Managerial Finance Report: Analysis of Corporate Finance Topics

This report provides an analysis of several key topics within managerial finance. It begins by examining the growing prevalence of non-financial performance metrics in annual incentive programs, discussing how companies are using financial and non-financial metrics to evaluate executive performance. The report then delves into corporate dividend policy, specifically in the tax-free environment of the UAE, and analyzes how financial executives make decisions regarding dividend payouts. Next, the report explores the perspectives of Middle Eastern financial managers, comparing their approaches to capital budgeting, capital costs, capital structure, and corporate governance with those of their European and North American counterparts. The report also investigates how CFOs make capital budgeting and capital structure decisions, examining the use of academic theory versus practical application. Finally, the report concludes with a discussion of various valuation techniques, including balance sheet analysis, income statement multiples, and discounted cash flow methods, highlighting their importance in evaluating a company's financial performance.

Running head: MANAGERIAL FINANCE
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Name of the student
Name of the university
Author Note

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Discussions
Topic 1: Annual incentive programs: nonfinancial performance metrics grow in
prevalence by Steve Sabow
The article discusses the importance of incentives and rewards received by the employees
for the achievement of goals in a short period. The financial and non-financial performance
metrics are used to evaluate the performance of the executives based on government laws and
disclosures. The financial metrics are net income, earnings per share and pre-tax net income. The
non-financial metrics are the cost control, safety and customer satisfaction. The Hay Group 300
analyse the statements of proxy used by 300 US-based companies, to discover the performance
metrics used by these companies in evaluating their incentive plan. Among them, 98 per cent
revealed the performance metrics used by their company to assess the incentive plan in 2011.
About 91 per cent of the Hay Group 300 also disclosed the form of performance metrics used.
The most common earning standards were profits, pre-tax net income, earnings, operating
revenue and earnings per share (Sabow and Wise, 2014). However, earnings per share consider
the most commonly used metrics for the short-term incentive plan. The results from the Hay
Group 300 indicates the performance of the financial metrics, is either constant or declining
whereas, the non-financial metrics are increasing. The result shows that around 95.9 per cent of
the Hay Group 300 companies used two or more than two measures in their performance metrics.
While 65.5 per cent, which is almost two-third used four or more rules in their parameters
(Schmidt and Reda 2017). The findings of this study are to continue the use of financial
performance measures and increase the use of non-financial measures in the short-term or annual
incentive plan.

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Topic 2: Corporate dividend policy in practice: Evidence from an emerging market
with a tax-free environment
This article talks about the analysis of the dividend policy, practised in the emerging
market of the tax-free climate of the UAE. Dividend policy is basically, the guidelines set by the
company to pay out the earnings to its shareholders. This article states many theories related to
the payment of cash dividends by the company to its shareholders, but no theory explains why it
is done so. The author mainly follows the Brav et al. (2005) payout policy and examines the
issues that arose in the United Arab Emirates (Floyd, Li and Skinner 2015). This policy
investigated the decisions given by the financial executives on the dividend policy and
repurchasing shares of the publicly UAE listed firms. The main motto of this article is to
examine the dividend policy and issues related to it in a corporate tax-free environment of UAE.
Further, no tax is applicable on the personal income of the individual that includes dividends.
The market of UAE is characterised as more volatile and less information efficient. This paper
exhibits the more substantial financial constraints and the effect of dividend policy in developed
markets on the firm. The study conducts an actual survey that explains the interview conducted
from managers of twenty-eight companies that found the dividend policy to be sticky and
targeted the payout ratio for a longer term. The result of this study shows that dividend payout
policy is conservative. It is necessary to pay dividends to the shareholders to retain earnings in
the company. It is seen the Chief Financial Officers are reluctant towards decreasing the profits
of the company and they use the old dividend pay-out system to determine their dividend policy.
When it comes to the US, it is seen that the Chief Executing Officers are less constrained
towards their dividend policy. The non-dividend payers in the US, are reluctant to pay dividends
because they think that once the payment of dividend is started, their operation in the inflexible

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payers’ world in compulsory (Ahmed 2015). The managers in the UAE considers payment of
dividends as the residual cash flow. The profits are taken into account after all the investments
decision are made in the UAE. Whereas, it is vice-versa in the US. The taxes are not considered
necessary in the scrutinising the determinants of dividend payout policy in UAE. In the US,
repurchase is the residual cash flow while in UAE, it is not generally known. However, this
study still raises questions about dividend policy determinants. It highlights the importance of the
cultural and the institutional environment in the determination of the payout policy.
Topic 3: Theory versus practice: perspectives of Middle Eastern financial managers
by Abdelaziz Chazi Paulo Renato Soares Terra, and Fernando Caputo Zanella
This article presents a unique survey conducted to examine the aspect of the business
managers about the financial decisions set in the Middle Eastern region. Their answer is used to
compare both the economic theory and its practices with the European and North American
peers. It analyses their prospect related to their firm's capital budgeting, capital costs, capital
structure and corporate governance. This article uses the questionnaire format of Graham and
Harvey, which is also used with the two additional questions on corporate governance (Bodnar
2019). It discusses the administration in six different Middle Eastern countries (Kuwait, Bahrain,
Saudi Arabia, Oman, UAE and Qatar). The survey also contains an additional question about the
Islamic law and its impact on corporate finance using financial instruments. This study surveys
the different economic aspects of cost of capital, capital budgeting, corporate governance and
capital structure. The Chief Financial Officers were interviewed in regards to the use of Islamic
financial instruments. Four hundred seventy-nine questionnaires were sent, out of which only 38
were received with a resulting 7.9 per cent return rate. The net present value (NPV) and the
internal rate of return (IRR) are the most preferred methods for capital budgeting. This result is

