The assignment covers various financial aspects and terms applied in daily business operations. It includes stock analysis, taxation liability, ratio analysis, and funding analysis.
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Running head: FINANCIAL MANAGEMENT Financial Management Name of the Student: Name of the University: Author’s Note:
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1FINANCIAL MANAGEMENT Executive Summary The aim of the assignment is to cover various financial aspects and terms which are applied by us in the daily business operations. The financial terms covered by us include the aspect of stock analysis with various probability functions, computation of taxation liability of a firm, ratio analysis of a firm and a funding analysis for an entity. Various financial axioms and evaluation of the factors affecting the international operations of a firm was also discussed by us in the due course of assignment.
2FINANCIAL MANAGEMENT Table of Contents In Response to Question 1..........................................................................................................2 In Response to Question 2..........................................................................................................2 In Response to Question 3..........................................................................................................3 In Response to Question 4..........................................................................................................4 In Response to Question 5..........................................................................................................6 In Response to Question 6..........................................................................................................7 References................................................................................................................................10
3FINANCIAL MANAGEMENT Introduction The assignment would be covering various aspects of the finance in terms of the taxation liability, stock analysis, evaluating financial position with the help of ratio analysis for the firm. Various aspects of risk and return in terms of diversification in the portfolio was also taken into consideration while evaluating the financial performance of a portfolio. There are various business and macro-economic considerations which are taken into analysis while deciding upon the international operations of a firm and the same was discussed in the assignment. Discussion Tax Analysis a) The corporation tax liability was calculated with the help of the tax rates given and after including the additional surtax amount that will be paid. The taxable amount for the corporation was around 17,660. Tax RateCorporate Tax RatesTaxable Amount ($)Remaining Amount ($) 15%$ 0–$50,00075001175000 25%$ 50,001–$75,00062501150000 34%$75,001–$10,000,0003,9100 35%over $10,000,000-- 17660Total Tax Liability b) Sources of revenue generation is primarily from the taxation charged on the income earned and is the key source for the purpose of generating income for the purpose of various developments and operational activities carried on by the government. The social and economic objectives of the government in the case of all round development of the economy
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4FINANCIAL MANAGEMENT is also important. Key factors of the economic activities are the tourism industries, fisheries, forestry and agriculture are some of the key areas where the government has to spend additional effort. Social Aspects for the government could be in the form of land tenure security, giving access to basic securities and proper governance structure are some of the key areas where the government has to give additional focus (Hamilton and Webster 2018). Stock Analysis a) Return and risk factor for Stock A and Stock B was calculated with the help of the probability factor for each of the possible values generated by the stock and the cumulative value of the stock on an overall basis. The risk and return analysis could be done by examining the probability of each factor as follows: Common Stock ATotalCommon Stock BTotal Probabilit y Retur n Retur n (%) Probabilit y Retur n Retur n (%) 0.212%2%0.14%0% 0.518%9%0.36%2% 0.327%8%0.410%4% 0.215%6% Total Return from A20%Total Return from B12% Standard Deviation2.92%Standard Deviation1.48% b) Diversification is an important perspective when analysing about the various factors in perspective of the stocks and other asset classes. Diversification in the field of equity, debt funds, cash and cash equivalents would be helping the investor diversify the risk return based from the various asset class that are associated with the portfolio perspective. Equity on the other hand has a higher risk return basis on the other hand the debt fund has a moderate risk to lower risk and moderate return for a portfolio. Thus, diversification in more than one stock or asset class does not only remove the unsystematic risk which is associated with investment
5FINANCIAL MANAGEMENT but also gives an hedge to the investor in contrast to the various macro and business factors directly associated with the stock investment (Briere, Oosterlinck and Szafarz 2015). Financial Analysis a) The net funding requirement would be based by taking the base value of sales for the year 2001andtheassociatedassetandliabilitieswithapercentageofthesame.After incorporating with all the changes in the value of assets and liabilities of the company, the difference amount created in the liability side of the balance sheet would be taken as the borrowing amount. The difference amount that was calculated was around 2.25 million and the same would be financed with the help of borrowing that would be done by the company (Von Gaudecker 2015). b) The net funding amount for the company would be strictly based on the difference amount found in the liability side of the balance sheet of the company. The additional funding determinedfor the company would be helping the company in generating significant operational activity for the company. Financial risk and the business risk are the two important perspective that should be taken into view while analysing the financial position of the business. Ratio Analysis a) The ratio analysis for the McDonalds Corporation was done for assessing the financial position and financial performance of the company for the year 2016. Profitability, liquidity and activity ratio were some of the common ratio’s that were analysed and the same were compared with the help of the industry norms.
