Financial Management and Decision Making

This article covers topics such as evaluation of company's capital structure, principles of corporate governance, stakeholder's approach, investment appraisal techniques like NPV and IRR, and ways of incorporating risk into investment appraisal process.

FINANCIAL
MANAGEMENT
AND
DECISION MAKING

Contents
TASK...............................................................................................................................................3
Question No 1..................................................................................................................................3
Evaluation of company’s capital structure which consist of equity shares and bonds:..........3
Question No 2..................................................................................................................................4
a) Main principles of corporate governance along with critical evaluation of reason for
development of corporate governance codes:........................................................................4
b) Critical discussion on need of stakeholder’s approach and related factors which entity need
to consider when they appraise their corporate strategies:.....................................................5
Question No 3..................................................................................................................................6
a) Calculation of NPV of the project along with recommendation on selection thereof:......6
b) Calculation of IRR of Project A:........................................................................................7
c) Evaluation of strength and weakness of IRR:....................................................................8
d) Discuss the ways of incorporating risk into investment appraisal process:.......................9
Question No 4................................................................................................................................10
a) Main methods available to assist managers while dealing with capacity utilisation:......10
b) Calculation of optimal product mix and sales mix plan:..................................................11
REFERENCES..............................................................................................................................14

TASK
Question No 1
Evaluation of company’s capital structure which consist of equity shares and bonds:
Capital structure is the combination of capitals from different sources of finance. The capital of
a company consists of equity share holders’ fund, preference share capital and long term external
debts. The source and quantum of capital is decided keeping in mind the following factors:
• Control: Capital structure should be designed in such a manner that existing shareholders
continue to hold majority stake (Budding, Faber, and Schoute, 2021).
 Risk: Capital structure should be designed in such a manner that financial risk of a
company does not increase beyond tolerable limit.
 Cost: Overall cost of capital remains minimum.
 Practically, it is difficult to achieve all of the above three goals together, hence, a finance
manager has to make a balance among these three objectives.
However, the objective of a company is to maximise the value of the company and it is prime
objective while deciding the optimal capital structure. Capital Structure decision refers to
deciding the forms of financing (which sources to be tapped); their actual requirements
(amount to be funded) and their relative proportions (mix) in total capitalisation. Capital
structure decision will decide weight of debt and equity and ultimately overall cost of capital as
well as Value of the firm. So capital structure is relevant in maximizing value of the firm and
minimizing overall cost of capital. Whenever funds are to be raised to finance investments,
capital structure decision is involved. A demand for raising funds generates a new capital
structure since a decision has to be made as to the quantity and forms of financing.
To balance financial risk, control over the company and cost of capital, a company usually does
not procure entire fund from a single source, rather it makes a mix of various sources of finance.
Hence, cost of total capital will be equal to weighted average of cost of individual sources of
finance (Gelman and Kliger, 2021).
WACC is also known as the overall cost of capital which includes the cost of different sources
of capital as explained above. WACC of a company depends on the capital structure of a

company. It weighs the cost of capital of a particular source of capital with its proportion to
the total capital. Thus, weighted average cost of capital is the weighted average after-tax
costs of the individual components of firm’s capital structure. That is, the after-tax cost of each
debt and equity is calculated separately and added together to a single overall cost of capital.
The WACC of the organisation is reduced depending upon the type of capital structure the
organisation is holding and depending upon the expectation of the shareholders and stakeholders
also. The capital structure consisting of equity and bonds will create risk on the moderate level
within the organisation. However due to change in the capital structure the overall cost of the
organisation gets reduced also (Hacioglu and Aksoy, 2021).
Question No 2
a) Main principles of corporate governance along with critical evaluation of reason for
development of corporate governance codes:
The core principles of good corporate governance are being mentioned below:
 Accountability:
Accountability refers to responsibility towards the action and possible action taken by the
company. Accountability plays the vital role in the corporate as responsibility makes the
work accountable and will be performed in an effective and efficient manner. The senior
management in the organisation is responsible for corporate governance as governance is
directly linked to performance and discipline within the entity.
 Responsibility:
The board of director are responsible to act or take action on behalf of the company.
Therefore, they have the full responsibility and powers to take major decision on behalf
of the company so that market position of the organisation gets improved. They have the
complete responsibility to oversee the management of the company such as appointing
the higher management personnel within the corporate, monitoring the performance of
middle and lower-level divisions of the organisation. Accountability with goes with
responsibility and they are connected to each other directly and indirectly. The board are
accountable towards the shareholders of the organisation as they are the owners of the
company and they have invested their funds in the business (Hamid and Loke, 2021).

