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Finance 4 Final (Reflection Paper) In Capital Structure, for me it is the tools and analysis that should be given focus

and attention being a finance manager of a corporation or firm for attracting and convincing stock subscribers and shareholder that their invested money will not be wasted, instead their investment will grow. Assets Are owned by the business that can be converted into cash. Liabilities Anything that is owed to others or simply payables. Leverage, for me it is how assets and liabilities being use having its fixed cost, attempting to increase the returns of common stockholders. The difference for me between operating leverage and financial leverage is, operating leverage is the use of assets own by the business that can be converted into cash like cash in bank, account receivable, land, building and machinery having its fixed cost, while in financial leverage use the liabilities or payables of the business like accounts payable, notes payable, salaries payable having its fixed cost, to make the business more profitable and also for the benefit of the common stockholders. Variable Cost, for me are cost that move in close relationship to changes in sales like the number of units produced and sold by the firm. For me Variable Cost is also important to a firm or business that involves producing product, because in business you cant escape from changes, and for me in variable cost is how you manage the raw materials, direct labor as well as sales commissions. Fixed Cost, for me it is related to the passage of time or depreciation of property and equipment. And also it involves payment of the business as the operation goes by like, payment of bills and rentals. And for me as a finance manager, these type of payments should be regularly paid for the continuity of the business. The use of excessive amount of financial leverage caused the market value of the firm and shareholders wealth to decline and also the cost of capital will rise. As I read this, the market value of the firm and shareholders wealth will decline due to excessive amount of financial leverage, this is because as stated earlier financial leverage is the use of liabilities and payables of the business and if you spent excessive amount on this, your business is majority focus on accepting debts, payments and hiring employees even if they are not necessarily needed of course the business will experience a recession. For example a business that focus more on credit and less focus in market for me 80% of it would result to recession. And also it affects the rise of capital cost, because a business that focus more on financial leverage, the business should expect more capital cost to provide its liabilities, payables and anything that is owed to others like providers and suppliers. The 5 steps procedure designed to assist Financial Managers: Step 1 : Compute the expected level of EBIT after the expansion.

For me, as a Financial Manager after an expansion of the business next thing to be done is to compute the level of Earning Before Interest and Taxes or (EBIT) so that you can determine if the expansion made by the business is earning or losing. Step 2 : Estimate the variability of this level of operating earnings. For me, you should estimate the variability of this level of operating earnings so that you can determine the quality that business and the customers will be satisfied. Step 3 : Compute the indifference point between the two alternatives. For me, as a Financial Manager you should compute the indifference between the two finance alternatives to be able to compare and decide what should be the alternative fitted and can make the business more productive. Step 4 : Analyze these estimates in the context of the risk the firm willing to assume You should analyze the estimated context of the risk the firm willing to pursue so that by the time goes by you already know and prepared what are the things to be done and in the case of recession you have already set a solution or alternative to the problem. Step 5 : Examine the market evidence to determine whether the proposed capital structure is to risky. You should examine the type or level of risk your business wanted to engage, so that you can measure if the company can survive with the level of risk or else you may take a lower type of risk fitted to the capital structure. EBIT-EPS Analysis and Stock Prices Its just show that as a Financial Manager if you are planning to increase the returns of stockholders, it is joint with the increase level of financial risk, and due to the increase level of financial risk the cost of capital also increase, and in accordance to this you are needed to asses more on the trade-off between the higher earnings per share to its stockholders return and also higher cost of capital. Cash Insolvency Analysis In the cash obligations and payables by the firm as a financial manager you should know the limitation of the companys obligation. In order to comply the liabilities and to be able to pay the payable of the company regularly. Industry Standard As an investor you should consider the risk of your investment to a company youre planning to invest. Simply because no person let his/her money lose. Profitability and Need for Funds

I can say that highly profitable firms with limited need for funds, tend to have a lower debt ratio and opposite to it are low profitable firms are having high debt ratio. This is because high profitable firms have enough funds to pay its debt and obligation simply because they have the earnings regularly, while in low profitable firms have the lesser funds to comply with its obligation because they dont have the regular earnings to pay its obligation and due to this I can say they tend to have high debt ratio. Growth Prospects In this Prospect, for me a firm for it to grow rapidly it is necessary to have big fund to finance the abundance of attractive investment and for the firm to invest in various type of opportunities. Tax Consideration In dividend decisions, tax have been primary reason why firms decided to repurchase their own stocks. And in this case, for me, the reason why the firms repurchasing their own stocks is because taxes on capital gains can be deferred into the future(when the stock is sold) and this case for me it is advantageous to the firm of the said tax consideration because tax is only payable by the time the stock is sold.


Submitted by: Mark Piquero

Submitted to: Francis Paul Butal