpkin, 2007).
Among number of concepts, the name of inflation is one of them which have its own recognition
and importance in the broad nutshell of an economy. Apart from an economy, the effects of
inflation could also be found on an organization as well (Dess & Lumpkin, 2007).
Investment decisions always depend upon the rate of return on the investment, and inflation is
one of those external factors that affect directly on the same. Inflation is the thing that decreases
the value of the currency and also leads to decrease the potential income as well.
Inflation changes the level of interest rates considerably from an investment and thus its final
consequence could be seen on the organizational productivity as well as on the rate of return
(ROR). Interest rates would have been categorized into two different types which predominantly
are real interest rates and nominal interest rates. Real Interest rate is the rate in which the effects
of inflation would not be included, while the rate in which the effects of inflation would be added
is called nominal rate of interest.
The addition of inflation with the interest rate would certainly increase the interest rates and then
the corporate analysts have to undertake the same rate in order to discount different steam of
cash flows. High and low interest rate only effect on the discounting factor which then decrease
or increase the level of WACC and cost of borrowing as well as cost of doing business. Rate of
Return (ROR) would decrease considerably, with the increase in the inflation rate and to net off
the same, companies usually charge high rate of return from the investees.
It is extremely important to value a steam of a cash flow without taking inflation into
consideration because it is the only thing as without it an organization cannot be in the net of
economic prosperity.
Conclusion
According to large number of professionals and corporate analysts, organisation has been
referred to a place in which hundreds of people work together for the achievement of a specific
goal (Dess & Lumpkin, 2007). This is an obvious fact that, every organisation has the same
perspective in its mind which is to broaden the net income recognition (Dess & Lumpkin, 2007).
The leniency of the organisations towards its bottom line and external shareholders is one
of the main things for the organisational productivity and efficiency (Dess & Lumpkin, 2007).
The real dominance of an organisation lies in the fact that how well it uses its natural and human
capital for the long run productivity and efficiency of the entity (Dess & Lumpkin, 2007).
Strategies are at the heart of an organisation and no organisation can sustain completely
in this competitive environment without employing strategies. It is more than important for an
organisation to timely check and measures its operational strategies to cope up with all sorts of
challenges which the company may encounter during its operations (Derrick, 1992)
Organisation is basically a set of departments that collectively works for the long run efficiency
of the company and inevitably, no organisation can sustain without the ad hoc working of its
different departments.
Among different departments, the name of finance department is one of them. The main
perspective of this assignment is also relates to one of the major functions of the finance
department as a whole. The company which has been chosen for this assignment is basically a
hypothetical company with the name of “XX Chemicals”. From the entire analysis, it is found
that companies have to use capital budgeting stance is extremely important from the standpoint
of the company and it would be equally beneficial from the viewpoint of the XX chemical. All
the answers discussed in the above sections have been answered accordingly.
Bibliography
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