1. Research on the overview of Managerial Finance.

Managerial Finance

It deals with the investment decision and the financing decision and the whole operation of the
firm form its own point of view. Decision-making and proper resource management are used to
create and maintain value through application of financial principles within a corporation.

Managerial finance is concerned with the duties of the financial manager in the business firm.
Financial managers actively manage the financial affairs of any type of businesses financial and
nonfinancial, private or public, large and small, profit-seeking and not-for-profit. They perform
such varied financial tasks as planning, extending credit to customers, evaluating proposed large
expenditures, and raising money to fund the firms operations. In recent years, the changing
economic and regulatory environments have increased the importance and complexity of the
financial managers duties. As a result, many top executives have come from the finance area.

The Financial Manager's Responsibilities

Forecasting and planning: Strategic planning, pro-forma financial statements, cash budgeting.

Major investment and financing decisions: Capital budgeting, capital structure and cost of
capital decisions.

Coordination and control

Dealing with financial markets: Raising funds in the money and capital markets.

The size and importance of the managerial finance function depends on the size of the company.
In small firms, the financial decisions are usually made by the accounting department. As a firm
grows, a separate department is created for the finance function.

People in all areas of responsibility within the firm must interact with finance personnel and
procedures to get their jobs done. For financial personnel to make useful forecasts and decisions,
they must be willing and able to talk to individuals in other areas of the firm. The managerial
finance function can be broadly described by considering its role within the organization, its
relationship to economics and accounting, and the primary activities of the financial manager.

2. Research also on the following topics:

a. Cost of Capital

Cost of Capital

Cost of capital refers to the opportunity cost of making a specific investment. It is the rate of
return that could have been earned by putting the same money into a different investment with
equal risk. Thus, the cost of capital is the rate of return required to persuade the investor to make
a given investment.

Cost of capital is determined by the market and represents the degree of perceived risk by
investors. When given the choice between two investments of equal risk, investors will generally
choose the one providing the higher return.

Investors frequently borrow money to make investments, and analysts commonly make the
mistake of equating cost of capital with the interest rate on that money. It is important to
remember that cost of capital is not dependent upon how and where thecapital was
raised. Put another way, cost of capital is dependent on the use of funds, not the source of funds.

The difference between cost of equity and cost of debt

Cost of Capital
Cost of Equity Cost of Debt
If the companys only source has been
The cost of debt refers to situations
equity put in by the companys owners or
where the company has funded itself
shareholders, then you can simply
through debt alone. This would mean the
calculate the cost of capital by analyzing
company has financed all of its operations
the cost of equity. The cost of equity then
simply by lending from creditors. By
represents the compensation the market
calculating the cost of debt, youll receive
demands in exchange for the companys
the cost of capital.
assets.

The companies decrease the overall cost of capital in both cases and what it means for the
business finances because they are aiming for a balanced mixture of debt and equity financing is
to decrease.

Debt financing is more tax-efficient to equity financing. The higher the level of debt, the higher
the leverage, which means higher interest rates due to increased risk. Therefore, a mixture of
both financing sources often provides the lowest cost of capital.

The definition of weighted average cost of capital (WACC)

As mentioned above, company financing hardly ever relies on a single source. Therefore, the
cost of capital is often calculated by using the weighted average cost of capital (WACC). Since it
analyses both equity and debt financing, it provides a more accurate picture of how much interest
the company owes for each operational currency it finances.

It gives a proportional weight to the different costs of capital, such as equity and debt, to derive a
weighted average cost. Each capital component will be multiplied by its proportional weight and
the sums will be added together.

When companies refer to the cost capital, they often would have calculated it based of the
WACC method. The following sections will look at the calculations methods in more detail, but
heres a quick example of what WACC means.

