The Role Of Finance And Its Effect On Portfolios, Managing Portfolio Risks And Tax Liabilities

Identify three fundamental types of decisions that financial managers make and identify which part of the balance sheet each of these decisions affects.

1)Capital budgeting
: Capital budgeting is the decision which is important in long-term. In a business, it is required to asses and evaluate potential capital or investments. That would leads a company to have maximized benefits. Building new facilities or expanding a training program are one of the examples. Long-term assets is categorized as this type of fundamental decision in balance sheet.

This step involves short and long term debt equity analysis. The proportion of equity capital depends on the possessing and additional funds will be raised. The choice of the source of funds the company has are the issue of shares and debentures, loans to be taken from banks and financial institutions and public deposits to be drawn in form of bonds. The choice will depend on relative merits and demerits of each source and period of financing. The management of the investment funds is key in allocating that the funds are going in the correct place. The profits that are made can be down in two ways dividend declaration which includes identifying the rate of dividends and retained profits in which the volume has to be decided which will depend upon expansion and diversification of the company. The management of cash is another important function. Cash is needed for all different aspects of the company such as payment of salaries, overhead and bills. All of these are important in a company and how successful the financial aspect is going to be.The financial management practices include capital structure decision, investment appraisal techniques, dividend policy, working capital management and financial performance assessment. A company needs to have well financial in order to be successful. “A company that sells well but has poor financial management can fail.” (Johnston)

Advantages- Less liability for stakeholders. Ability to raise funds/capital in the form of stocks as needed.

b) The decision to invest in projects increases the shareholders value of the company. This is consistent with the growth and from the NPV criteria, positive NPV of projects increases the shareholder's value.

Such an intense focus has been placed on quarterly earnings as an indication of a company’s success by everyone from analysts to executives that ethics have for the most part been thrown out the window, sacrificed to the all important number, i.e. earnings per share. This is the theory in Alex Berenson’s book “The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America.” This number has become part of a game to be played, a figure to be manipulated – beat the number and Wall Street all but throws a parade, miss it and a company’s stock may be abandoned. Take into account the incentives that executives have to beat the number and one can find plenty of reasons to manage earnings.

Managing a company’s operations, marketing and sales activities and expense management are but a few of the decisions that management has to deal with. After it has made a profit the company will then need to decide what to do with those profits. Among the options for using profits are: operations, returning cash to shareholders, or keeping cash in reserve for future use

Importance: this gives us a picture of a firm that how perfectly they are using the money from shareholders to bring profits and grow the company.

The dividends to Kennecott equal to the difference between Carborundum’s net income after adjustment and the profit retention. The methodology Kennecott’s management team used to determine the value of Carborundum to Kennecott was evaluated using an incorrect set of cash flows. First, it subtracted out the profit retention requirements needed to support Carborundum’s growth even though Kennecott would own the full equity in Carborundum, which is incorrect. Second, depending on the method used to value the company, the relevant set of cash flow is needed to be determined, either the free cash flow to the firm or the free cash flow to equity.

If the financing of the project comes partially from issuing debt and cash infusion from the owners, the available cash will increase without as much interest expense. This will cause the company books to look bad because of lower EPS, however the company will have a choice not to pay dividends if necessary rather than being bound to pay interest expense.

Management is willing to vary their investment (investing less) as well as issue more stock. This is not against their policy. But the management would not be willing to borrow more as their borrowing policy is limited to 40% debt to equity ratio.

According to the CAPM model:R_i=α+βR_m+ε, α represent the abnormal return gained by the portfolio. If the market is efficiency, the α has to be zero.

The dividends that stockholders receive and the value of their stock shares depend on the business’s profit performance. Managers’ jobs depend on living up to the business’s profit goals.

This essay will begin to look at the main financial statements used by decision makers in businesses today. This essay will go into detail about the income statement and statement of financial position and whether these two statements provide decision makers with their financial information adequately. This essay will also include the various advantages and disadvantages of each financial statement as well as describing whom the decision makers are and why financial statements are important to them. A conclusion will be present at the end of this essay to demonstrate an overall view of whether financial statements are beneficial to decision makers.

According to Hall et al., (2000) and Schmid (2001) (as cited in Paul et al., 2007, p. 10), they found out that at the stage of development, businesses are informationally opaque which means the information is not transparent to public. At the same time, the start-up firm’s assets are often intangible and knowledge-based. So, if compared to the opportunities in the public companies, investors in the start-up work with less historic performance data on which investment judgements can be based. Again, the researches mentioned that the firms prefer internal to external finance when the external funds are necessary. It can be clearly understood that the firm prefer debt to equity finance. This hierarchy stems from information asymmetry between managers and investors with the results that, in attempting to raise external capital, investors will face an adverse selection problem and demand a premium that raises the required rate of return on external capital. At this point, the firms are definitely better off with the internally generated funds. The overall impact of information asymmetry is that external financing may carry a substantial investment premium (Jovanovic, 1982; Storey, 1994 as cited in Paul et al., 2007, p. 11). So, debt is preferable to equity finance due to the less risky

The Great Reversal is a compelling paper written by Raghuram Rajan and Luigi Zingales exploring the facilitation of financial systems in financial development. The paper asks the question; why financial systems have appeared to be repressed despite the correlation between financial systems and financial development. The paper explains that historically not all countries have pursued policies that have encouraged financial development, it develops a political and social theory which explains how