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Financial Decision Making

Financial Decision Making

Suppose you are the assistant treasurer of a tractor manufacturing company in United States. Today is 10 July 2020 and your firm is going to receive a payment of AUD1,638,000 from your Australian customer in exactly three months’ time for the tractors your firm sold to him. The treasurer of your company, Zoe Lee, who is also your boss, is concerned that the Australian dollar exchange rate might fall between now and October and would like to lock in the value of this future income today. This morning you have asked OUHK Bank to provide following currency data to you:

10 July 2020 Currency Forwards Currency Spot 1-month 3-month 6-month EUR/USD 1.3043 1.3045 1.3048 1.3055 AUD/USD 0.9066 0.9046 0.9008 0.8954 GBP/USD 1.5109 1.5106 1.5100 1.5092

a Demonstrate how you would use a currency forwards contract to hedge the risk exposure. Calculate the value, in term of USD, which your firm would effectively lock in based on the above currency quotations. (7 marks)

b Suppose that three months later the spot rate becomes AUD/USD0.9108. Work out the profit or loss on your forward contract position. (4 marks)

c Compare the original exchange rate of AUD/USD0.9066 with the three-month-later spot rate of AUD/USD0.9108 and analyse any gain or loss of funds in terms of US dollars. (4 marks)

d With the results in parts (a) to (c), explain how the forward contract has eliminated the firm’s exposure to the fluctuation in the Australian dollar exchange rate. (10 marks)

e Explore any alternatives other than currency forwards. Discuss your recommendations. (15 marks

A financial determination that is focused on the volume of finance being raised from a variety of long-term resources for cash like, value shares, preference offers, debentures, banking institution lending options and so on. Is known as financing selection. Quite simply, it is a choice around the ‘capital structure’ from the firm.

Capital Structure Owner’s Fund + Borrowed Fund

Financial Risk:

The chance of default on settlement of periodical fascination and pay back of capital on ‘borrowed funds’ is named fiscal chance.

Factors Affecting Financing Decision:

1. Charge- The fee for increasing funds from various options is unique. The fee for home equity is a lot more than the expense of obligations. The lowest priced provider must be determined prudently.

2. Threat- The danger related to different sources is different. More chance is assigned to borrowed funds in comparison with owner’s account as curiosity pays into it which is also repaid following a fixed length of time or on expiry of its tenure.

3. Flotation charge- The charge linked to issuing securities like broker’s commission payment, underwriter’s service fees, expenses on prospectus etc. Is named flotation cost. Higher the flotation expense, a lot less desirable is definitely the way to obtain financial.

4. Income situation in the business- In case the cash flow placement of any company is adequate it can simply use lent resources.

5. Management considerations- If your present shareholders desire to keep the full control of enterprise then financial can be elevated through lent funds but if they are ready for dilution of power over organization, collateral offers can be used for increasing financing.

6. State of capital markets- During boom period, finance can easily be raised by issuing shares but during depression period, raising finance by means of debt is easy.

3. Dividend Decision:

A monetary choice which happens to be interested in choosing the amount of the net profit acquired from the business needs to be handed out among shareholders (dividend) and how significantly must be retained for future years contingencies (retained earnings) is called dividend selection.

Dividend means that part of the revenue which can be given to shareholders. The decision regarding dividend should be undertaken keeping in view the entire target of making the most of shareholder s wealth.

Factors affecting Dividend Decision:

1. Income- Company experiencing great and stable getting could state higher amount of dividends as dividends are paid for out of current and previous revenue.

2. Steadiness of benefits- Businesses generally adhere to the insurance policy of dependable dividend. The dividend per reveal is just not changed in the event getting adjustments by tiny percentage or surge in revenue is temporary in general.

3. Growth prospects- In the event there are actually development potential customers for the organization soon then, it is going to preserve its income and consequently, no or a lot less dividend will probably be proclaimed.

4. Cashflow roles- Dividends include an outflow of money and therefore, availability of enough cash is foremost need for proclamation of dividends.

5. Preference of shareholders- While determining about dividend the preference of shareholders is also taken into consideration. In the event that shareholders wish for dividend then firm may go for declaring exactly the same. In such case the amount of dividend is dependent upon the standard of requirements of shareholders.

6. Taxation plan- A business is needed to shell out income tax on dividend declared by it. If taxation on dividend is greater, firm will prefer to pay less by using benefits whereas if income tax charges are reduced, then much more benefits might be announced through the company.

Kinds of Economic Selections – 3 Kinds: Expense Decision, Loans Decision and Dividend Selection Financial managing is concerned together with the acquisition, financing and control over belongings with many total objectives in your mind. The contents of modern day strategy of financial control might be separated into three major decisions, viz., (1) Purchase determination (2) Credit choice and (3) Dividend determination.

A strong takes these choices simultaneously and continuously in the regular span of organization. Company may not get these judgements within a sequence, but selections must be taken together with the target of maximising shareholders’ prosperity.

Type # 1. Expense Choice: It is actually more essential compared to other two choices. It begins with a determination of the total amount of assets needed to be held by the firm. It begins with a devotion in the full amount of solutions should be kept using the business.

The required assets fall into two groups:

(i) Long term Assets (repaired resources – vegetation & machines territory & complexes, and many others.,) which entail big expense and generate a return over a duration of period in future. Expenditure in long term resources is popularly generally known as “capital budgeting”. It can be described as the firm’s determination to spend its recent funds most efficiently in set belongings with an anticipated stream of advantages over a series of many years.

(ii) Simple-term Resources (present resources – raw resources, job-in-approach, completed goods, debtors, money, and so on.,) which can be changed into cash within a fiscal 12 months without diminution in value. Expenditure in present belongings is popularly generally known as “working funds management”. It refers to the management of existing assets.

It is really an crucial selection of a organization, as brief-success is definitely the requirement for long-word accomplishment. Firm should not maintain more or less assets. Far more possessions decreases profit and you will find no danger, but having much less resources is much more dangerous and much more rewarding. Hence, the key facets of doing work funds control are the buy and sell-off between threat and return.