It is important to understand why it is essential to do the math. As mentioned briefly above, the
cost of capital can be an essential part of a business financial decision-making.
Since cost of capital provides the business with the minimum rate of return it needs on its
investments, it is an essential part of budgeting decisions. By knowing the cost of capital, the
business can make better decisions on its future investments and other such financing options.

For example, it can help the business to find projects that will generate appropriate gains for the
business. On the other hand, it can prevent the business from making an investment, which
wouldnt provide quick enough returns for the company.

Therefore, a cost of capital reveals the business plenty about the type and value of its past and
future investments. If a business doesnt know the rate of return or the cost of financing its
operations, it cant expect much business success.
Calculating the cost of debt
First, look at how you can calculate the cost of debt. Debt in this formula includes all forms of
debt the company uses in order to finance its operations. These could be various bonds, loans and
other such forms of debt.

As mentioned earlier, there are two formulas for calculating the cost of debt. This is because it
deals with interest, which can be deducted from tax payments. Thus, the alternatives are to
calculate the cost of debt either before- or after-tax. Generally, the after-tax cost is more widely
used.

The before-tax rate can be calculated by two different methods. First, you can calculate it by
multiplying the interest rate of the companys debt by the principal. For instance, a P100,000
debt bond with 5% pre-tax interest rate, the calculation would be: P100,000 x 0.05 = P5,000.

The second method uses the after-tax adjusted interest rate and the companys tax rate.

Even if you use the after-tax rate, youll still need the above before-tax rate. The formula for
calculating the after-rate tax is:

Cost of debt (after-tax rate) = before-tax rate * (1 marginal tax rate)

Keep in mind the before-tax rate is also often referred to as the yield-to-maturity on long-term
debt.

Calculating the cost of equity

There are also two ways of calculating the cost of equity: the more traditional dividend
capitalization model and the more modern capital asset pricing model (CAPM).

The dividend capitalization model uses the following formula:

Cost of equity = (dividends per share [for next year] / current market value of stock) + growth
rate of dividends
More recently, many companies have started to the use the CAPM method. Under this method,
the idea is that investors need a minimum rate of return, which is equal to return from a risk-free
investment, as well as a return for bearing extra risk.

The formula is as follows:

Cost of equity = risk free rate + beta [i.e. risk measure] * (expected market return risk free
rate)

Calculating WACC

If the company has used different methods of financing, then the cost of capital is calculated by
the weighted average cost of capital. The above formulas are also needed in this method.
The method for calculating WACC is often expressed in the following formula:

WACC = percentage of financing that is equity * cost of equity + percentage of financing that is
debt * cost of debt * (1 corporate tax rate)

In order to calculate the percentage of financing that is equity, you need the following formula:

Percentage of financing that is equity = market value of the firms equity / total market value of
the firms financing (equity and debt)

To calculate the percentage of financing that is debt, you can use the following formula:

Percentage of financing that is debt= market value of the firms debt / total market value of the
firms financing (equity and debt)

The WACC will increase if the beta (risk measure) and the rate of return on equity increase. This
is because a growing WACC denotes a drop in valuation and a growth in risk.

b. Dividends and Policy

A share of the after-tax profit of a company, distributed to its shareholders according to the
number and class of shares held by them.

Smaller companies typically distribute dividends at the end of an accounting year, whereas
larger, publicly held companies usually distribute it every quarter. The amount and timing of the
dividend is decided by the board of directors, who also determine whether it is paid out of
current earnings or the past earnings kept as reserve. Holders of preferred stock receive dividend
at a fixed rate and are paid first. Holders of ordinary shares are entitled to receive any amount of
dividend, based on the level of profit and the company's need for cash for expansion or other
purposes.
 Dividends
Property Scrip dividend
dividend Liquidating
Cash Dividend Stock dividend A company may not dividend
On the date of A company may issue have sufficient funds
declaration, the A stock dividend is a non-monetary to issue dividends in When the board of
board of directors the issuance by a dividend to investors, the near future, so directors wishes to
resolves to pay a company of its rather than making a instead it issues a return the capital
certain dividend common stock to cash or stock scrip dividend, which originally contributed
amount in cash to its common payment. Record this is essentially a by shareholders as a
those investors distribution at the promissory note dividend, it is called a
shareholders liquidating dividend,
holding the without any fair market value of (which may or may
company's stock on a the assets not include interest) and may be a
consideration.
specific date. distributed. to pay shareholders precursor to shutting
at a later date. down the business.

