COMPREHENSIVE ESSAY AND DISCUSSION (10 points each) 1. scusss the Working Capita
ID: 2794012 • Letter: C
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COMPREHENSIVE ESSAY AND DISCUSSION (10 points each) 1. scusss the Working Capital Financing Policies 2. Site an example of Long- term Financial Management and Discuss its important considerations 3. How does Risk affect your personal investment plan? 4. Explain comprehensively yhte overall goal of financial management - Maximization of Shareholders Wealth 5. Supposed to are a member of company X.s board of directors and chairperson of the company's compensation committee. If a company's board of directors want management to maximize shareholder wealth, should the CEO compensation be set as a fized amount, or shoould the compensation depend on how well the firm performs. If it is to be based on performance, how should perfromance be measured? What factor should your committee consider in setting the CEO's compensation? Would it be easier to measure performance by the growth rate in reported profits or the growth rate in the stocks intrinsic value? Think of both theoritical and practicall considerationsExplanation / Answer
Discuss the working capital financing policies ?
Working Capital Financing Policies
MAXIMAZATION OF SHAREHOLDER’S WEALTH: OVERALL GOAL OF THE FINANCIAL MANAGEMENT:
Effective financial decision making requires an understanding of the goal(s) of the firm. What objective(s) should guide business decision making that is, what should management try to achieve for the owners of the firm? The most widely accepted objective of the firm is to maximize the value of the firm for its owners, that is, to maximize shareholder wealth. Shareholder wealth is represented by the market price of a firm’s common stock.
Warren Buffett, CEO of Berkshire Hathaway, an outspoken advocate of the shareholder wealth maximization objective and a premier “value investor, ” says it this way:
Our long-term economic goal . . . is to maximize the average annual rate of gain in intrinsic business value on a per -share basis.We do not measure the economic significance or performance of Berkshire by its size; we measure by per-share progress.
The shareholder wealth maximization goal states that management should seek to maximize the present value of the expected future returns to the owners (that is, shareholders) of the firm. These returns can take the form of periodic dividend payments or proceeds from the sale of the common stock. Present value is defined as the value today of some future payment or stream of payments, evaluated at an appropriate discount rate. The discount rate takes into account the returns that are available from alternative investment opportunities during a specific (future) time period.
The longer it takes to receive a benefit, such as a cash dividend or price appreciation of the firm’s stock, the lower the value investors place on that benefit. In addition, the greater the risk associated with receiving a future benefit, the lower the value investors place on that benefit. Stock prices, the measure of shareholder wealth, reflect the magnitude, timing, and risk associated with future benefits expected to be received by stockholders.
Shareholder wealth is measured by the market value of the shareholders’ common stock holdings. Market value is defined as the price at which the stock trades in the market place, such as on the New York Stock Exchange. Thus, total shareholder wealth equals the number of shares outstanding times the market price per share.
The objective of shareholder wealth maximization has a number of distinct advantages. First, this objective explicitly considers the timing and the risk of the benefits expected to be received from stock ownership. Similarly, managers must consider the elements of timing and risk as they make important financial decisions, such as capital expenditures. In this way, managers can make decisions that will contribute to increasing shareholder wealth.
Second, it is conceptually possible to determine whether a particular financial decision is consistent with this objective. If a decision made by a firm has the effect of increasing the market price of the firm’s stock, it is a good decision. If it appears that an action will not achieve this result, the action should not be taken (at least not voluntarily).
Third, shareholder wealth maximization is an impersonal objective. Stockholders who object to a firm’s policies are free to sell their shares under more favorable terms (that is, at a higher price) than are available under any other strategy and invest their funds elsewhere. If an investor has a consumption pattern or risk preference that is not accommodated by the investment, financing, and dividend decisions of that firm, the investor will be able to sell his or her shares in that firm at the best price, and purchase shares in companies that more closely meet the investor’s needs.
For these reasons, the shareholder wealth maximization objective is the primary goal in financial management. However, concerns for the social responsibilities of business, the existence of other objectives pursued by some managers, and problems that arise from agency relationships may cause some departures from pure wealth-maximizing behavior by owners and managers. (These problems are discussed later.) Nevertheless, the shareholder wealth maximization goal provides the standard against which actual decisions can be judged and, as such, is the objective assumed in financial management analysis
DIFFERENCE BETWEEN MARKETING FUNCTION AND SELLING?