6FINANCIAL MANAGEMENT Ratio Analysis in the books of McDonald's Corporation
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7FINANCIAL MANAGEMENT ParticularsAmt Current Assets1143 Current Liabilities2985 Current Ratio (Current Assets/Current Liability)0.38 Cost of Goods Sold6537 Inventory71 Inventory Turnover Ratio (COGS/Inventory)92 Sales 1150 8 Accounts Receivable484 Accounts Receivable Turnover (Sales/Accounts Recvble)24 365 Days365 Accounts Receivable Turnover24 Average Collection Period (365/Accounts Receivable Turnover)15.35 Total Liabilities9310 Total Assets 1824 2 Debt Ratio (Total Liabilities/Total Assets)0.51 Sales 1150 8 Total Assets 1824 2 Total Assets Turnover (Sales/Total Assets)0.63 Sales 1150 8 Fixed Assets 1496 1 Total Fixed Assets Turnover (Sales/Total Fixed Assets)0.77 Operating Profit2794 Sales 1150 8 Operating Profit Margin (Operating Profit/Sales)24% Net Profit1642 Total Shareholder's Equity8852 Return on Common Equity (Net Profit/Equity Shareholder's)19%
8FINANCIAL MANAGEMENT b) The future sum of the $5000 was calculated with the help of the compounding rate of 6% annual interest rate that would be added to the principal value for a sum of 5 years and the formula applied is as follows: Future Value = Present Value (PV)*(1+r)^(n) Future Value = 5000*(1+0.06)^5 Future Value = $6691.13 c) The Economic Order Quantity or the EOQ level was determined with the help of the formula as follows: Economic Order Quantity (EOQ Level) Quantity (Q) SQRT((2*DS)/ H) Where; Q = EOQ Units D = Demand in Units S = Order Costs (per purchase order) H = Holding Costs (per Unit, per year) Where Demand250000 Order Cost100 Holding/Carrying Cost10 Quantity (Q)2236 Average Inventory1000 International Finance International operations for a business are dependent on various business factors and macro-economic factors for a company. There are various techniques and strategies that needs to be deployed for managing and mitigating the operational, investment and financing risk associatedwith the operationsof a business (Hamiltonand Webster2018). The
9FINANCIAL MANAGEMENT associated risk for a business can be in the form of fluctuating currency value, GDP growth rate, inflation rate, interest rate and political/legal environment where the operations of the company is based. Risk management for the company can be done in the form of various strategies that will be deployed by the company for managing the risks associated with the overseas investment. Deployment of foreign currency hedging tools like futures, options and swaps can help mitigate the currency, interest and other macro-economic factors for the company. On the other hand side political/legal factors can be better managed and overseen with the help of the analysis of the factors affecting the operations and the financial performance of the business (Charles, Schmidheiny and Watts 2017) The risk associated with the forex risk can be better explained with functional currency and the reporting currency of a company. Functional currency is the currency where the operations of the company is majorly carried out by the company and the reporting currency is the currency where the company is actually based and is the reporting currency for the purpose of preparation of the financial report of a company (Avdjiev, McCauley and Shin 2016). Financial Axioms 1. Risk- Return Trade- Off:The risk return trade off can be well associated when an investor selects the return required from an investment along with risk that would be inherited with the same. Risk and return trade-off could be better understood as the point where the return for an investor gets maximised with the lowest possible return (Duffie and Wang 2016). 2.Time value of money:The concept of time value of money says that the value of money today is worth more than the same available at a future date. The same can be well explained
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10FINANCIAL MANAGEMENT with the help of loss of potential value of a money with rising i8nterets rate and inflation rate in the economy (Talmor 2018). 3. Cash is King:Liquidity is one such factor that ensures that the operations of the business are carried out well with the help of theadequate cash that is maintained that by the company. Adequate cash ensures that the operations of the company are carried out well and the company is able to pay off with the current obligations of the company on a timely manner (Chambers, Echenique and Saito 2016). 4. Incremental Cash Flows:The incremental cash inflows can be in the form of higher earnings for the company and the same could be well because of the higher revenue or optimum utilization of resources for the company thereby reducing the cost for the company (Chan and Rate 2018). Incremental cash outflows for the company on the other hand could be in the form of higher initial investment or the costs associated with the project that the company pays while associated with the project and the same increase the overall total cash outflows for the company. Thus incremental cash flows for a company can be both on the basis of cash inflows and cash outflows for a firm depending upon the situation and the factors associated with the project. 5. Agency Problem:Agency problem arises usually when there is a problem between the shareholders and the management of the company and the same can be because of the operational and investment activities carried out by the management of the company (Hamza and Jedidia 2017). Agency problem can also be related as a conflict between the shareholders and the management of a company. However, the solution for the same is when the management of the company carries on activities in accordance with the policy of the company.