 Transparency:
Transparency simply means willingness of the entity to provide complete and clear
information to their shareholder or other stakeholders which are connected to the
business. It is important for an organisation to disclose the material fact towards the
performance of the business and all the activities they are carrying must be completed on
timely manner. Transparency gives confidence to the stakeholders towards the various
decision making and processes carried out by the management of the company.
 Fairness:
It simply means to provide equal treatment that is all the shareholders and other
stakeholders of the organisation must be provided equal remuneration irrespective of the
fact what are their holding within the organisation. The shareholders have been provided
proper protection in terms of various act applicable on the company such as companies
act etc. Not only stakeholders, the treatment must be given in the equal proportion to all
the employees, communities and public officials within the organisation so that work
does not suffer due to in equality in the entity (Hollowell, Kollar, and Kovalova, 2019).
b) Critical discussion on need of stakeholder’s approach and related factors which entity need to
consider when they appraise their corporate strategies:
The stakeholder method refers to a exercise in which the managers of the enterprise formulates
and implements distinct techniques to fulfil and offer with the wishes of the stakeholders to lead
them to live related with the enterprise and its operations. The managers of the enterprise employ
the distinct marketplace surroundings and the imperfections which might be gift withinside the
marketplace and create a treasured possibility for the enterprise and its operations. This is an
moral idea that is taken up via way of means of the management of the enterprise. It is used to
deal with the final results in an effort to be because of the selections taken via way of means of
the enterprise, its developments withinside the income and the income in an effort to be earned
via way of means of the control (Jun, Dinçer, and Yüksel, 2021). The collective effect of the
various factors at the stakeholders is defined on this method. This principle and method have a
distinct precept which derives the usage of this method withinside the enterprise. These concepts
of stakeholder method are mentioned below:
Principle of Entry and Exit: An entity ought to have clean guidelines for hiring, firing, and
paintings profile of the personnel without a ambiguity.

Principle of Externalities - The selections taken via way of means of an entity may also have an
effect on human beings who've no members of the family with the entity. The principle shows
that folks that can be laid low with the findings of a enterprise also are to be dealt with at par
with different stakeholders.
 Principle of Agency - The shareholders employ the employer’s control to run the entity’s
enterprise. Management isn't the proprietor of the entity however an agent performing on
behalf of the employer (Kusairi, Sanusi, and Zamri, 2019).
 Principle of Governance - Any adjustments affecting the connection among stakeholders
and the employer want to be permitted via way of means of them unanimously.
 Principle of Contract Cost – The stakeholder ought to undergo any value on a same basis,
i.e., one ought to now no longer pay extra than another. Furthermore, the value-sharing
ought to be comparable or proportionate to the benefit gained.
 Principle of Limited Immortality – The company ought to function with long-time period
goals at attention and now no longer for the incentive of short-time period perks.
Longevity guarantees self-assurance withinside the stakeholders of the entity. A
stakeholder is involved with the long-time period desires of the entity.
Question No 3
a) Calculation of NPV of the project along with recommendation on selection thereof:
Net present value is the investment appraisal technique that has been followed by various
businesses so that they can evaluate the feasibility of the project which is under consideration.
The calculation of NPV are being mentioned below:
Project A( Figures in Pound)
Years Cash
Inflows
Discounting
@ 12%
PV of Cash
Inflows
1 8000 0.893 7144
2 12000 0.797 9564
3 10000 0.712 7120
4 6000 0.636 3816
4 5000 0.636 3180
Present
Value of
Cash Inflow 30824
Less: Cash
Outflow 29000

