GROUP FOUR (4)

QUESTION 1(2)
Why strategic financial managers are interested in expected cash flows
from a security
Cash flows refers to the amount of money coming into the firm or the cash that
is going out of the business, which could be as a result of interest received on an
investment or invested in a particular project respectively. This implies that we
have two types of cash flow. That is, cash-in-flow and cash-out flow.
Traditionally, strategic financial managers ensure that they effectively or
strategically manage the finances of a firm with the intent of maximizing the
value of the firm or shareholders wealth and at the same time minimizing cost.
So, with such mindset, strategic financial managers would like to know the
future cash flows to be realized from any security they would invest in, so as to
make prudent financial decision regarding the management of such expected
cash flows.

Why strategic financial managers are interested in required rate of return

on a security.
A Required Rate of Return (RRR) is the minimum return an investor will accept
for owning a company's stock, as compensation for a given level of risk
associated with holding the stock. The RRR is also used in corporate finance to
analyze the profitability of potential investment projects.
In reality, every investment comes with a certain level of risk. And for that
matter, the investor must be compensated for taking such risk. So, just as
strategic financial managers take investment decision with the intention of
maximizing their shareholders’ wealth, it is therefore, prudent that they
carefully evaluate or assess any investment they want to invest the firm’s
money. They can do this by ensuring that the require rate on an investment is
good enough for them not to put the firm in danger. They can also analyze the
profitability of an investment using some investment appraisal techniques such
as Net Present Value, Internal Rate of Return, Discounted Pay Back Period, and
others, and all these could be done by the use of RRR. It is therefore, because of
some of the above reasons why they should be interested in the required rate of
return.
Question 2(9)
SOLUTION:
Calculating dividend yield.
Initial price per share (P0) = $25.
After one year or new price per share (P1) = $35.
Dividend per share (DIV1) = $2.

DIV1
Dividend yield =
P0

Dividend yield $2 =
$25

Dividend yield = 0.08 x 100 = 8%

This means that if we buy this share at $25 each and pays a $2 dividend, we will
be getting 8% as a return on the investment every year.
Calculating capital gain yield:

P1-P0
Capital gain yield =
P0

35-25
Capital gain yield =
25

Capital gain yield 10 =

25

Capital gain yield = 0.40 x 100

Capital gain yield = 40%
This implies that after one year the price of the we bought at $25 have
appreciated by 40%.

Calculating total percentage return:

DIV1 P1-P0
Total percentage return = +
P0 P0

$2 $35-$25
Total percentage return = +
$25 $25

Total percentage return = 0.08 + 0.40

Total percentage return = 0.48 x 100
Total percentage return = 48%

This indicates that the total returns we will earn after one year would be 48%.
Calculating the amount, we would receive at the end of the one year should
our initial investment is $1000
Amount received = (Rate of return x Amount invested) + Amount invested
Amount received = (0.48 x $1000) + $1000
Amount received = $480 + $1000
Amount received = $1,480.
When we invest $1000 initially, after one-year time we would be getting
$1,480. Meaning that actual return, we have earned is $480 ($1,480 - $1000)
after one year.

QUESTION 3(11)
Strategic Financial Management (SFM)
Strategic financial management is the study of finance with the long-term aims
and interests, considering the planned goals of a firm or enterprise and the
means of achieving them. Thus, it is an approach to management that relates
financial techniques, tools and methodologies to tactical decisions making to
have overall innovative perspective of financial wellbeing of the firm to
facilitate growth, sustenance and competitive edge consistently.

Optimal Capital Structure:

Optimal capital structure of a firm is the best mix of debt and equity financing
that maximizes a company’s market value while minimizing its cost of capital.
In theory, debt financing offers the lowest cost of capital due to its tax
deductibility. However, too much debt increases the financial risk to
shareholders and the return on equity that they require. Thus, companies have to
find the optimal point at which the marginal benefit of debt equals the marginal
cost.
Why optimal capital structure is important.
To maximize return. The primary objective of every corporation is to promote
the shareholder’s interest. A balanced capital structure enables company to
provide maximum return to the equity shareholders of the company by raising
the requesting capital funds at minimum cost.
To minimize cost. The primary objective of a company is to maximize the
shareholders’ wealth through minimization of cost. A well-advised capital
structure enables a company to raise the requisite funds from various sources at
the lowest possible cost in terms of market rate of interest, earning rate expected
by prospective investors, expense of issue, is to maximize the return to the
equity shareholders as well as the market value of shares held by them.

The role of Hedgers and Speculators in the futures market

The two major categories of traders are hedgers and speculators. Although these
two groups trade in the futures market, they are trying to accomplish very
different objectives, and the following is the roles they play.

Hedgers trade not only in futures contracts but also in the commodity, equity, or
product represented by the contract. They trade futures to secure the future price
of the commodity of which they will take delivery and then sell later in the cash
market. By buying or selling futures contracts, they protect themselves against
future price risks. Speculators bet on the price change potential for one reason
only — profit.

The interaction between speculators and hedgers is what makes the futures
markets efficient. This efficiency and the accuracy of the supply-and-demand
equation increase as the underlying contract gets closer to expiration and more
information about what the marketplace requires at the time of delivery
becomes available.

A hedger may try to take the speculator’s money, and vice versa. A speculator,
for example, may buy a contract from a hedger at a low price, anticipating that
it will be worth more. The hedger sells at that low price because he expects the
price to decline further. Hedgers transfer the risk of price variability to others in
exchange for the cost of the hedge.

