Strategic Financial Management MCOP302- Synetic Business School

On the basis of the afore said three types of proposals a planner should evaluate each one of them by making within group comparison in the light of capital budgeting exercise. Whereas this ratio in its ideal form varies from industry to industry. It also depends on the planning mode of the organization under study. https://1investing.in/ No organization can run an existing business and promote a new expansion project without a suitable internally mobilized financial base or both internally and externally mobilized financial base. The SM lay down the path for moving from present situation to the destination and develops the overall policies.

It shows how the company is worth for every one rupee of shareholders money employed as capital in the company. An MB ratio of more than one means the company has added more value to shareholders than the capital contributed by them and vice versa. EVA can also be referred to as economic profit, and it attempts to capture the true economic profit of a company. It takes into consideration the risk factor and time value of money as the current present value of any particular course of action is measured.

C) The stock price resulting from the Gordon model is hypersensitive to the growth rate chosen. Parameters are the baselines or boundaries for the financial model. For example, the level of debt may have a minimum and maximum value. We also will set our beginning account balances within the financial model. One simple approach to forecasting is to setup a model that relies on averages from past historical data.

To do this, he’ll need to calculate his company’s operating cycle. This means the cycle would start when he began paying for the goods, materials and ingredients used to make various pastries and baked goods. His bakery’s operating cycle wouldn’t end until all of his baked goods have been sold to customers and he’s received cash from his sales.

Operating Cycle Concept:

Corporation valuation is a process and a set of procedures used to estimate the economic value of an owner’s interest in a business. Valuation is used by financial market participants to determine the price they are willing to pay or receive to perfect the sale of a business. The longer the planning period, the more inaccurate the If we need to increase reliability in forecasting, we should consider a shorter planning period. The planning period depends upon how often existing plans need to be evaluated.

On the basis of interviews with corporate executives, Lintner concluded that firms select target payout ratios to which they gradually adjust actual dividend payments over time. The cash account and the reserve account of a company will be reduced when the cash dividend is paid. Thus, both the total assets and net worth of the company are reduced when the cash dividend is distributed.

Even the comparison becomes difficult if the number of alternatives increase and sometimes it also gives erroneous result under such situation. The dividend discount model is a way of valuing a company based on the theory that a stock is worth the discounted sum of all of its future dividend payments. In other words, it is used to value stocks based on the net present value of the future dividends. ” It is named after Myron J. Gordon who originally published it in 1959, although the theoretical underpin was provided by John Burr Williams in his 1938 textThe Theory of InvestmentValue. The equation can also be understood to generate the value of a stock such that the sum of its dividend yield plus its growth equals the investor ‘s required total return. The dividend discount model values a firm at the discounted sum of all of its future dividends, and does not factor in income or assets.

Hence OTC traded options are not bound by strict expiration date, specific limited strike price and uniform underlying asset. Since exchange traded options are guaranteed by the exchanges, hence they have less risk of default because the deals are cleared by clearing houses. As an example, if you live in the U.S. and invest in a Canadian stock in Canadian dollars, even if the share value appreciates, you may lose money if the Canadian dollar depreciates in relation to the U.S. dollar.

A business has a choice to select between short-term vs. long-term sources of capital. Normally, the short term funds are cheaper to long-term but risky. Short term funds are risky in terms of risk of refinancing and risk of rising interest rates.

The resulting number is the number of days in the company’s operating cycle. Although the importance of working capital is unquestionable in any type of business. Working capital management is a day to day activity, unlikecapital budgetingdecisions. Most importantly, inefficiencies at any levels of management have an impact on the working capital and its management.

Financial Planning is a continuous process that flows with strategic decision making. The Operating Plan and the Financial Plan will both support the Strategic Plan. The best place to start in preparing a budget is with sales since this is a driving force behind much of our financial activity.

Start with Strategic Planning

In the year, ECIL suffered a loss of Rs.60 crore and had to be reported to the BIFR. But the most important of them all are equity capital, debt eva is used to measure the firm optimum value through capital, and specialty capital and sweat equity. Each of these is a separate group of financial and has its own benefits and uniqueness.

There is no hard and fast rule about the quant um of safety margin and depends upon the nature and uniqueness of the firm in addition to the current assets and current liabilities. This aspect points to the require of arranging funds to finance current assets. It says at any time a need for working Capital arises; financing agreement should be made quickly. The monetary manager should have the knowledge of sources of the working capital funds as wheel as investment avenues where idle funds can be temporarily invested.

