Corporate Financial Management: PDF

Corporate Financial
Management

By considering the retirement laws and rapid increase in recognition among employees regarding
the importance of savings, numbers of retirement contributions are revolving around in
retirement funds and financial institutions. In the contemporary world, it is essential to gain a
better understanding of the retirement planning to identify retirement goals and the activities to
be performed to achieve the same in current context. It is very important for the tertiary sector
employees to interpret retirement planning, as they have a comparatively short period of
employment. Their work schedule is based on their technological knowledge, having rapid
obsolesce with the technological advancement. Organizations provide two types of a pension
plan to their employees these are Defined Benefit and Investment Choice plan, the decision is of
the employee which one they want to choose. They must make a decision according to their
needs, goals and financial targets in order to shield their future.
The present study provides highlights on the superannuation plan for the tertiary sector
employees for making investment and savings at the time of retirement. The government of
Australia has provided great support in retirement savings to motivate employees to save more;
they have obligated minimal contributions in suitable superannuation funds for the employees.
This low contribution level was established in order to reduce the stress forced by social security
system about the pension payments for providing support to employees at the stage of retirement
(Bodie, 2013).
Defined Benefit Plan and the Investment Choice Plan
A defined-benefit plan refers to retirement plan sponsored by the employee, wherein employee
gets benefit which is calculated by making use of a formula that assesses multiple factors for
example employment length and background of salary (Clark, Lusardi and Mitchell, 2015).
Portfolio management and risk associated with an investment are administered by the company
for the plan. Moreover, restrictions are also placed on the withdrawal of funds, for example,
specified methods and time of withdrawing funds. A defined benefit pension plan is an
investment plan whereby an employer assures an employee for given pension payment, in a
lump-sum amount that is computed by a formula based on the salary history of employee
(Keynes, 2016). Determination of tenure of age and services are also assessed instead of relying
on personal investment returns on a direct basis (Thakur, Jain and Soni, 2017). The defined
benefit plan is a plan in which the benefit is compensated to employees at the time of retirement

and is identified by making use a formula, which features in key determinants like the final
average salary of the employee, their age and amount of time by which they were employed.
Investment choices plan is an offer provided by most of the superannuation funds. This type of
plan enables a member of super fund to choose whether they want to invest their super fund or
not. Being a super fund member, the employee can generally decide from a range of investment
portfolios, like a balanced option, cash option, growth option or conservative option (Marglin,
2014). Those employees who can select Investment choices plan can hold personal investment
account including individual contribution as well as superannuation funds sponsored by
employees, plus a yearly allocation of gains made on their invested funds, minus any
administration as well as management charges. The territory employees can vote of the kinds of
the assets or the portfolios under the plan of investment choice towards the superannuation
assistance which is invested in and also selecting among the 4 strategies of investment. They are
a secure fund, which is cash and security of fixed interest of Australia (Merton, 2014). The
selection fund of Trustees is a balanced fund of overseas and domestic shares, infrastructure,
property assets and private equity reserves. Next is the Stable fund, which includes bond and
fixed interest securities along with a little disclosure to local and international shares and
property. Last is the Shares fund where the investment is exclusively in local and international
shares.
Both of these investments possess risk, by considering the same it is essential for the employees
to know the risks of making an investment in these funds. The nature of these investment
options, it is considered that employees are not likely to hold risk, due to less bearing on risk
employees must select defined benefit plan, and on the other hand, if the employee is likely to
hold high risk, then they can go for investment choice plan (Larimore and et al. 2009). Defined
benefit plan is less risky because this is produced and provided by the organization, while the
Investment choice plan is highly risky, as the management of the portfolio is done by employees.
Initially, it is significant to assess the ability and readiness to bear risks after decision shall be
made (Gitman, Juchau and Flanagan, 2015). If the employee does not want to associate with risk,
then the best option is defined benefit plan because all the risk is borne by the company.
However, if they make an investment in Investment choice plan, then they will have an option
regarding the asset portfolio where they want to invest.

Important factors to be considered by tertiary sector employees for deciding between Defined
Benefit Plan and the Investment Choice Plan
The main factor is to determine the current financial position of employee itself to pertain
income, debt, savings and expenditure. In order to develop a structure of savings, expenditure on
various aspects, assets and balances will provide a proper base to the employee for making a
decision on what plan is to be selected. The prevailing financial condition of employees states
the capacity to bear risks to make a contribution to the retirement plan (Bateman and et al.,
2014). This can understand by taking an example, in a situation where an employee has secured
investment sources that they must no doubt go for investment choice plan for generating a higher
return, but in the case is they do not possess secured future investments can they must definitely
select defined benefit plan.
The territory employees must keep in mind that the money they have saved for future can be
wrinkled by the inflation factor (Csiszar, 2014). This is the reason they want to ensure that the
retirement process they have selected should offer them the best chances for facing the inflation
factor. In this part, it is explained as an advantage plan which the employees should ensure, that
offering the return will become proficient in mitigating opportunity inflation factor (Howard and
Yazdipour, 2015). The investment plans are critically designed by taking into consideration the
risk and the inflation factors. Hence the employees of the tertiary sector must select the
alternative which provides a better outpacing of the risk factor of inflation along with the return
on investment.
Issues relating to the concept of the time value of money and other factors in this decision-
making process
The time value of money is a key notion of making a decision in terms of investments, which
that that is the availability of money ion present time is highly worthy as compared to the future
times. It is predominantly based on the possible capacity of earning; It is argued by the principle
that, money is eligible to gain interest and make increment in its value over time. Thus it
possesses high worth at the present time. It is said that money must be investment immediately
rather keeping it in a mere locker because investment will be more beneficial which can come in
the form of higher returns or interest (Baker and Ricciardi, 2015). One more reason for making
money investment is the changes in inflation which can make a reduction in the purchasing