Speculators assume price variability risk, thus making the transfer possible in
exchange for the potential to gain. A hedger and a speculator can both be very
happy from the outcome of price variability in the same market.

Functions of the financial manager (s).

1. Financial Forecasting and Planning:
A financial manager has to estimate the financial needs of a business. How
much money will be required for acquiring various assets? The amount will be
needed for purchasing fixed assets and meeting working capital needs. He has
to plan the funds needed in the future. How these funds will be acquired and
applied is an important function of a finance manager.

2. Acquisition of Funds:
After making financial planning, the next step will be to acquire funds. There
are a number of sources available for supplying funds. These sources may be
shares, debentures, financial institutions, commercial banks, etc.
The selection of an appropriate source is a delicate task. The choice of a wrong
source for funds may create difficulties at a later stage. The pros and cons of
various sources should be analyzed before making a final decision.

3. Investment of Funds
The funds should be used in the best possible way. The cost of acquiring them
and the returns should be compared. The channels which generate higher returns
should be preferred. The technique of capital budgeting may be helpful in
selecting a project.
The objective of maximizing profits will be achieved only when funds are
efficiently used and they do not remain idle at any time. A financial manager
has to keep in mind the principles of safety, liquidity and soundness while
investing funds.

4. Helping in Valuating Decisions:

A number of mergers and consolidations take place in the present competitive
industrial world. A finance manager is supposed to assist management in
making valuation etc. For this purpose, he should understand various methods
of valuing shares and other assets so that correct values are arrived at.

5. Maintain Proper Liquidity:

Every concern is required to maintain some liquidity for meeting day- to-day
needs. Cash is the best source for maintaining liquidity. It is required to
purchase raw materials, pay workers, meet other expenses, etc. A finance
manager is required to determine the need for liquid assets and then arrange
liquid assets in such a way that there is no scarcity of funds.

3. The axioms of Strategic Financial Management.

1. The risk-return trade-off: We won’t take on additional risk unless we
expect to be compensated with additional return. The greater the risk, the
greater the expected return.

2. The time value of money: A dollar or Ghana cedes received today is worth
more than a dollar or cedes received in the future. A dollar received today is
worth more than a dollar received tomorrow because a dollar received today can
earn a day’s interest by tomorrow.
3. Cash- not profits- is king. This means that in measuring value we will use
cash flows rather than accounting profits because it is only cash flows that the
firm receives and is able to reinvest. You cannot entirely spend “profit” or “net
income”. These accounts are only paper figures and includes both realized and
unrealized gains, cash and receivables. Cash is the primary asset of an entity
that can be reinvested or used to pay bills. Cash flow could be more vital than
the income statement because it shows the actual amount that could be used in
the regular business operations. Cash flow does not equal net income. This is
due to the timing differences in accrual accounting between the recording of a
transaction and the receipt or disbursement of cash. In finance, cash is king

4. Incremental cash flows: It’s only what changes that counts. Think
incrementally. It is only what changes that counts. In making business decisions
we will only concern ourselves with what happens as a result of that decision.
This means that in a situation where financial mangers want to invest the firms’
fund or money; they must analyze such investment as to whether it will result in
increasing the cash inflow of the firm but not a decrease.

5. The curse of competitive markets: Why it’s hard to find exceptionally

profitable projects. Success attracts competition. Competition lowers profits. In
competitive markets, extremely large profits cannot exist for very long because
of competition moving in to exploit those large profits. As a result, profitable
projects can only be found if the market is made less competitive, either through
product differentiation or by achieving a cost advantage.

6. Efficient capital markets: The markets are quick and the prices are right.
Security prices adjust very quickly and appropriately to new information.
Assuming the information is correct, then the prices will reflect all publicly
available information regarding the value of the firm
Example: announcing a stock split
7. The agency problem: Managers won’t work for owners unless it’s in their
best interest. Most people will work harder for themselves than they will for
someone else. The agency problem is a result of the separation between the
decision makers and the owners of the firm. As a result, managers may make
decisions that are not in line with the goal of maximization of shareholder
wealth.

8. Taxes bias business decisions. This axiom states that decisions about using
cash flows must always use after-tax cash flows. When we evaluate new
projects, we will see income taxes playing a significant role. When the company
is analyzing the possible acquisition of a plant or equipment, the returns from
the investment should be measured on an after-tax basis. Otherwise the
company will not truly be evaluating the true incremental cash flows generated
by the project

9. All risk is not equal. Some risk can be diversified away and some cannot.
Total risk is a combination of firm-specific risk, which can be diversified away,
and market risk, which cannot be diversified away. Since some risks can be
diversified away and some cannot, the process of diversification can help reduce
risk, and as a result, measuring a project’s or an asset’s risk is very difficult.

10. Ethical dilemmas are everywhere in finance:

Ethical behavior is doing the right thing, and ethical dilemmas are everywhere
in finance. Businesses that are not trusted by other businesses or by customers
will not maximize the wealth of stockholders. Perhaps the primary goal of firms
should address stakeholders and not just stockholders.
 NAMES INDEX NUMBER
ADOVOR EMMANUEL 10095563
AMOAKO KEZIAH 10093396
DUMAH JOHN PAUL 10091424
DWOMOR LIVINGSTONE ISAAC 10095773
BRIDGET ESI FOSUA MIEZAH 10095042
GNAGNE ELLE- STELLA 10095620

AMOUH EMMANUELLA 10101358

KORSINAH WILSON 10093745
BANNERMAN EDMUND 10094124
DANSO RAYMOND 10091396

LIST OF THE MEMBERS OF GROUP FOUR (4)