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similar to the survey of North America but somewhat different from that of the European study.
According to the surveyed data of 38 CFOs, they preferred a single discount rate in the company
instead of the country-specific rate with regards to the cost of capital. This result is also similar
to the previous one in the case of the survey in developed countries. Most of the CFOs from the
Gulf preferred the adjustment of either the cash flow or the discount rate for evaluating the risks
in the project (Gümüsay 2015). Most of his survey focuses on capital structure, where the firms
in the Middle East countries finances 20 per cent of the total assets with the long-term debt
whereas the firms in the US finances 30 per cent only. The survey shows that risk management
was the most critical factor that affects the choices between the long-term and the short-term
debts. Murabaha is considered to be the most important financial instruments in Islam. However,
the overall result of the survey shows that corporate finance practices are almost similar among
the CFOs in the Middle East, North America and Europe. It also indicates that corporate finance
activities do not affect the Arab Gulf countries culturally.
Topic 4: How Do CFOs Make Capital Budgeting and Capital Structure Decisions?
by John Graham and Campbell Harvey
In this article, a survey is conducted to analyse the financial practice of capital structure
and capital budgeting at the corporate level in the present scenario. This survey result identifies
the importance of organizational theory and its methods. The other companies recognise the
aspects; observe it and modify it to operate. A survey was conducted through primary research
where around 4440 companies participated, and 392 complete responses were received. The
questionnaires contained about 100 questions that deal with the importance and implications of
capital budgeting and capital structure. The decisions were taken based on the responses that
help in examining the interrelations of these two corporate policies. This survey helps in

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understanding and analysing the decision making process by the responses received from CFOs.
The study exhibits the relationships that exist between the managerial factors and financial
choices. The results of the survey contrast on both these aspects. The survey results show that
academic theory is followed in many companies concerning capital budgeting. It uses the
techniques of net present value (NPV) and discounted cash flow (DCF) for the evaluation of
capital budgeting in new projects (Erel, Myers and Read 2015). However, in the case of capital
structure, the companies pay more attention to the practical aspects of decision-making rather
than on the finance theory.
Further, this article discusses that corporate finance practices affect the decision of the firm
because of their size. Large companies are likely to use the NPV to take corporate decisions
while smaller companies rely on the criteria of payback. From the survey conducted, it is
observed that NPV is the most essential and commonly used factor in making corporate
decisions and project evaluation. The credit ratings and financial flexibility are the two natural
factors that analyse the assessment of capital structure in settlement of debt policy. The
companies were reluctant to use the EPS to value equity and thus, avoided EPS dilution. The
findings also show the importance of the degree of undervalued stock for the issuance of equity.
Most of the CFOs can feel the undervaluation of equity and find it difficult to protect corporate
accounts from dilution. Moderate evidence was collected which shows that the trade-off capital
structure theory is less followed (Graham, Harvey and Puri 2015). The results show the
importance of financial flexibility and undervalue equity in taking business decisions. The study
reflects the acceptance of the two financial theory in corporate decision-making, but at the same
time, a further modification is needed to reflect the observance in the corporate practice.
Topic 5: Valuation Techniques by Nick Mansour and Alexander Tauber

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This article talks about the importance of valuation techniques and their different
categories. An investor or an entrepreneur needs the valuation techniques at the time of growing,
purchasing or selling an on-going business or at the time of starting a new business. The
financial performance of any company is evaluated by the three categories of valuation
techniques (Easton and Sommers 2018). Firstly by analysing the balance sheet. Secondly through
multiples of the income statement. Thirdly, through the discounted cash flow. These techniques
will yield a value range that is beneficial in negotiation. According to the accounting principles,
the balance sheet is calculated by deducting the values of total liabilities from the total assets.
The balance sheet valuation is a medium to estimate the worth of the assets of the company and
the three techniques involved are the book value, the adjusted book value and the liquidation
value. The book value is the easiest way of valuation and is used very rare by the companies for
calculating the final transaction price. The adjusted book value is a technique of improving the
accounting values of the entity with its market value. It assumes that the company is an ongoing
concern and the benefits of the assets and the liabilities are taken approximately. The liquidation
value is the estimated value of the total assets and the obligations of the company. It takes into
consideration that the company will auction its holdings if it ceases operating. The income
statement valuation is a technique that is used to value an entity by taking advantage of its
earnings. The use of EBIT and EBITDA are the two important measures that generate business
potential. The discounted cash flow is a valuation technique to determine the investment value
based on the future cash flow of a business. There are four steps of the discounted cash flow
technique, and they are as follows. The first step is the projection of the cash flow. Second is
selecting the discount rate. The third is the derivation of the terminal value at the end of the
expected cash flow. Fourth and the final step is to obtain the projected cash flow by applying a