NPV 1824
Project B ( Figures in Pound)
Particular Year 1 Year 2 Year 3
Profits 15000 20000 6000
Add: Depreciation 4000 4000 4000
Free Cash Flows 19000 24000 10000
Working Capital Recovery Nil Nil 20000
Salvage Value Nil Nil 5000
Cash Inflows 19000 24000 35000
PVF@12% 0.893 0.797 0.712
Present Value 16967 19128 24920
Total Present Value 61015
Less Cash Outflow 44000
NPV 17015
From the above it has been concluded that Project B must be selected by the organisation as it
gives higher NPV. Therefore, it is recommended to the entity is to make investment in the
Project B.
b) Calculation of IRR of Project A:
IRR is the rate at which present value of cash inflows is equals to present value of cash outflows.
To calculate the IRR trial and error method has been used (Momotova, Belokon, and Stroi,
2018).
Starting rate for discounting is 12% for which the NPV is calculated below:
Project A( Figures in Pound)
Years Cash
Inflows Discounting @ 12%
PV of
Cash
Inflows
1 8000 0.893 7144
2 12000 0.797 9564
3 10000 0.712 7120
4 6000 0.636 3816
4 5000 0.636 3180
Present Value of Cash Inflow 30824
Less: Cash Outflow 29000
NPV 1824

Second rate for discounting is 15 % for which the NPV is calculated below:
Project A( Figures in Pound)
Years Cash
Inflows Discounting @ 15%
PV of
Cash
Inflows
1 8000 0.87 6960
2 12000 0.756 9072
3 10000 0.658 6580
4 6000 0.572 3432
4 5000 0.572 2860
Present Value of Cash Inflow 28904
Less: Cash Outflow 29000
NPV -96
Using the interpolation techniques, the IRR will be as under: -
= Lower rate + lower rate NPV/ (Lower rate - Higher rate NPV) * Difference in rates
= 12 + 1824 / (1824 + 96) * (15-12)
= 12 + 5472 / 1920
= 12 + 2.85
= 14.85%
The IRR for the Project A has been arrive to 14.85% which shows that at this rate the
present value of cash inflows are equals to present value of cash outflows.
c) Evaluation of strength and weakness of IRR:
Advantages of IRR:
 It is considered easier to calculate.
 IRR includes positive as well as negative cash flow.
 It is used for evaluation as how attractive a specific project or investment turns out to be.
 It helps to assert and find time value of money. It is measured by computing the interest
rate at which the current value of cash flow would result to be equivalent to capital
required.
 IT functions well when one requires to evaluate the results as well as fluctuations
observed and even the reason behind it (Nadar and Wadhwa, 2019).
Disadvantages of IRR:

 It ignores the future the potential future related costs which would influence as well as
impact the profitability of business.
 IRR allows to compute value of future cash flow which makes an implicit assumption
which in cash of cash flow can be reinvested in same way and same rate as IRR.
d) Discuss the ways of incorporating risk into investment appraisal process:
The higher rate in volatility in the economy world wise has affected the investor to search those
investments which are safer for them. The investor considers capital budget when considering
the investments amongst various categories. The capital budget is the plan which to use by the
investors to invest in long term assets of the entity such as plant and machinery, land and
building etc. When the investor considers risk in capital budgeting then only they can mitigate
the risk relating to such investments. Following are the ways of incorporating the risk in
investment appraisal process:
 Risk Premium:
The investors always had the mind-set to avoid the risk and it is necessary for the
investors in those projects which has higher risk so that they can get the higher returns
from such investment. Risk premium is the discount rate that will be added to the risk-
free rate related to borrowing. The appraisal has been added to investment using the
discount rate has been given and those investments will be selected that provide
considerable higher returns to the investor and the company (Rogers, 2019).
 Payback Period:
The total time that has been required by the project to recover the initial amount of
investment is considered as payback period. The investors set the time and within such
time frame they expect that returns are to be received to them. Those projects whose
returns are considerably low as compared to other projects are considered as riskier
investments.
 Certainty Equivalent:
At the time of appraising the projects, the cash flows that are being received in the future
are estimated using the probability measures such as forecasting techniques etc., however
these pictures do not provide accurate picture regarding the future events. In it necessary
to convert the cash flows into certain cash flows by multiplying them with CE factors.
The risky investments always have low certainty equivalent rating in the market, hence

