Final Paper

This paper is due in Week 4.

Introduction: tell me what you are going to do in this assignment.

Identify a topic: Select from below

1. The Role of Managerial Finance

Do a review of the class materials

Discuss how your topic helps decision making in capital and personal budgeting

Apply your topic to interest rates and securities

Explain debt

Conclusion

Include at least 3 References in APA style

Your paper should be 3-5 pages of at least 750-1500 words

Final Paper-Sample Solution

The Role of Managerial Finance

Introduction

Managerial finance is a branch of finance that deals with financial techniques associated with analyzing trends, income statements, and comparing financial statements when managing businesses (Zutter & Smart, 2019). It analyses these techniques with a primary focus on maximizing corporate profits, which are significant in shareholder value. Notably, managerial finance incorporates various aspects of financial management, such as cash management, financial reporting, planning, and predicting the company’s capital budget and the types of capital suitable for funding projects, such as debt or equity. These aspects are essential in a business’ daily operations (Zutter & Smart, 2019). As a result, to understand managerial finance’s roles, the essay begins by exploring its influence on decision-making processes related to capital and personal budgeting. It further examines its application in interest rates and securities. The last part highlights its role in debt management within a company. Therefore, managerial finance is a core pillar in business management since it provides relevant information that businesses can utilize to improve their performance and competitive advantage.(Managerial Finance Roles Essay-Example)

Influence of Managerial Finance on Capital and Personal Budgeting Decisions

Capital budgeting entails the procedures businesses perform to evaluate the potential of projects or investments. Companies or investors must assess the feasibility of projects before approving or rejecting them. The decisions they make during project evaluations are based on managerial finance. For instance, Zutter and Smart (2019) observe that making personal budgeting decisions, individuals must consider facets of managerial finance like capital used to finance the budget, cash management, and plans on how to budget for household items. It helps in decision-making by analyzing individual previous budget trends to determine how they can effectively raise, use, and plan for their finances.(Managerial Finance Roles Essay-Example)

Consequently, companies also apply managerial finance across various types of capital budgeting, including discounted cash flow analysis, payback analysis, and throughput analysis. They use the discounted cash flow (DCF) to determine the initial cash flow required to fund investments, such as revenue and other cash disbursements to cover maintenance and additional costs. Chizmar et al. (2020) illustrate that the DCF analysis utilizes the present value and the cost of capital to determine the project’s financial needs. The company’s decisions on the project’s current value must be discounted to ensure they exceed the opportunity cost for the investment to be profitable in the future (Burgos, Kittler & Walsh, 2020). On the other hand, the cost of capital refers to the weighted average debt and equity outcomes. It details the minimum cash inflows required to cover operating costs. Notably, analyzing the DCF aspects of a project and choosing the most profitable one requires the input of managerial finance. It helps examine the company’s current assets and liabilities to ascertain potential future challenges and mitigation measures with the cash flow system. The managers determine the feasibility of a project by comparing the trends and income statements from similar projects.(Managerial Finance Roles Essay-Example)

Moreover, payback analysis in capital budgeting also incorporates managerial finance in making important decisions related to the return on capital. According to Zutter and Smart (2019), investors use the method to evaluate the profitability of investments. In this case, managerial finance facilitates market studies on similar investments based on the demand and possibility of the chosen project generating profits (Burgos, Kittler & Walsh, 2020). Market analysis, which includes industrial competition, prices, and the state of the economy, is essential in helping the company determine appropriate financing strategies and asset management mechanisms. The last type of capital budgeting is throughput analysis, which focuses on a company’s profit generation by assuming all costs are operating expenses. In this case, maintaining profitability requires the company to maximize its throughput with more emphasis on bottleneck operation. Enhancing bottleneck operations requires managerial finance input, such as analyzing trends or similar investments to determine company resources that can increase its throughput (Burgos, Kittler & Walsh, 2020). Such resources must guarantee long-term demand, translating into long-term project profitability.