The small-scale sector accounts for 99 per cent of sick/weak units as on March 2001, its share in total bank credit outstanding was only 17-5 per cent. A leverage buyout is any acquisition of a company which leaves the acquired operating entity with a greater than traditional debt-to-worth ratio. In certain organizations the require is subject to wide fluctuations due to seasonal variations. The necessities of working capital in such cases depend upon the production strategy. The working capital necessity of a concern is directly influenced by the size of its company which may be calculated in terms of scale of operations. Only concern with sufficient working capital can exploit positive market conditions such as purchasing its necessities in bulk when the prices are lesser and by holding its inventories for upper prices.

You should forecast for a specific reason – to help make better decisions. Forecasting is extremely difficult and you must pull from all relevant sources. We previously discussed the Percent of Sales Method and Trend Analysis as a way of forecasting. Quantitative techniques of forecasting are best used when changes are infrequent.

• In today’s world of rapid change, quantitative techniques tend to be of little use.
• In order to develop budgets, we will start with a forecast of what drives much of our financial activity; namely sales.
• Since administrations have to be concerned with correct financial arrangement, these and other funds must be raised sensibly.
• The disadvantage is that such a policy might decrease corporate flexibility.
• There is a high degree of inverse co-relationship between the quantum of working capital; and the rapidity or speed with which the sales are affected.
• Sufficient working capital enables a concern to face company crisis in emergency periods such as gloominess because during such periods, usually, there is much pressure on working capital.

To communicate financial goals, most businesses utilize a variety of criteria. Strategic plans, for example, are measured in terms of profits and market share, whereas goods and production lines within a plant are measured in terms of profit margins or cash flows. When any firm undergo financial distress, it cannot typically meet its debt repayment obligations using its liquid assets. Unless there is an unexpected recovery of performance, the distressed firm is likely to default on its debt. This could result in a formal bankruptcy filing, a dismissal of the management, and possibly, liquidation of the firm . Traditionally long-term interest rates usually exceeds short-term rate since of the decrease flexibility of long-term borrowing relative to short-term borrowing.

Automate the Process

In some markets, the company can raise funds at lower cost and can swap for a particular market. A low credit rated firm can raise funds from floating rate credit market and enjoy comparative advantage over highly rated company because it pay a smaller risk premium. The differing interest rates in different markets can be arbitraged and disbursed between the counter parties. In case of interest rate swap, the exchange may be of cash flows arising from fixed or floating interest rates, equity swaps involve the exchange of cash flows from returns of stocks index portfolio. Currency swaps have basis cash flow exchange of foreign currencies and their fluctuating prices, because of varying rates of interest, pricing of currencies and stock return among different markets of the world. The purpose of EVA is to assess company and management performance.

It is very important that we have control over the detail since commercial programs sometimes over-analyze transactions and provide way too much detail. This is why many financial planners prefer spreadsheets over commercial programs. A good example of short-term financial planning is the Cash Budget.

The firm pays ‘additional’ or ‘extra’ dividend if earnings are higher than normal in any year. “The term dividend refers to that portion of profit which is distributed among the owners / shareholders of the firm”. The existence of an optimum capital structure is not accepted by all. David Durand identified the two extreme views – the Net income and net operating approaches.

Cash dividend:

Debt capital ranks superior than equity capital for the repayment of annual returns. This means that legally, the interest on debt capital must be repaid in full before any dividends are paid to any suppliers of equity. Debt capital is that type of capital which is infused into a business with the understanding that it have to be paid back at a prearranged future date. In the meantime, the owner of the capital , agree to recognize interest in exchange for you using their wealth.

Strategic planning is a formal process for establishing goals and objectives over the long run. Strategic planning involves developing a mission statement that captures why the organization exists and plans for how the organization will thrive in the future. Strategic objectives and corresponding goals are developed based on a very thorough assessment of the organization and the external environment. Finally, strategic plans are implemented by developing an Operating or Action Plan. Within this Operating Plan, we will include a complete set of financial plans or budgets. Financial planning is a continuous process of directing and allocating financial resources to meet strategic goals and objectives.

Profit maximization objective ignores the time value of money and does not consider the magnitude and timing of earnings. It treats all earnings as equal though they occur in different periods. It helps to formulate appropriate strategies and facilitates constant monitoring of action plans to match with the long term objectives.