Financial Management Theory and Corporate Governance: Exam Questions and Solutions

24 hours exam

Table of Contents
Question 1........................................................................................................................................3
Evaluating the proposition that financial management theory will make it plausible for it to
reduce its weighted average cost of capital to a minimum level.................................................3
Question 2........................................................................................................................................5
Question 3........................................................................................................................................7
(a) Calculating NPV for both the projects and determining the best...........................................7
(b) calculation of IRR for project A............................................................................................8
(c) Evaluating strengths and weaknesses of IRR method............................................................9
(d) Discussing the ways for incorporation of risk.......................................................................9
Question 4......................................................................................................................................10
(a) Critically Discussing the main method available to assist managers with example situations
...................................................................................................................................................10
(b) Calculating optimal product and sales mix plan..................................................................10
REFERENCES................................................................................................................................1

Question 1
Evaluating the proposition that financial management theory will make it plausible for it to
reduce its weighted average cost of capital to a minimum level
There is various requirement of the organization which are needed to be accomplished
by the firm in turn gaining the significant ability to coordinate with the prevailing situation can
become possible (Kruk, 2021). Capital of the business can be sourced by using the two methods
such as equity and finance which tend to offer ability to enterprise to coordinate with
requirements by achieving appropriate feasibility to overcome the risk and capability to enhance
profitability. It is important for the firm to get the proper insights about the significant
proposition of debt and equity in turn achieving the ability to reduce related cost can become
possible. This is one of the highly affecting success determinant so focusing on having relevant
& reliable proportion of equity and debt in capital structure is important.
Financial management is one of the significant theory for managing resources of an
organization in efficient and effective managing in turn n profitability maximization for decision-
making can become possible (Brasov and et.al., 2018). This is basically related with maintaining
cash flows via ensuring that reliable level of profitability though cost of the capital obtained can
become possible. Debt involves borrowing money to be repaid and plus while equity including
raising money by selling interest in the company. There are different types of the capital
structure theory that are included in the capital structure formulation that includes pecking order,
contingency, trade off and cash conversion cycle. There are basically four types of the financial
management decision which are taken into the processing so that higher effectiveness in respect
to decline the capital utilization cost can become possible. This involves financial, investment,
dividend and working capital decision. Appropriate application of the financial management
theory provides the ability to the enterprise to gain depth understanding taking to meet higher
effectiveness and effectiveness can be done in proper manner. Weighted average cost of capital
is helpful in firm's average expense of the capital from the sources of finance such as finance and
equity. In this respect of reducing the WACC there are different form of the actions which are
usually focused by the firm for gaining the appropriate understanding in turn meeting the
profitability and sustainability can be done.
For accomplishing the objective of the reducing weighted average cost of capital the
main focus that is provided by the organization is to cutting debt financing cost, capital

restructuring and lowering equity expenditure. The capital structure tends to give significant
ability to coordinate with the requirements of the organization in turn optimal utilization to
decline the overall expense so that significant understanding to have profitability can become
possible (Capital Structure., 2022). The classical model of the capital structure is related with
reflecting that WACC declines so that reflecting advantages of debt provided by tax system via
deductible to firm in contrast to return to equity. Pecking order theory is related with having
the prioritizing source of financing from the internal financing to equity. In addition to this, it is
related with considering the equity as the last resort so that internal funds' utilization in order
to gain the proper ability to reduce the cost to reduce. The particular theory of the financial
management is related with using internal funds in preferential order, then issuing debt in case of
need and using the equity as the last resort of financing. On the basis of this, it can be specified
that there is higher required level of funds to gain profitability via declining WACC in turn
attaining the significant approach can become possible.
Net income theory of the capital structure in the financial management is to get the h
value of the firm that can be increased by decreasing the overall cost of capital through having
the higher debt proportion. In addition to this, the main reason behind having the higher capital
through h debt financing method as it is cheaper than equity source of financing. This indicates
that the change in financial leverage of firm m will lead to a corresponding change in the
WACC. This net income approach suggests that h with incline in proportion of debt decreases
WACC which tend to enhance firm's value increasing. On the other side, the particular theory
there is decline in leverage results in increasing of weighted average cost of capital.
Trade off theory of the capital structure in the financial management is the idea that
company chooses how much debt and equity finance is taken into the consideration by balancing
costs and benefits. This particular approach of the financial management of the company
provides assistance in understanding that having appropriate advantage to financing with the
option of debt by having the benefit of reducing tax so that distress including bankruptcy debt
cost & non bankruptcy expense, on the basis of this particular method it can be identified that
marginal benefit of further increase in debt decreases as debt inclines while marginal cost
enhances so that optimizing overall value will help in focusing on trade off when choosing how
much proportion of debt and equity is required to be taken into the consideration.