A firms dividend policy refers to its choice of whether to pay out cash to shareholders, in what
fashion, and in what amount. The most obvious and important aspect of this policy is the firms
decision whether to pay a cash dividend, how large the cash dividend should be, and how
frequently it should be distributed. In a broader sense, dividend policy also encompasses
decisions such as whether to distribute cash to investors via share repurchases or specially
designated dividends rather than regular dividends, and whether to rely on stock rather than cash
distributions.
Dividend Payout Policies

A company that issues dividends may choose the amount to pay out using a number of methods.

Target payout ratio

Stable dividend policy
Even if corporate earnings are in flux,
stable dividend policy focuses on
maintaining a steady dividend payout.
A stable dividend policy could target a long-run
dividend-to-earnings ratio. The goal is to pay a
stated percentage of earnings, but the share
payout is given in a nominal dollar amount that
adjusts to its target at the earnings baseline
changes.

Dividend Policies

Constant payout ratio Residual dividend model

A company pays out a specific percentage of Dividends are based on earnings less funds
its earnings each year as dividends, and the the firm retains to finance the equity portion
amount of those dividends therefore vary of its capital budget and any residual profits
directly with earnings. are then paid out to shareholders.

c. Short Term Financial Management

Short-term Financial Planning and Management

This topic discusses the fundamentals of short-term financial management; the analysis of
decisions involving cash flows which occur within a year or less. These decisions affect current
assets and /or current liabilities. We know that net working capital is the difference between
current assets and current liabilities; since short-term finance is concerned with current assets
and current liabilities, this topic is also referred to as working capital management. Some
examples of short-term financial decisions are questions such as:

How much How much cash

inventory should should be kept on
be kept on hand? hand?

How should the

Should goods be
firm borrow
sold on credit?
short-term?
Cash and net working capital

Current assets are defined as cash and other assets that are expected to be converted to cash
within one year. The four major categories of current assets are:

1) cash
2) marketable securities
3) accounts receivable
4) inventory

Current liabilities are short-term obligations which require payment within one year. The three
major categories are:

1) accounts payable
2) accrued wages and taxes, and other expenses payable
3) notes payable.

The size of the firms investment in current assets A flexible current asset policy implies that the
firm maintains relatively high levels of cash, marketable securities and inventories, and grants
liberal credit terms which result in relatively high levels of accounts receivable. Restrictive
policies mean that the firm maintains relatively low levels of current assets. In order to determine
the optimal levels of current assets, the costs and benefits associated with each policy must be
identified.
d. Payout Policy and Capital Structure

Capital Structure refers to the way a corporation finances its assets through some combination of
equity, debt, or hybrid securities. There are many methods for the firm to raise its required funds.
But the most basic and important instruments are stocks or bonds. The firm's mix of different
securities is known as its capital structure.

The Target Capital Structurecapital structure refers to the combination of funds, in the form of debt and
equity, a firm uses to finance its assets. A firm usually sets a target capital structure, which is the
proportion of debt and equity it wants to use to finance investments, that is used as a benchmark when
raising funds for investing in new capital budgeting projects.

