Financial Management : Cfo - Assessment Answer

Answer:

Introduction

The management of finance is the most critical function for the management of very company. The maximization of the shareholders value, which is the ultimate goal of any company, depends to a lot extent on the efficiency and effectives of the management of finance (Ramnath, Rock, & Shane, 2008). In this context, a report has been presented here that provides coverage of basic concepts of the finance alongside the role and responsibilities of the financial analyst assistance.       

Case Study 1

Investment Projects in a Mineral Company

The business operations of a mineral company involve exploration and extraction of the minerals, oil and gas. Thus, the projects that could an investor find to invest in a mineral company would be mineral exploration, minerals extraction, and production of oil and gas (Norton Rose, 2011). The mineral exploration projects involve the activities aimed at finding out mines and places where the mineral could be extracted from. The mineral exploration projects are undertaken by the mineral companies at the initial stage and the work of extraction of minerals is started after the completion of the exploration projects. From the investment view point, the exploration projects are much more risky then extraction of the project. This is because the determination that the outcome of the exploration projects would positive or negative is highly uncertain. However, if the risk is high in investing in the exploration project then the returns are also very high. If the exploration projects end up with the positive outcome, the company earns huge amount of profits, which increase the wealth of the investors.                   

2: Activities to be undertaken in CFO’s Office

The Chief Financial Officer (CFO) of the company is responsible to manage and direct the activities of the finance function (Lapovsky & McKeown-Moak, 2010). The activities performed in a finance function of a company may involve preparation of the financial statements, analysis of the financial statements, and preparation of the internal reports for the managerial decision making. The preparation of the financial statements requires agile and skilled personnel possessing professional level knowledge in the finance domain. Further, the finance function is also responsible to take care of the corporate compliances such as submitting required returns and reports to the securities exchange commission of the country (Lapovsky & McKeown-Moak, 2010).

In the light of the above discussion, it could be inferred that as an assistance of the financial analyst, one could expect to undertake and assist in book keeping. Further, the assistant could also be asked to prepare reports for internal control and managerial purposes such report on working capital requirements and preparation of the list of financial sources. The assistant will also be responsible to assist the superior managers in preparing the budgets and long terms finical forecasts. Further, the assistant could also be asked to extract information from internal as well external sources to assist the management in financial forecasting (Lapovsky & McKeown-Moak, 2010).              

3: Management of Finances of a Listed Company

The fact that Antipodes Mineral Resource (AMR) Company is listed on the Australian Securities Exchange (ASX) adds more to the duties of the financial managers. In addition to the normal functions, certain special functions are also required to be undertaken in a listed company. Thus, the duties of the financial managers of a listed company also get widened with the coverage of new areas which includes compliance with the regulatory requirements (Quiry et al., 2011). The regulatory requirements for a listed are many more as compared to an unlisted company. In order to comply with the regulatory requirements, the financial managers have to prepare various reports and returns for submission to the regulatory authorities.

Further, the size of a listed company is also generally bigger than the unlisted companies. Big size of the company and the wide spread operations add to the difficulties of the financial managers of the company. Thus, the fact that AMR is a listed company brings concern to the financial manager and increases their responsibility and accountability. In addition to this, as a financial manager of a listed company, the person should also be in possession of the knowledge of share issues (Quiry et al., 2011). One more resource in the form of share issue is added for analysis of the sourcing of funds in case of a listed company.

4: Accountability of Antipodes Mineral Company

The primary objective or goal of a company is to build the investor’s worth. Thus, the business is primarily responsible to its owners to give them the required return. However, in the modern business environment, the business could thrive and survive only when a proper balance is maintained between the needs of all the stakeholders such as shareholders, society, and environment (Mermod & Idowu, 2013). Thus, the listed companies which operate at a large scale should assume the responsibility to meet out the needs of the society and the environment along with the shareholders. It is worthwhile to note that now a days the regulators from all around the world are stressing on the corporate social responsibility and have made it compulsory for the listed companies (Mermod & Idowu, 2013).

The corporate social responsibilities are about the responsibilities of the company toward the society and the environment. Compliance with the corporate social responsibility requirements is essential not only because it’s a legal requirement but to maintain sustainability in the business operations (Mermod & Idowu, 2013). The companies utilize the natural resources which have bearing on the environment. Further, the company’s operations, products, and services affect the society in various ways. Therefore, it is essential for the companies to undertake the responsibility and accountability for the betterment of the society and preservation of the environment. Thus, being a listed company, AMR should take accountabilities for the betterment of the society and conservation of the natural resources.  

Case Study 2

Part a: Computation of NPV

In order to enhance the production capacity, the company is considering adding new product line to the existing operations. The net present value is considered to be the most appropriate tool for analysis and evaluation of the new product line from the financial perspective (Madura, 2008). The net present value is computed by deducting the present of value of the cash outflows from the present value of the cash inflows. The present value of the cash outflows and the inflows is computed by discounting the same at the appropriate discount rate. In the current case of RWE Enterprises, the net present value has been computed by discounting the cash flows at the rate of 10%, which is shown below:  

Calculation of Net Present Value for New Product Line

Year

Cash Flows

Present Value

(a)

(b)

c= [1/(1+10%)^1]

(d)=b*c

0

-3,000,000.00

                   1.000

-3,000,000.00

1


700,000.00

                   0.909

     636,363.64

2

700,000.00

                   0.826

     578,512.40

3

700,000.00

                   0.751

     525,920.36

4

700,000.00

                   0.683

     478,109.42

5

-1,300,000.00

                   0.621

-807,197.72

6

700,000.00

                   0.564

     395,131.75

7

700,000.00

                   0.513

     359,210.68

8

700,000.00

                   0.467

     326,555.17

9

700,000.00

                   0.424

     296,868.33

10

900,000.00

                   0.386

     346,988.96

 

Net Present Value

136,462.99

In the present case of RWE Enterprise, the initial cash outflow is estimated to be $3,000,000, which involves the money to be sent on purchasing the equipment. Further, it has been estimated that the company would earn additional cash profits of $700,000 each year from the installation of the new production line. In the 5th year of operations, it has been estimated that $2,000,000 will be required to be spent on refurbishment. Thus, the 5th year cash flows after adjusting the inflows of $700,000 work out to be -$1,300,000. Further, at the end of the useful life, the salvage value of the equipment is estimated to be $200,000, which has been added to the cash flows of the 10th year.      

