Financial Management: Theory, Corporate Governance, NPV, IRR, and Managerial Methods

This study material from Desklib covers financial management theory, corporate governance, NPV, IRR, and managerial methods. It explains how to reduce the weighted average cost of capital, the main principles of corporate governance, the need for adapting to stakeholder approach, and ways to incorporate risk. It also includes calculations of NPV and IRR, advantages and disadvantages of IRR, and methods that assist managers. The subject is Financial Management and the course code is not mentioned. The college/university is not mentioned.

Financial management

Table of Contents
MAIN BODY..................................................................................................................................3
Question 1........................................................................................................................................3
Financial management theory to reduce the weighted average cost of capital to a minimum
level..............................................................................................................................................3
Question 2........................................................................................................................................3
(a) Main principles of corporate governance...............................................................................3
(b) Need for adapting to stakeholder approach and its benefits to stakeholders.........................4
Question 3........................................................................................................................................5
(a) Calculation of NPV................................................................................................................5
(b) Calculation of IRR.................................................................................................................6
(c) IRR advantages and Disadvantages.......................................................................................6
(d) Ways to incorporate risk........................................................................................................6
Question 4........................................................................................................................................6
(a) Methods that assist managers.................................................................................................6
(b) Product and Sales mix............................................................................................................7
REFERENCES................................................................................................................................1

MAIN BODY
Question 1
Financial management theory to reduce the weighted average cost of capital to a minimum level
To make the weighted average cost of capital to a minimum level the financial
management will reduce the cost of capital and increase the bond in the capital structure. The net
income theory will be applied as according to this theory the capital structure of the firm will be
changed increasing the value of the firm. according to the theory the cost of capital is reduced by
raising funds more by the debt source of financing. The debt source usage to finance the business
organization is cheaper than the equity source of finance to raise the funds. Trade off theory is
the theory of financial management used to decide the balance between the capital structure of
the firm (Brigham and Ehrhardt, 2019). The costs and benefits are balanced by choosing to
finance through debt source than the equity source. The approach followed by the trade-off
theory of the financial management allows to take the advantage by financing through debt
alternative and paying the reduced amount of tax. As per the traditional theory of financial
management the capital structure in which the additional cost of raising fund by debt and by
equity are the same. The traditional theory says that by having the leverage equal to zero the
weighted average cost of capital can be reduced.
Question 2
(a) Main principles of corporate governance
The main principles of corporate governance are accountability, transparency, fairness
and responsibility. Corporate governance refers to the systematic rules, practices and activities
that controls and directs a firm. Corporate governance needs to be developed to ensure that its
main principles are duly followed by the corporations. Corporate governance codes are needed to
make sure that the activities of the business enterprise are ethical and fair. It is responsible for
ensuring that the corporate has hard and soft laws. Financial regulations are formulated by the
corporate governance (Kovermann and Velte, 2019). Accounting standards and financial stability
is maintained through these standards. NSE prime’s corporate governance is known for its
framework and high level of standards. The instructions and guidelines by the government are
implement by corporate governance. Thus corporate governance is essential.

(b) Need for adapting to stakeholder approach and its benefits to stakeholders
Stakeholders are all the persons that are concerned with the performance of the company.
The organizational objectives are largely influenced by the stakeholders. The interest of the
stakeholders is prioritised through stakeholder approach. All the practices in the organization are
formulated to maximize the satisfaction of the stakeholders. It is essential to be adapted so that
the company can ensure its effective competitive edge in the market and creates value in the
products and services through innovations (Gurzawska, 2020). Following this approach will
benefit the stakeholder other than shareholders. The brand recognition will increase at a fast
increasing rate. Operational costs of the firm will reduce making it more cost effective than
before. The top talent will be attracted to work for the organization. The customer will be highly
satisfied.

Question 3
(a) Calculation of NPV
The project A and Project B has been evaluated on the basis of NPV technique of
capital budgeting (Bogataj and Bogataj, 2019). The results reveals that both the projects have
negative present value of the returns that will be generated in the future it means that the projects
are not profitable. But the Project A is better than the Project B as the loss is less in this project.

(b) Calculation of IRR
IRR for the Project A at the assumption of cost of capital as 15% is computed as 10%.
The IRR is not good indicating that the project is not profitable.
(c) IRR advantages and Disadvantages
Strengths: Time value of money is considered. Simple calculations are required (Xiao, Liu and Feldman, 2018). Easy to understand. Required rate of return is not needed.
Weaknesses: Same IRR throughout the product is assumed. Mutually exclusive projects ignored.
(d) Ways to incorporate risk
 Sensitivity Analysis: It is a quantitative measure of assessing risk (Saltelli and et.al.,
2019). It determines how the changes made in the variables of the specific project
impacts the output of that project. Thus the risk is incorporated.
 Profitability Assignment: By the way of profitability analysis the future profits that will
be generated by the investment project are estimated. All kinds of operational, financial
and market risk are taken into account during the assigning of profitability.
Question 4
(a) Methods that assist managers
Lead strategy assists the managers. The production decisions are made on the basis of
anticipation of the increase in demand in the market in future (Hoang, Jamal and Tan, 2019). The

limitations in the production capacity are countered by increasing the efficiency of the existing
resources to increase the production capacity for meeting the anticipated increased level of
demand ensuring the competitive edge in the market by taking the risk.
Lag strategy is the another method that assist the manager in the process of maximizing
the capacity within the limitation. According to this method being followed the managers resist
from taking the risk. The anticipation of increase in demand is ignored and the production
process is undertaken as usual (Zheng and et.al., 2019). When the demand actually rises in the
market the production process by the firm takes up the speed and produce more by increasing the
capacity through bringing efficiency in the resources.
(b) Product and Sales mix
The above calculation deducts the variable cost from the selling price to know the
contribution that each type of product makes towards the recovery of the fixed costs incurred.
The most contributing product is highlighted by the calculation and that is Nonus so the firm

tries to produce maximum to its units. Then 187 units are Manus will be produced followed by 2
units of opus. The total profit will be maximized that is £2765.

REFERENCES
Books and Journals
Bogataj, D. and Bogataj, M., 2019. NPV approach to material requirements planning theory–a
50-year review of these research achievements. International Journal of Production
Research, 57(15-16), pp.5137-5153.
Brigham, E. F. and Ehrhardt, M. C., 2019. Financial management: Theory & practice. Cengage
Learning.
Gurzawska, A., 2020. Towards responsible and sustainable supply chains–innovation, multi-
stakeholder approach and governance. Philosophy of Management. 19(3). pp.267-295.
Hoang, K., Jamal, K. and Tan, H. T., 2019. Determinants of audit engagement profitability. The
Accounting Review. 94(6). pp.253-283.
Kovermann, J. and Velte, P., 2019. The impact of corporate governance on corporate tax
avoidance—A literature review. Journal of International Accounting, Auditing and
Taxation. 36. p.100270.
Saltelli, A. and et.al., 2019. Why so many published sensitivity analyses are false: A systematic
review of sensitivity analysis practices. Environmental modelling & software. 114. pp.29-
39.
Xiao, Q., Liu, H. and Feldman, M., 2018. Assessing livelihood reconstruction in resettlement
program for disaster prevention at Baihe county of China: Extension of the
impoverishment risks and reconstruction (IRR) model. Sustainability. 10(8). p.2913.
Zheng, Y. and et.al., 2019. Perovskite solar cell towards lower toxicity: a theoretical study of
physical lead reduction strategy. Science Bulletin. 64(17). pp.1255-1261.
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