Capital Structure Theory

Trade-off theory Signaling Theory
most people agree that managers and
Under a very restrictive set of
other insiders possess more information
assumptions, they showed that the value
about the firm than outside investors. The
of a firm increases as it uses more and
fact that managers have asymmetric
more debt. In fact, according to their
information, which means they have some
theory, the value of the firm is maximized
information that outside investors do not,
when it is financed with nearly 100
could mean that any action taken by a
percent debt. However, the theory
firm, including how it raises funds
ignored the costs associated with
(capital), might provide a signal to the
bankruptcy, which can be considerable.
less-informed investors.
Dividends are cash payments made to stockholders. Decisions about when and how much of
earnings should be paid as dividends are part of the firms dividend policy. Earnings that are paid
out as dividends cannot be used by the firm to invest in projects with positive net present
valuesthat is, to increase the value of the firm. The dividend policy that maximizes the value
of the firm is said to be the optimal dividend policy.

Residual dividend policyas an investor, you should want the firm to retain any earnings it can
invest at a rate of return that is at least as high as your opportunity cost. Firms that agree with this
concept might follow a residual dividend policy where dividends are paid only if earnings are greater
than what is needed to finance the equity portion of the firms optimal capital budget for the year.

Stable, predictable dividendssome managers believe that dividends should never

be decreased unless it is absolutely necessary. These managers probably follow a
stable, predictable dividend policy, which requires that the firm pays a dividend that is
the same every year or is constant for some period and then is increased at particular
intervalsthat is, dividend payments are fairly predictable.

Constant payout ratioa firms dividend payout ratio is defined as the proportion of
earnings per share (EPS) that is paid out as dividends (DPS)that is, payout ratio =
DPS/EPS. Firms that follow a constant payout ratio dividend policy pay the same
percentage of earnings as dividends each year.

Low regular dividend plus extrasrequires a firm to pay some minimum dollar dividend
each year and then to pay an extra dividend when the firms performance is above normal (or
above some minimum standard)
e. Risk Management

Risk is an event or cause leading to uncertainty in the outcome of the business operations. We
manage risk daily without describing this as risk management. We consider what might go
wrong and take steps to reduce the impact if things do go wrong. Risk management involves
understanding, analyzing and addressing risk to make sure organizations achieve their objectives.
So it must be proportionate to the complexity and type of organization involved.

Risk Management Standards

A number of standards have been developed worldwide to help organizations implement risk
management systematically and effectively. These standards seek to establish a common view on
frameworks, processes and practice, and are generally set by recognized international standards
bodies or by industry groups. Risk management is a fast-moving discipline and standards are
regularly supplemented and updated.

The different standards reflect the different motivations and technical focus of their developers,
and are appropriate for different organizations and situations. Standards are normally voluntary,
although adherence to a standard may be required by regulators or by contract.

One description of risk is the following: risk refers to the uncertainty that surrounds future events
and outcomes. It is the expression of the likelihood and impact of an event with the potential to
influence the achievement of an organization's objectives.
 Establishing goals and
context (i.e. the risk
environment)

Identifying risks

Analysing the
identified risks

Assessing or
evaluating the risks

Monitoring and
reviewing the risks and
the risk environment
regularly

Continuously
communicating,
consulting with
stakeholders and
reporting

Risk management is, at present, implemented in many large as well as small and medium sized
industries. It is outlined how a large company can handle its risks in practice and contains a
computer based method for risk analysis that can generate basic data for decision-making in the
present context.
f. Financial Planning

Financial planning is the task of determining how a business will afford to achieve its strategic
goals and objectives. Usually, a company creates a Financial Plan immediately after the vision
and objectives have been set.

Six Steps in the Financial Planning Process

The following steps make up the financial planning:

1. Establishing and defining the client-planner relationship - The financial planner explains
or documents the services to be provided and defines his or her responsibilities along
with the responsibilities of the client. The planner explains how he or she will be paid and
by whom. The planner and client should agree on how long the relationship will last and
on how decisions will be made.

2. Gathering client data and determining goals and expectations - The financial planner asks
about the client's financial situation, personal and financial goals and attitude about risk.
The planner gathers all necessary documents at this stage before giving advice.