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discounted rate (Christersson, Vimpari, and Junnila 2015). From the above, it can be concluded
that the income statement multiplies and the discounted cash flow are the two methods that are
used frequently to determine the valuation of any entity or an organisation. The valuation is an
essential skill that one can achieve through practice and experience.
Topic 6: Company Valuation in Mergers and Acquisitions: How is Discounted Cash
Flow Applied by Leading Practitioners? By W. Todd Brotherson, Kenneth M.
Eades, Robert S. Harris, and Robert C. Higgins
This article analyses the application of the discounted cash flow method in the various
valuable enterprise by conducting interviews with leading investment banks. The firm spends a
significant amount on the mergers and acquisitions. The managers face several challenges while
estimating the value of the firm in the merger and acquisition process. Hence, for this, they use
the discounted cash flow technique to measure the firm’s value. This article highlights the
different DCF techniques used by the practitioners in the leading investment bank for business
valuation. These practitioners represent both the sellers and the buyers as they are the financial
advisors of their company and have the experience in the mergers and acquisition of the
company. The DCF framework is an essential technique for the valuation of any business. The
finance theory and its academic use are aligned across the banks (Nelson 2018). This study
focuses on the application of the DCF framework model in vivid transactions across the context
of mergers and acquisitions in the business. Future research shows the different features that put
a light on the valuation approach of the company. The resultant outcome is different due to the
difference in incentives. The banks estimate the discount rate in the financial markets under the
investor's alternatives. The practitioners or the advisors control the standard financial framework
for assessing the target of the capital costs of the firm. The data is used by comparing different

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firms in the commercial market. The variation in data and discount rates is adjusted according to
the size of the firm, and this affects the valuation policies of the practitioners. The application of
DCF in the valuation of mergers and acquisition is to consider an art where different
practitioners use theoretical as well as practical concepts to derive the actual information
available. The practitioners use different evaluation method to deal with uncertainty in the
estimation values. The investment banks before taking decisions, evaluate the issues that arise
due to the valuation of the sum of parts for the multi-business firms. The practice includes the
process and its implementation in a detailed assessment. The cost of collaboration is challenging
in the merger and acquisition of any firm (Loukianova, Nikulin and Vedernikov 2017). For this
uncertainty, the discounted rate should be the same for all the cash flows. This step taken is not
the same for every bank. Therefore, it can be concluded that the discounted cash flows are not
the only mean to make decisions. It is a very challenging task for these analytic techniques to put
the monetary values in the discounted cash flow in complex organisations.
Topic 7: Top 8 Ways Companies Cook The Books by Rick Wayman
In this article, the author discusses the principal ways by which companies use fraudulent
activities to manipulate financial statements. The article discusses the different money
manipulation method to get alert in the future if the dishonest prevails. Every company use the
tactics for managing the numbers for achieving the budgets and receiving the bonuses. The
factors for fact misrepresentation includes desperation, greed, immortality and lousy judgment
(Panguluri Nelson and Wyman 2017). All of these factors lead to corporate fraud. Few
companies that cooked the books are Enron, WorldCom and Adelphia. These companies not
only changed the rules but take the misrepresentation to the extreme level. WorldCom and Enron
are the companies that claimed to have billions in assets.

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Nevertheless, once they were exposed, all their claims were false, and they were
bankrupt. To protect the companies from the fraudulent disaster, one needs to learn the money
manipulation method. It will help in getting alert to the fraudulent companies that are cooking
the books. The different signs are accelerating revenues, accelerating the expenses that precede
an acquisition, delaying expenditures, non-recurring costs, pension plans, other costs or incomes,
synthetic leases, Off- Balance sheet items and the bottom lines. The two ways to accelerate the
revenues are as follows (Hussein, Kasim and Arumugam 2015). Firstly, a large sum is paid as
current sales at the booking of the services that will be provided later over a few years. Second is
channel stuffing where a fraudulent practice use to inflate figures of sales and earnings.
Here, more products are sent forcefully to the retailers than required in the distribution
channel and consider them sold. The expenses of the company that is to be acquired should pay
all the costs before the merger. Both the entities share the earning per share after the merger. The
delaying in expenses is also another tactic used in falsifying the figure in the balance sheet. The
non-recurring costs are the extra expenses taken by the company to incur every year. The other
expense or income is the tactics where the companies hide their expenses and investments that
are committed to selling equipment. The pension plan is the investment of the company in the
name of gain. If this grows fasts, it will be recorded as revenue for the company. There are
tactics used by the company where the parent company do not put the financial statement of their
subsidiary unit by creating a separate legal business entity. A synthetic lease is a long-term lease
of five to ten years that keep the record of the new building away from the appearing on the
financial statements. The bottom line is the manipulating of the items and hiding them from the
company’s financial statements.

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References
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Business Research, 5(2), pp.73-85.
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