they are being avoided. This is because of the probability of netting the estimated cash
flows is unlikely (Yue, Gizem Korkmaz, and Zhou, 2020).
 Sensitivity Analysis:
A project's go back on funding is stricken by elements consisting of sales, investments,
tax charge and price of sales. Sensitivity evaluation measures the quantity to which the
project's coins flows extrude in reaction to modifications in this type of elements. The
sensitivity evaluation method includes figuring out the elements that affect the project's
coins flows, setting up a mathematical courting among those elements and studying how
a extrude in every of those elements have an effect on the project's coins flows. If a
project's coins flows are touchy to modifications in any of the above-indexed elements,
its miles taken into consideration unstable and therefore avoided.
Question No 4
a) Main methods available to assist managers while dealing with capacity utilisation:
The following are the approaches by which the manager of the entity deals with capacity
utilisation:
• Boost Planned Manufacturing: It is usually hard to elevate the capital that suppose is right
sufficient to begin the enterprise. Raising capital from the marketplace is usually a time-
eating technique and right making plans is a must. Planning in advance usually allows you
in the usage of your assets withinside the quality viable manner. We see quite a few might-
be marketers suffering to conform surprising adjustments in manufacturing, demand,
production etc. If performed from scratch, it usually results in performance at each stage.
Planning and Scheduling are the 2 cornerstones for a success operation, along with
capability usage.
• Sharing Capacity: Sharing capability is rising as a key manner to maximise capability usage.
It is a win-win state of affairs for each the events as they each get gain out of it. It will
increase their possibilities to live withinside the marketplace with confined capital. One can
supply favoured commercial capability from a proprietor, wherein each proprietor and
seekers are benefited. This now no longer simplest improves usage and avoids duplicity of
investment, however additionally growth profitability and coins glide conditions. Sharing
capability now no longer simplest solves the troubles of budding marketers however

additionally allows to create surroundings wherein capability proprietors and capability
seekers can seamlessly have interaction for higher capability usage (Zhang, Zhu, and Li,
2020).
• Maximizing usage = Increasing profits: Entrepreneurs need to provide you with modern
thoughts to make the maximum of the to be had capacities. One need to usually take a look
at their capability very well to decide how it may be quality applied from a specific
standpoint. They say you need to realize your product quality earlier than beginning your
enterprise, much like that, you need to be acquainted with each tiny element concerning the
capacities for your hand. Consider numerous conditions and create modern thoughts to
maximise usage and therefore, profits.
• Strategic Decision Making: Whenever you're making plans to begin whatever new, strategic
development is important for enterprise development. Successful traders search for
corporations which +has clean techniques in hand and strategic choices have an absolutely
excessive have an effect on at the destiny of the organization. Your method needs to
attention on increasing enterprise with low manufacturing prices for the most capital gain,
which in flip might make your enterprise constant and offer greater consumer base.
• Promotions Work Best: Capacity usage is going hand in hand with product demand. A begin
up or any organization need to make steady efforts to enhance the great in their product and
growth its public demand. Engaging withinside the promotional activities, introducing new
approaches through which product price may be increased, which in flip will increase the
manufacturing fee which ends up in most capability usage.
• Structured Approach: Start with small capacities to stability your finances. Increase your
capability with a growth in product demand. Paying excessively for much less
manufacturing might bog down your income fee, as you usually have a preference of
growing your area with a growth in demand. You need to be bendy for fluctuations in
demand.
• Subcontracting: In subcontracting, the entity are taking orders and convey for different
corporations. In this manner, there's most usage of the capability and you're making now no
longer only for your enterprise however for different corporations as well. In a manner
subcontracting let’s maximize the capability usage and income simultaneously.