3. Analyzing and evaluating the client's financial status - The financial planner analyzes
client information to assess his or her current situation and determine what must be done
to achieve the client's goals. Depending on the services requested, this assessment could
include analyzing the client's assets, liabilities and cash flow, current insurance coverage,
investments or tax strategies.

4. Developing and presenting the financial planning recommendations and/or alternatives -

The financial planner offers financial planning recommendations that address the client's
goals, based on the information the client provided. The planner reviews the
recommendations with the client to allow the client to make informed decisions. The
planner listens to client concerns and revises recommendations as appropriate.

5. Implementing the financial planning recommendations - The financial planner and client
agree on how recommendations will be carried out. The planner may carry out the
recommendations for the client or serve as a "coach" coordinating the process with the
client and other professionals such as attorneys or stockbrokers.

6. Monitoring the financial planning recommendations - The client and financial planner
agree upon who will monitor the client's progress toward goals. If the planner is involved,
he or she should report to the client periodically to review the situation and adjust
recommendations as needed.
Lessons Learned

Managerial Finance
Managerial finance is important in each aspect of the business be it accounting, finance,
production, etc. This is for us to understand and do a good job in their own fields. Marketing
people, for example, has many things to consider like availability of inventory, market share of
the product, plant capacity and many activities that can relate to the field. Similarly, accountants
must understand how accounting data are used in corporate planning and are viewed by
investors.

Cost of Capital
The importance of capital is always been considered while taking financial decisions as its very
relevant in the following spheres like designing the capital structure which gives feedback to the
right capital mix, capital budgeting decisions, comparative study of sources of financing,
evaluating of financial performance, knowledge of firms expected income and inherent risks, and
financing and dividend decisions. In sum, the importance of cost of capital is that it is used to
evaluate new project of company and allows the calculations to be easy so that it has minimum
return that investor expect for providing investment to the company.

Dividend and Policy

A sound dividend policy is important for people who value profit certainty of a company. It
follows that a high and regular corporate dividend policy means that companies have a
benchmark for doing well. Therefore, the overall health of the company can be equated by more
dividends. Dividend policies are more valuable to small companies or cooperatives with excess
cash and a few good projects where the net present value of these projects is positive. Meanwhile
companies, without excess cash but have several good projects where NPV is also positive will
only derail the undertaking of current projects. While a good corporate dividend policy is
equated to excess cash, the value of the company is not hinged on the value of dividends as there
are other indicators of a companys performance.

Short-Term Financial Planning and Management

In order for the business firms to function properly, they finance their operations from short-term
and long-term sources. Although short-term financial decisions almost always involve short-
lived assets, there is a linkage between short-term and long-term financing decisions arising from
a firm's cumulative capital requirements. Because of the availability of funds, if you have a
surplus of long-term financing, you would need less short-term funds. Ordinarily, the maturity of
capital sources were matched with the life of the assets funded by them were always done. For
example, some minimum level of working capital is needed permanently in the business and is
financed from permanent sources, whereas the seasonal increase in working capital typically is
financed from short-term sources.

Risk Management
Risk is the main cause of uncertainty in any organization. Thus, identifying risks and managing
them before they even affect the business are what companies increasingly focus more on. The
ability to manage risk will help companies act more confidently on future business decisions.
Their knowledge of the risks they are facing will give them various options on how to deal with
potential problems.

Financial Planning
Financial Planning is process of framing objectives, policies, procedures, programs and budgets
regarding the financial activities of a concern. This ensures effective and adequate financial and
investment policies. The importance of financial planning is to secure and ensure availability of
funds. Also, the reasonability of cash flows and its stability are maintained. On the investor point
of view, financial planning tends to be a magnet especially if future benefits are certainly be
realized. It also a guide in the tracking of growth and expansion in the long-run survival of the
business. Lastly, financial planning is a formulation of reducing risks and uncertainties,
maximizing resources, and ensures profitability of the company.