Question

You are a manager who works in the finance department of ANZ Corporation in Malaysia. You are interested to analyse the core principles of finance that influence your company’s financial figures. Explain any FIVE (5) principles of finance that give significant impacts to your decision making process in order to achieve the desired financial performance for the year 2020 (25 marks for this question).

Write Any FIVE of this

Principle 1 The Risk -Return trade off

Principle 2 The time value of Money

Principle 3 Cash is King, not profit!

Principle 4 The importance of incremental cash flow

Principle 5 Markets are competitive

Principle 6 Capital Markets are efficient

Principle 7 Agency Problem

Principle 8 The impact of taxes on investment decision

Principle 9 Diversification

Principle 10 Business Ethics

Answer 1

Answer)

1 The Risk - Return trade off:

Risk Return Trade of basically the change in Risk and Returns when you are comparing investment options available with you i.e. forgoing or gaining the additional return in exchange of Risk. For example you may invest in FD at 8% with negligible risk or invest in Equities at 100% return with 100% risk. This scenario is tje trade off you have to decide and choose.

Higher risk is associated with greater probability of higher return and lower risk with a greater probability of smaller return. This trade off which an investor faces between risk and return while considering investment decisions is called the risk return trade off.

Principle 2 The time value of money :

The time value of money (TVM) is the concept that money you have now is worth more than the identical sum in the future due to its potential earning capacity. This core principle of finance holds that provided money can earn interest, any amount of money is worth more the sooner it is received.

The time value of money is important because it allows investors to make a more informed decision about what to do with their money. The TVM can help you understand which option may be best based on interest, inflation, risk and return.

Now, let's look at time value of money examples. If you invest $100 (the present value) for 1 year at a 5% interest rate (the discount rate), then at the end of the year, you would have $105 (the future value). So, according to this example, $100 today is worth $105 a year from today.

Principle 4 The importance of incremental cash flow :

Incremental cash flow is the additional operating cash flow that an organization receives from taking on a new project. A positive incremental cash flow means that the company's cash flow will increase with the acceptance of the project. A positive incremental cash flow is a good indication that an organization should invest in a project.

Incrementalcash flow is the potential increase or decrease in a company's cash flow related to the acceptance of a new project or investment in a new asset.

Positive incremental cash flow is a good sign that the investment is more profitable to the company than the expenses it will incur.

Incremental cash flow can be a good tool to assess whether to invest in a new project or asset, but it should not be the only resource for assessing to the new Venture.

Principle 8 The impact of taxes on investment decision :

Investment is a crucial dimension of economic science, as it guarantees not only consumption in the long run, but also a sustainable growth path. However, we are aware that there are many other factors that can influence the dynamics of investment within the various economies under study. One of these factors is taxation: besides the taxes levied on firms’ profits, taxes affect several economic aggregates that may impact decisively on investment decisions. Additionally, taxation is recognised a priori as being detrimental to investment. Therefore, our goal is to disentangle the relationship between tax systems and investment dynamics.

In detail, it can be seen that in this study we have developed an empirical model to assess both linear and non-linear correlations between tax compositions in terms of GDP, investment, which is proxied by gross fixed capital formation. Additionally, our attempt to uncover possible non-linear impacts of the several tax sources led us to conclude the existence of optimal tax item revenue thresholds with regard to investment changes. This empirical exercise was carried out with the use of panel data techniques, for both the short- and long-term perspective for all OECD countries, between 1980 and 2015.

The results achieved evidence the existence of certain tax-to-GDP thresholds. Specifically, some optimal values of tax items as a proportion of GDP maximise investment decisions. In particular, regarding the short-run, we found a maximising threshold for the promotion of long-run investment growth of 10.65% for taxes on individual income. On the other hand, we come to the conclusion eventually that maximum threshold levels to promote investment growth exist for taxes on firms’ profits and taxes on the consumption of goods and services, of 6.27% and 9.19%, respectively. Furthermore, we found a minimum threshold of 11.35% for social security contributions.

With regards to the short-run, we only found one maximum threshold of 10.65% for taxes on individual income, while a minimum threshold value of 12.09% was found for social contributions. In addition, we found minimum threshold values, on average, of 7.37% and 14.18% for profits and consumption of goods and services taxes, respectively.

These results are of extreme importance. They give new insights into the optimisation of tax systems with respect to investment decisions. Consequently, several research lines could be pursued in the future to study deeper each tax source design in order to efficiently guarantee a tax that could ensure high levels of compliance, without jeopardising investment decisions. Several other analyses could also be carried out with the objective of finding possible complementary or competing roles between taxes and other macroeconomic variables. In sum, our article gives new insights that must be explored for a better understanding of tax systems.

Principle 10 Business Ethics :

Ethical decision-making is a discipline. It is an approach to identifying and resolving issues in the business context. Of course, it occurs in many other contexts. Nor can ethical business decision-making be boiled down to just “doing the right thing.” There is more to it than that.

Applying ethics in the business context requires an awareness or sensitivity to ethical issues that may arise and a method to resolve relevant issues as part of an overall decision. To ensure adequate examination of ethical issues, there are a number of basic questions that can be examined. This approach can be applied in a variety of contexts and can be modified as appropriate to fit a company’s profile.

Ethical business decisions often require a careful discussion among interested parties. The dialogue is important to conduct and evaluate. If regularly practiced, a company and its managers can apply this discipline in making important decisions based on ethical principles.