b) Calculation of optimal product mix and sales mix plan:
The product mix of a firm refers to the diversity of items that the company offers to its
clients. The company must blend its many products in the best possible way. In the industrial
sector, product mix and limiting issues are major challenges. These factors have an impact on
what a company can sell, how many orders it can fulfil, and how much profit it can make. A
company's product mix refers to the diversity of things it offers. Companies are reticent to limit a
product's production, especially if it is selling well. In most cases, the more money you make, the
better your chances of profit. However, there are occasions when limiting production is prudent.
Take the example of trainers. Some companies will only create a certain number of trainers to
prevent losing value. By retaining exclusivity, limiting output helps to keep or increase value.
Following is the efficient product mix for the business of Mankona plc:
Manus Nonus Opus
Inventory 275 220
Budgeted sales 605 550 440
Selling Price 17.60 19.80 15.40
Direct Materials 8.80 6.60 2.20
Direct Labour 4.40 6.60 9.90
Contribution per
unit
Selling price 17.60 19.80 15.40
Materials 8.8 6.6 2.2
Labour 4.4 6.6 9.9
Contribution 4.4 6.6 3.3
Manus Nonus Opus
Contribution 4.4 6.6 3.3
Units 605 550 440
Contribution per unit 0.0072 0.012 0.0075
Rank 3 1 2
Product mix

Manus Nonus Opus
Units - 550 440

REFERENCES
Books and Journals
Budding, T., Faber, B. and Schoute, M., 2021. Integrating non-financial performance indicators
in budget documents: the continuing search of Dutch municipalities. Journal of Public
Budgeting, Accounting & Financial Management.
Gelman, S. and Kliger, D., 2021. The effect of time-induced stress on financial decision making
in real markets: The case of traffic congestion. Journal of Economic Behavior &
Organization, 185, pp.814-841.
Hacioglu, U. and Aksoy, T. eds., 2021. Financial Ecosystem and Strategy in the Digital Era:
Global Approaches and New Opportunities. Springer Nature.
Hamid, F.S. and Loke, Y.J., 2021. Financial literacy, money management skill and credit card
repayments. International Journal of Consumer Studies, 45(2), pp.235-247.
Hollowell, J.C., Kollar, B., and Kovalova, E., 2019. Cognitive decision-making algorithms for
sustainable manufacturing processes in Industry 4.0: Networked, smart, and responsive
devices. Economics, Management and Financial Markets, 14(4), pp.9-15.
Jun, Q., Dinçer, H. and Yüksel, S., 2021. Stochastic hybrid decision‐making based on interval
type 2 fuzzy sets for measuring the innovation capacities of financial
institutions. International Journal of Finance & Economics, 26(1), pp.573-593.
Khan, D., 2020. Cognitive driven biases, investment decision making: The moderating role of
financial literacy. Investment Decision Making: The Moderating Role of Financial
Literacy (January 5, 2020).
Kusairi, S., Sanusi, N.A., and Zamri, N., 2019. FINANCIAL HOUSEHOLDS'EFFICACY,
RISK PREFERENCE, AND SAVING BEHAVIOUR: LESSONS FROM LOWER-
INCOME HOUSEHOLDS IN MALAYSIA. Economics & Sociology, 12(2), pp.301-
318.
Momotova, O.N., Belokon, L.V., and Stroi, G.V., 2018, April. Conceptual approaches to
formation of financial strategy of a higher education institution. In International
Conference Project “The future of the Global Financial System: Downfall of
Harmony” (pp. 803-812). Springer, Cham.
Nadar, D.S. and Wadhwa, B., 2019. Theoretical review of the role of financial ratios. Available
at SSRN 3472673.

Rogers, J., 2019. Strategy, Value and Risk: Industry Dynamics and Advanced Financial
Management. Springer Nature.
Yue, P., Gizem Korkmaz, A. and Zhou, H., 2020. Household financial decision making amidst
the COVID-19 pandemic. Emerging Markets Finance and Trade, 56(10), pp.2363-
2377.
Zhang, J., Zhu, S., and Li, Z., 2020. The construction and simulation of internet financial product
diffusion model based on complex network and consumer decision-making
mechanism. Information Systems and e-Business Management, 18(4), pp.545-555.