Difference between Marketing and Selling:
Marketing
Selling
Concept
It is a strategy based on a mix of activities that are aimed at increasing the sales.
It is the strategy of meeting the needs in an opportunistic, individual method, driven by human interaction.
Focus
Efforts
It makes an effort such that the customers actually want to buy the products in their own interest.
The company makes the product first and then figures a way to sell and make profit.
Business
A customer satisfying process.
Actual sales of goods.
Cost
The consumers determine the price; the price determines the cost.
Cost determines the price.
Motive
Customer satisfaction is the primary motive.
Sales are the primary motives.
Orientation
External market orientation.
Internal production orientation.
Perspective
It takes an outside-in perspective.
It takes an inside-out perspective.
Concept
It is a broad, composite and worldwide concept.
It is a narrow concept related to buyer, seller and production.
Strategy
It has a ‘pull’ strategy.
It has a ‘push’ strategy.
Beginning
It begins much before production of goods and services.
It comes after production and ends with delivery and collection of payment.
Scope
It has a wider connotation and includes many research activities.
It is a part of marketing.
FOUR COMPONENTS OF MARKETING MIX?
The marketing mix and the 4Ps of marketing are often used as synonyms for one another. In fact, they are not necessarily the same thing.
The 4Ps are:
A good way to understand the 4Ps is by the questions that you need to ask to define your marketing mix. Here are some questions that will help you understand and define each of the four elements:
Product/Service
Place
Price
· · What discounts should be offered to trade customers, or to other specific segments
Promotion
FOUR STAGES OF PRODUCT LIFE CYCLE:
The product life cycle has 4 very clearly defined stages, each with its own characteristics that mean different things for business that are trying to manage the life cycle of their particular products.
Introduction Stage – This stage of the cycle could be the most expensive for a company launching a new product. The size of the market for the product is small, which means sales are low, although they will be increasing. On the other hand, the cost of things like research and development, consumer testing, and the marketing needed to launch the product can be very high, especially if it’s a competitive sector.
Growth Stage – The growth stage is typically characterized by a strong growth in sales and profits, and because the company can start to benefit from economies of scale in production, the profit margins, as well as the overall amount of profit, will increase. This makes it possible for businesses to invest more money in the promotional activity to maximize the potential of this growth stage.
Maturity Stage – During the maturity stage, the product is established and the aim for the manufacturer is now to maintain the market share they have built up. This is probably the most competitive time for most products and businesses need to invest wisely in any marketing they undertake. They also need to consider any product modifications or improvements to the production process which might give them a competitive advantage.
Decline Stage – Eventually, the market for a product will start to shrink, and this is what’s known as the decline stage. This shrinkage could be due to the market becoming saturated (i.e. all the customers who will buy the product have already purchased it), or because the consumers are switching to a different type of product. While this decline may be inevitable, it may still be possible for companies to make some profit by switching to less-expensive production methods and cheaper markets.
Marketing
Selling
Concept
It is a strategy based on a mix of activities that are aimed at increasing the sales.
It is the strategy of meeting the needs in an opportunistic, individual method, driven by human interaction.
Focus
- It targets the construction of a brand identity, needs of the consumers and how to reach to the consumers.
- It starts with the buyers and focuses constantly on the buyer’s needs.
- It is the final act of buying goods or products by the consumers through a point sale.
- It starts with the seller and is focused with the seller’s needs.
Efforts
It makes an effort such that the customers actually want to buy the products in their own interest.
The company makes the product first and then figures a way to sell and make profit.
Business
A customer satisfying process.
Actual sales of goods.
Cost
The consumers determine the price; the price determines the cost.
Cost determines the price.
Motive
Customer satisfaction is the primary motive.
Sales are the primary motives.
Orientation
External market orientation.
Internal production orientation.
Perspective
It takes an outside-in perspective.
It takes an inside-out perspective.
Concept
It is a broad, composite and worldwide concept.
It is a narrow concept related to buyer, seller and production.
Strategy
It has a ‘pull’ strategy.
It has a ‘push’ strategy.
Beginning
It begins much before production of goods and services.
It comes after production and ends with delivery and collection of payment.
Scope
It has a wider connotation and includes many research activities.
It is a part of marketing.
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