11FINANCIAL MANAGEMENT 6. Tax Biased Business Decisions:Taxation plays an important role when assessing the overall profitability of a company. It has been observed that various business and investment decisions are made by corporates and entities that help them save taxes and the same can be in the form of tax deductible expenses which are on a cash and non-cash basis (Oni and Letier 2016). 7. All Risk is not equal:Business Risks and Financial Risks are the two main form of risks that can significantly affect the performance and the financial position of a company. Business risks can be in the form of slowdown in revenue, higher or rising costs, increased competition, changing business laws and regulations and overall economic scenario. On the other hand the financial risk of a business is associated with the level of debt a company has on the financial statement of the company. Financial risk should be at a very minimal risks and the same is associated with debt of a company and the associated interest that the company pays (Robinson and Sensoy 2016). 8. Ethical Dilemmas in Finance:Ethics in finance can be in the form of socially responsible and an aware investor who is aware of the changing financial scenarios and the associated rules and regulations of an investment. There are several ethical rules and guidelines that help the investors in the way and procedure for investment (Sadgrove 2016). 9. Curse of Competitive Market:The curse of competitive market can be in the form of the higher or rising competition and the associated effects the same has on the financial performance of a company and the overall business and market environment (Kim et al., 2016). High competition between the firms could be well observed where there is high fixed costs involved and sellers reduces the quality or the prices of the product in order to sustainable in the business thereby affecting the business or consumer market.
12FINANCIAL MANAGEMENT 10. Efficient Capital Markets:An efficient capital market is one where new information in relation to the asset prices are quickly adjusted in the stock price of a company and the same says about the efficiency of the market in reflecting news and updates in the value of the asset showing efficiency of the capital markets (Mahto and Khanin 2015). Conclusion Various financial terms and points were considered and discussed while doing the assignment and the application of the same in the every aspect of business operation was well observed. From stock financial analysis to firm’s financial position various factors and aspects were taken into analysis for evaluating the financial position of an entity. There were some common financial axioms which we also discussed in the assignment which are applied in the due course of business.
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13FINANCIAL MANAGEMENT References Avdjiev, S., McCauley, R.N. and Shin, H.S., 2016. Breaking free of the triple coincidence in international finance.Economic Policy,31(87), pp.409-451. Briere, M., Oosterlinck, K. and Szafarz, A., 2015. Virtual currency, tangible return: Portfolio diversification with bitcoin.Journal of Asset Management,16(6), pp.365-373. Chambers, C.P., Echenique, F. and Saito, K., 2016. Testing theories of financial decision making.Proceedings of the National Academy of Sciences,113(15), pp.4003-4008. Chan, K. and Rate, E.A.I., 2018. & 6 The Time Value of Money.Financial Management. Charles Jr, O.H., Schmidheiny, S. and Watts, P., 2017.Walking the talk: The business case for sustainable development. Routledge. Duffie, D. and Wang, C., 2016. Efficient Contracting in Network Financial Markets. Hamilton,L.andWebster,P.,2018.Theinternationalbusinessenvironment.Oxford University Press. Hamza, H. and Jedidia, K.B., 2017. Money Time Value and Time Preference in Islamic Perspective.Turkish Journal of Islamic Economics,4(2), pp.19-35. Kim, J.B., Li, L., Lu, L.Y. and Yu, Y., 2016. Financial statement comparability and expected crash risk.Journal of Accounting and Economics,61(2-3), pp.294-312. Mahto, R.V. and Khanin, D., 2015. Satisfaction with past financial performance, risk taking, and future performance expectations in the family business.Journal of Small Business Management,53(3), pp.801-818.
14FINANCIAL MANAGEMENT Oni, O. and Letier, E., 2016, March. Optimizing the incremental delivery of software features underuncertainty.InInternationalWorkingConferenceonRequirementsEngineering: Foundation for Software Quality(pp. 36-41). Springer, Cham. Robinson, D.T. and Sensoy, B.A., 2016. Cyclicality, performance measurement, and cash flow liquidity in private equity.Journal of Financial Economics,122(3), pp.521-543. Sadgrove, K., 2016.The complete guide to business risk management. Routledge. Talmor, E., 2018. Private equity: Rethinking the neoclassical axioms of capital markets.The Journal of Alternative Investments,21(2), pp.10-15. Von Gaudecker, H.M., 2015. How doeshousehold portfoliodiversificationvary with financial literacy and financial advice?.The Journal of Finance, pp.489-507.