Finance in Action: Managerial Did you ever stop to think about the importance of

Question

Finance in Action: Managerial

Did you ever stop to think about the importance of the finance function for a successful, multinational company (i.e, McDonalds, Apple, Johnson & Johnson, etc)? Someone has to manage the cash flow, bank relations, payroll, purchases of plant and equipment, and the acquisition of capital. Economic variables, such as gross domestic product, industrial production, disposable income, unemployment, inflation, interest rates, and taxes (to name a few) must fit into the financial manager’s decision model and be applied correctly. Is the company being run for the benefit of stockholders or top management? Based on key concepts learned in this Business Finance class, please explain finance concepts that businesses have to overcome in the area of financial statements (balance sheets, income statements, and the statement of cash flows), retained earnings, shareholders’ equity, depreciation, and historical/replacement cost. Please include at least two (2) of the following in your discussions and explain how they affect the financial process.

Capital Budgeting Techniques (decision making: replacement, expansion, post-audit, net present value, mutual exclusive projects, payback periods, etc.)

Project Cash Flows and Risk (cash flows, project evaluation, replacement analysis, acceptance/rejection of the project)

The Cost of Capital (components costs of capital, cost of debt, cost of retained earnings, and weighted average cost of capital)

Explanation / Answer

A company has to perform various operations in its day to day working and has to take many financial decisions. If the company is a multinaitonal company with operations in various different countries then this task gets more complicated as there are many deifferences in the economical condition of different countries and there is an involvement of foreign exchange.

While expanding in other country, the most important decision that a company has to made is of capital expenditure involve in the expansion program. The investment amount is quite high and the risk associated with the project is also high and is normally irrecoverable without a substantial loss. So, while analysing the decision of expanding in other country, a company has to do through investigation on potential of business and after evaluation of profitability, the expansion should be done. For analysing capital budgeting decisions, ther are various emthods which a company may consider. Some of the main methods of analysis a project is to calculate NPV, IRR or payback period.

Only if the results derieved by the analysis is positive and show that it is worthy to take additional risk, the decision to expand or not must be made.   

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