Application of Managerial Finance on Interest Rates and Securities

Interest rates refer to the costs incurred when borrowing money or the rewards resulting from saving money (Banton, 2022). Banks charge interest rates based on the percentage of money an individual borrows or saves. Notably, central banks incorporate managerial finance aspects like financial reporting to analyze the expenses associated with managing loans (Zutter & Smart, 2019). In this case, they direct local banks to set higher rates for revolving loans like those obtained through credit cards. When determining the short-term interest rate charges, the central banks must study and analyze the figures and data on the trends in the economy based on how money is supplied. The Federal Open Market Committee (FOMC) raises interest rates when they wish to increase the money supply in the economy (Banton, 2022). This lures people into depositing funds and reducing borrowing. On the other hand, lowering the long-term interest rates creates demands for treasury notes, which attracts more borrowing.(Managerial Finance Roles Essay-Example)

Additionally, Banton (2022) observes that retail banks offer interest rates depending on necessity, market trends, and individual factors like credit worthiness. In this case, they must also incorporate managerial finance, like financial reporting analyzes and presents data related to these factors. For instance, companies or individuals considered high risk due to poor credit scores associated with failure to repay previous loans in time will result in higher interest rates. Consequently, managerial finance is also applicable in securities. Securities can either be debt or equity and involve valuable financial resources that different parties can trade, such as mutual funds, bonds, or stocks. Equity securities are stocks that a company can sell, and their performance depends on the economy, such as inflation rates.

Before purchasing securities, individuals must apply managerial finance concepts like planning, predicting, and financial reporting to evaluate future economic trends, like inflation rates (Zutter & Smart, 2019). Higher inflation rates increase stock investment risk, forcing investors to cower away from purchasing them. Individuals issue debt securities later sold to other parties in the form of debts at specific interest rates and maturity dates. Those dealing with debt securities must consider managerial finance concepts like financial reporting and predicting economic conditions and interest market trends to avoid side effects of market fluctuations. For example, analyzing changes in interest rates is essential in determining when to purchase bonds, such as high-interest rate periods reduce the value of bonds, making them cheap.(Managerial Finance Roles Essay-Example)

Debts

Debts refer to money that an individual or company borrows with the obligation of repaying it. They include secured, unsecured, revolving debts and mortgages (Sunardi, Husain & Kadim, 2020). The borrowers must provide collateral like investments, which the lenders can forfeit in case of default. The lenders must analyze previous company financial reports, including predicting their potential of repaying the loans, before deciding on the number of loans to give. Borrowers must also have well-designed repayment plans to avoid defaulting and attracting a poor credit score. Another type of debt is corporate debt which includes bonds. Companies raise money by issuing bonds or debentures to investors. The companies later pay the investors through regular interest payments until the bond’s maturity. Generally, Sunardi, Husain, and Kadim (2020) explain that investors must analyze the company’s potential to raise interest rates before buying the bonds. They can analyze its growth potential, profitability, competitive advantage, and resilience of the measures it has adopted in generating profits, such as rigorous advertisement of its products.(Managerial Finance Roles Essay-Example)

Conclusion

Based on the analysis above, it is evident that businesses can thrive by effectively utilizing managerial finance techniques. It enables them to manage cash, analyze financial reports of similar businesses, plan and predict their future goals and performance based on the reports, and determine the type of capital they should utilize to fund their operations (Zutter & Smart, 2019). In this case, the essay explores how managerial finance influences various types of capital budgeting, including DCF, payback, and throughput analysis. These analyses utilize the financial reports, market trends, data, and figures about different aspects of the economy to guide how companies or individuals raise, allocate, and manage finances. Moreover, it covers the applications of managerial finance on interest rates and securities, such as central banks’ efforts to create supply and demand for money to influence the increase or decrease of interest rates. It also discusses debt and equity securities and how market fluctuations affect them. The last part examines obligations, including corporate debts, and how managerial finance concepts like financial reports influence the amounts of debts given to borrowers. Henceforth, the essay exclusively explores the roles of managerial finance in capital and personal budgeting, interest rates and securities, and debts.(Managerial Finance Roles Essay-Example)

References

Banton, C. (2022, July 6). Interest rates. Investopedia. Available at:https://www.investopedia.com/terms/i/interestrate.asp#:~:text=The%20interest%20rate%20is%20the,annual%20percentage%20rate%20(APR). Accessed: July 15, 2022)

Burgos, J. A. M., Kittler, M., & Walsh, M. (2020). Bounded rationality, capital budgeting decisions, and small business. Qualitative Research in Accounting & Management.

Chizmar, S., Castillo, M., Pizarro, D., Vasquez, H., Bernal, W., Rivera, R., … & Cubbage, F. (2020). A Discounted cash flow and capital budgeting analysis of silvopastoral systems in the Amazonas region of Peru. Land, 9(10), 353.

Sunardi, N., Husain, T., & Kadim, A. (2020). Determinants of Debt Policy and Company’s Performance. International Journal of Economics and Business Administration, 8(4), 204-213.

Zutter, C. J., & Smart, S. B. (2019). Principles of Managerial Finance: Brief. Harlow, UK: Pearson.