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Corporate Finance-Financial Strategy - Coursework Example

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This work called "Corporate Finance-Financial Strategy" describes the impact of the financial strategy, various aspects of financial management on the example of Lenovo Group Ltd. The author outlines the evaluation of the strategy, its value, benefits…
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Corporate Finance-Financial Strategy
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Download file to see previous pages Cash management is an integral part of the financial policy of any company. This is because “short term funds are typically less expensive than long term funds. Under an aggressive funding strategy, the firm funds its seasonal requirements with short term debts and its permanent requirements with long term debts. Under a conservative funding strategy, the firm funds both its seasonal and its permanent requirements with long term debts.” (Lawrence J. Gitman, page 634)
Lenovo Group Ltd. kept a $1863m cash balance in 2009 against its total bank borrowings of $685m, and in 2008 bank deposits and cash were $2191m against the total bank borrowings of $561m. In other words, the company was keeping net cash reserves of $1178m in 2009 and $1630m in 2008 and not paying off the debts. It seems that the objective is to pursue a negative debt policy, as the company intends to meet short term requirements internally.
There is a general belief that the debt capacity of a company evaporates when business turns unprofitable. Business starts drawing debts on its short term debt capacity than a long term debt capacity. With Lenovo Group Ltd the situation is that company suffered losses in 2009, and it intends to improve its performance by following such a financial policy wherein huge cash is lying idle.
It can be seen from the financial results that the company suffered losses to the tune of $226m in 2009 when compared to profits of $484m in 2008, and then interim results of 2009-10 revealed profitability after big losses in 2009. Comparative EBIT or operating profits for interim 6 months ending 30 Sep 2009 is 1.20% as compared to 1.97% for 6 months ending on 30Sep 2008. This may support the financial policy of the company of pursuing a negative debt policy, provided cash funds are not kept idle. At the same time, the company has shown less dependency on short term debts that came down to $20.293m as on 31 March 2009 from $61.130m as on 30 March 2008; but again risen to 33.946m as on 30 Sep. 2009. The company is trying to pursue the policy of achieving a state of negative debts but has to bow down against the needs of the rising business. At this stage, keeping huge cash idle and allowing debts to rise is not the right approach to achieve a status of negative indebting. ...Download file to see next pagesRead More
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