Did you ever stop to think about the importance of the finance function for a su

Question

Did you ever stop to think about the importance of the finance function for a successful, multinational company (i.e, McDonalds, Apple, Johnson & Johnson, etc)? Someone has to manage the cash flow, bank relations, payroll, purchases of plant and equipment, and the acquisition of capital. Economic variables, such as gross domestic product, industrial production, disposable income, unemployment, inflation, interest rates, and taxes (to name a few) must fit into the financial manager’s decision model and be applied correctly. Is the company being run for the benefit of stockholders or top management? Based on key concepts learned in this Business Finance class, please explain finance concepts that businesses have to overcome in the area of financial statements (balance sheets, income statements, and the statement of cash flows), retained earnings, shareholders’ equity, depreciation, and historical/replacement cost. Please include at least two (2) of the following in your discussions and explain how they affect the financial process.

Capital Budgeting Techniques (decision making: replacement, expansion, post-audit, net present value, mutual exclusive projects, payback periods, etc.)

Project Cash Flows and Risk (cash flows, project evaluation, replacement analysis, acceptance/rejection of the project)

The Cost of Capital (components costs of capital, cost of debt, cost of retained earnings, and weighted average cost of capital)

Explanation / Answer

CAPITAL BUDGETING IS THE PLANNING PROCESS USED TO DETERMINE WHETHER AN ORGANISATION'S LONG TERM INVESTMENTS SUCH AS NEW MACHINERY ,REPLACEMENT MACHINERY,NEW PLANTS,NEW PRODUCTS AND RESEARCH DEVELOPMENT PROJECTS ARE WORTH THE FUNDING OF CASH THROUGH THE FIRM'S CAPITALISATION STRUCTURE(DEBT,EQUITY OR RETAINED EARNINGS).IT IS THE PROCESS OF ALLOCATING RESOURCES FOR MAJOR CAPITAL,OR INVESTMENT,EXPENDITURES.ONE OF THE PRIMARY GOALS OF CAPITAL BUDGETING INVESTMENTS IS TO INCREASE THE VALUE OF THE FIRM TO THE SHAREHOLDERS.

COST OF CAPITAL IS THE COST OF FUNDS USED FOR FINANCING A BUSINESS.COST OF CAPITAL DEPENDS ON THE MODE OF FINANCING USED-IT REFERS TO THE COST OF EQUITY IF THE BUSINESS IS FINANCED SOLELY THROUGH EQUITY,OR TO THE COST OF DEBT IF IT IS FINANCED SOLELY THROUGH DEBT.MANY COMPANIEES USED A COMBINATION OF DEBT AND EQUITY TO FINANCE THEIR BUSINESSES,AND FOR SUCH COMPANIES,THEIR OVERALL COST OF CAPITAL IS DERIVED FROM WEIGHTED AVERAGE COST OF CAPITAL . SINCE THE COST OF CAPITAL REPRESENTS A HURDLE RATE THAT A COMPANY MUST OVERCOME BEFORE IT CAN GENERATE VALUE,IT IS EXTENSIVELY USED IN THE CAPITAL BUDGETING PROCESS TO DETERMINE WHETHER THE COMPANY SHOULD PROCEED WITH A PROJECT.

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