power of the same amount. Further, the time value of money plays an important role in selecting
the investment plan. Making the investment of money rather than keeping it in hand, will help in
making future savings thereby making financial future
The theory of time value of money is very significant in most financial as well personal aspects
and decisions. For instance, one has to decide between obtaining a lump from their retirement
plan or payment stream payment in the near future (Gino and Mogilner, 2014). Within the
business, one may be choosing if or if not to purchase new equipment which will enhance
revenue in near times. These decisions are engaged with the comparison of present value and
future value (Madura and Gill, 2016).
There are three main rationales in order to support the time value of money notion. Initially, an
investment of money is to done to gain interest over time, providing it possible gaining capacity.
Along with this, money can be subjected to inflation and taxes, which means that consuming all
the worth of currency over time, while making it less worthy in future. Ultimately, there is the
presence of uncertainty of not obtaining the real amount of money in near future, if the
employees retain money at the current basis, there is no uncertainty of the same.
In order to get the best estimate of this risk is complex and thereby it is hard to make use of this
in a clear and effective manner. Further, these three reasons are why present worth of money is
valuable. These can be an investment to make higher returns in the form of interests.
However, this future money might be worn out by inflation and higher taxes. In a situation
where the future payment is outstanding, there is higher risk associated while obtaining it. The
time value of money and tax consideration is essential to be taken into account because cash in
hand is highly worthy than the money assured in future (Gino and Mogilner, 2014). The cash in
hand at a present time can be utilized for making the investment while earning interest, returns
and capital gains from the same. An assured dollar in the future is comparatively not valuable
than present money due to inflation. The main principle of finance (investment money can gain
in interest) retains that any amount of money is worth the earlier it is obtained. In the most
understandable way, the time value of money, states that all the aspects being equal, it is best to
hold money today instead of future.

Present study depicts that there are two main types of retirement plans; denied benefit plan and
investment choice plan. The study has thoroughly discussed both this plan; it can be said that
both plans are different from each other, both possess its own benefits and risks. However, it is
totally based on the employee whether they want to make a contribution to the Defined Benefit
Plan or Investment Choice Plan by considering their retirement preferences. Moreover, the study
shows the significance of TVM theory, its importance and its related issues while making
financial decisions.

References
Baker, H.K. and Ricciardi, V., 2015. Understanding behavioral aspects of financial planning and
investing.
Bateman, H., Deetlefs, J., Dobrescu, L.I., Newell, B.R., Ortmann, A. and Thorp, S., 2014. Just
interested or getting involved? An analysis of superannuation attitudes and actions. Economic
Record, 90(289), pp.160-178.
Bodie, Z., 2013. Investments. McGraw-Hill
Clark, R., Lusardi, A. and Mitchell, O.S., 2015. Financial knowledge and 401 (k) investment
performance: a case study. Journal of Pension Economics & Finance, pp.1-24.
Csiszar, J., 2014. Factors That May Affect Your Retirement Benefits. [Online]. Available
through: <https://www.freecreditreport.com/blog/factors-that- may-affect- your-retirement-
benefits/>. [Accessed on 4th May 2018].
Gino, F. and Mogilner, C., 2014. Time, money, and morality. Psychological Science, 25(2),
pp.414-421.
Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson
Higher Education AU.
Howard, J.A. and Yazdipour, R., 2015. Retirement Planning: Contributions from the Field of
Behavioral Finance and Economics.
Keynes, J.M., 2016. General theory of employment, interest and money. Atlantic Publishers &
Dist.
Larimore, T., Lindauer, M., Ferri, A. R. and Dogu, F. L., 2009. The Bogleheads Guide to
Madura, J. and Gill, H., 2016. Personal finance. Prentice Hall.
Marglin, S.A., 2014. Public Investment Criteria (Routledge Revivals): Benefit-Cost Analysis for
Planned Economic Growth. Routledge.
Merton, R.C., 2014. The crisis in retirement planning. Harvard Business Review, 92(7/8), pp.43-
50.
Retirement Planning. John Wiley &amp; Sons.
Thakur, S.S., Jain, S.C. and Soni, R., 2017. A study on perception of individuals towards
retirement planning. IJAR, 3(2), pp.154-157.