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444811 Corporate Financial Management

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444811 Corporate Financial Management
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    Corporate Financial Management    Fin200  5/26/2014  Corporate Financial Management 1 Corporate Financial Management Muhammad Waqar Ahmed 11300468 Masoud Ahmadi Pirshahid  Corporate Financial Management 2 INDEX 1 Role and Responsibility ……………………………………………………….. page3  1.1 Financial Reporting ………………………………………………………….. page5   1.2 Internal Control and Assurance …………………………………………… . page5 2 The Importance of Ethics to Business ……………………………………... .. page6 3 New Castle Coal Mine ………………………………………………………… page7   (a) Payback Period …………………………………………………… .... page8 (b) Internal rate of return ……………………………………………… .. page8 (c) Modified internal rate of return …………………………………… .. page8 (d) Net present value = Total PV  –  Investment ……………………… page8   (e) Profitability index = Total PV/ Investment ……………………… ... page8 4 Bond Analysis …………………………………………………………… ... …. page9  (a) The price of the bond will be given by …………………………… . page9 (b) Interest Rate and Bond Price ……………………………………… page9  (c) Equal coupon rate and the required rate, 9 per cent …………… page10   (d) Bond price …………………………………………………………… page10   (e) Inter  est Rate and Yield to Maturity ……………………………… .. page10 (f) Yield to Maturity …………………………………………………… .. page11 (g) Bond Rating ………………………………………………………… . page11 References ……………………………………………………………………… page12     Corporate Financial Management 3 1 Role and Responsibility of CFO to Westfarmers and Impact on Company Objectives Westfarmers Ltd   has varied business interests in retail covering supermarkets, common products and speciality departmental stores, fuel and liquor vents, home upgrading and office equipment; coal production plus export; gas handing out and supply; insurance; chemicals as well as energy and fertilisers; manufacturing and safety artefact supply. The following is the company’s trading information under the Austr  alian Securities Exchange (ASX): Company Name: WESTFARMERS LIMITED , ASX Code: WES, Company Office Address: 11 th  floor, Wesfarmers building, walkway 40, Perth, Western Australia, Australia, 6000, Company Website Address: http://www.wesfarmers.com.au, and Company GIS Industry Group: Food & Staples Retailing (Westfarmers, 2014a). The current Chief Finance Officer (CFO) of Westfarmers is Terry Bowen. He  joined the company in 2009. The role and responsibilities of the CFO at Westfarmers rotates around  three key areas : (1) General Management, (2) Financial Reporting, and (3) Internal Control and Assurance (Westfarmers, 2014b). General management entails debt management, equity management, dividend policy, capital management, and risk management. The CFO is tasked with instituting proper debt management so as to attain and maintain a strong investment-grade rating.  Corporate Financial Management 4 Westfarmers issues bonds so as to raise capital that is intended to finance its activities. This will help the company to expand its investment portfolio and provide enough capital to fiancé its operations. As regards equity management, the CFO has got to ensure that the company issues stable shares to the public (Westfarmers, 2014b). The CFO also has to ensure the company adopts the most-fitting dividend policy. This will drive the company’s objective of growing dividends over  -time (stable dividend policy). The policy also reflects the company’s profitability, projected cash flows, as well as available franking credits. This will also attract potential investors. In capital management, the CFO is tasked with ensuring that Westfarmers upholds a proficient capital structure. The capital structure maintained by the company should be in such a way that it permits financial flexibility as well as growth. Shareholders should also benefit from strong capital management through capital returns, which returns excess capital to shareholders (Westfarmers, 2014b). The CFO must also put in place stable risk management policies. This has got to be enabled through maintaining and adhering to clearly defined policies that covers market risk (interest rate risk, foreign exchange risk, and commodity price risk), liquidity risk as well as credit risk. The risk management should not take on speculative trading in financial instruments. Westfarmers is exposed to foreign exchange risk through selling coal abroad and buying inventory, mainly in US dollars. The CFO is required to cut down its currency exposure through forward contracts. It is also the objective of the company to manage interest rate risk through fixed rate debt and interest rates as well as currency interest rate swaps. The CFO should fulfil the company’s objective of
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