Question

Analysis of three financial management questions: (i) capital budgeting, (ii) capital structure and (ii) working capital management Define the three financial management questions and justify your group’s analysis by illustrating examples: Choose one or more events described by media (CNN Business, Financial Times, Dow Jones financial news etc.) about a company who is doing one or more activities related to the three financial management questions. Analyse that event (s) applying the three financial management questions. Note: Each question is to be illustrated by at least one event.

Answer 1

1) Capital budgeting- Capital budgeting is related to budgeting of capital which is related to allocation of capital into different projects which are generating a positive rate of return which is able to beat the cost of capital associated with them.capital budgeting decisions are very important in field of management of capital because they helps in selection of projects which will magnify the return of company in the long run as they have long term benefits associated with them which will help in profit maximization.

2) capital structure-capital structure is structuring of capital into proportion which will have adequate mix of various kind of financing through equity or debt which will help in overall maximization of return on capital and beating the overall cost of capital.

Various types of capital has different benefits associated with them . The interest payable on debt capital are tax deductible in nature and hence, After tax cost of debt is comparatively lower. The cost of equity is generally higher because they do not have any kind of tax deduction associated with them, and companies who prefer no dissolution of their capital would go for equity financing.

there must be an optimum mix of both equity and debt as there should always be a trade-off between deduction related to interest rates and cost of financial distress.

C) Working Capital Management- Working Capital Management is related with management of current asset as well as management of current liabilities in order to have an optimum liquidity and that will enhance the company to take better decisions by maintenance of liquidity and having adequate cash on its books, so it can have the liberty of decision making and never missing out an opportunity.

Companies often focus on reduction of overall debt into the capital structure so I would example it through Amazon, which has it's reduction plan incorporated into its overall strategic vision, so it has also focused on maintaining adequate liquidity which would be incorporated under working Capital Management and it is also focusing into having adequate capital proportion into various projects which are acceptable by the company when investment into International projects.