The results of the computation, as depicted in the table given above, show that the net present value in respect of the new product line being considered by RWE for expansion will be $136,462.99. The positive net present value indicates that the project under consideration is financially worthy and can be undertaken (Brigham & Ehrhardt, 2007). In the current case, the net present value of the new production line is positive and thus, the company can go ahead with the expansion program.   

Part c: Computation of Payback and Discounted Payback Period

Apart from net present value, the payback period is another tool that is applied in analyzing the financial viability of the project. The payback period indicates the length of the time period over which the cash outflows of a project would be recovered by the cash inflows. The shorter the payback period of a project better is would be for the company. Thus, the decision criteria in case of payback period, is the length of the time period; the project having shortest payback period would be given priority over the others. In case of evaluation of a single project, the payback period should be less than the total duration of the project. In the current case of RWE Enterprise, the payback period has been computed as under:

Payback Period

Year

Cash Flows

Cumulative Cash Flows

Logical Test

Logical Test

0

-3,000,000.00

 

 

0.000

1

700,000.00

-2,300,000.00

FALSE

0.000

2

700,000.00

-1,600,000.00

FALSE

0.000

3

700,000.00

-900,000.00

FALSE

0.000

4

700,000.00

-200,000.00

FALSE

0.000

5

-1,300,000.00

-1,500,000.00

FALSE

0.000

6

700,000.00

-800,000.00

FALSE

0.000

7

700,000.00

-100,000.00

FALSE

0.000

8

700,000.00

600,000.00

TRUE

7.857

9

700,000.00

1,300,000.00

FALSE

0.000

10

900,000.00

2,200,000.00

FALSE

0.000

 

Payback Period (Years)

7.857

The payback period for new product line is worked out to be 7.857 years as shown in the table presented above. The payback period of 7.857 years depicts that the company would recover all the cash expenses incurred on adding the new product line within almost 8 years time period. The economic life of this project is 10 years, thus, the payback period is less than the economic life of the project, which indicates that the project is financially worth undertaking. The payback period as computed above does not take into account the impact of the time value of money, which is critical in the capital budgeting decisions (Hawawini & Viallet, 2010). Therefore, the payback period has been revised computing discounted payback period taking into consideration the time value of money. The computation of the discounted payback period has been presented below:

Discounted Payback Period

Year

Discounted Cash Flows

Cumulative Cash Flows

Logical Test

Logical Test

a

B

 

 

 

0

-3,000,000.00

 

 

0.000

1

636,363.64

-2,363,636.36

FALSE

0.000

2

578,512.40

-1,785,123.97

FALSE

0.000

3

525,920.36

-1,259,203.61

FALSE

0.000

4

478,109.42

-781,094.19

FALSE

0.000

5

-807,197.72

-1,588,291.91

FALSE

0.000

6

395,131.75

-1,193,160.16

FALSE

0.000

7

359,210.68

-833,949.47

FALSE

0.000

8

326,555.17

-507,394.31

FALSE

0.000

9

296,868.33

-210,525.97

FALSE

0.000

10

346,988.96

136,462.99

TRUE

9.460

 

Payback Period (Years)

9.460          

The discounted payback period shows that the cash outlay will be recovered by the company in 9.46 years time period. Due to discounting, the value of cash inflows of the later years goes down and due to this downfall in the value of the cash inflows, the payback period is extended. In the current case, the payback period has been extended from 7.857 years to 9.46 years when the discounting is applied. However, the discounted payback period is also lower than the economic life of the project; thus, the decision would remain the same.

Conclusion

The financial management is one of the most crucial functions in an organization. In this report, the discussion has been carried on various aspects of the financial management converging the roles and responsibilities of the chief financial officer. Further, the report also covers the application of the net present value and payback period, which are the most crucial tools of the capital budgeting.  

References

Brigham, E. & Ehrhardt, M. 2007. Financial management: theory & practice. Cengage Learning.

Corporate Social Responsibility in the Global Business World

Hawawini, G. & Viallet, C. (2010). Finance for Executives: Managing For Value Creation. Cengage Learning.

Lapovsky, L. & McKeown-Moak, M.P. (2010). Roles and responsibilities of the chief financial officer: new directions for higher education, number 107. John Wiley & Sons.

Madura, J. (2008). International financial management, abridged edition. Cengage Learning.

Mermod, A.Y. & Idowu, S.O. (2013). CSR, sustainability, ethics & governance. Springer Science & Business Media.

Norton Rose. (2011). Mineral companies: a comparison of the requirements of the five stock exchanges. Retrieved September 09, 2016, from https://www.nortonrosefulbright.com/files/mineral-companies-a-comparison-of-the-requirements-of-five-stock-exchanges-september-2011-56563.pdf

Quiry, P., Le Fur, Y., Salvi, A., Dallocchio, M., & Vernimmen, P. (2011). Corporate finance: theory and practice. John Wiley & Sons.

Ramnath, S., Rock, S., & Shane, P.B. (2008). Financial analysts' forecasts and stock recommendations: a review of the research. Now Publishers Inc.

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