The Key Aspects of Corporate Financial Management - Case Study Example

Corporate Financial Management Name Course Tutor Unit Code Date Role and Responsibility of CFO to Westfarmers and Impact on Company Objectives Westfarmers Ltd has varied business interests in retail covering supermarkets, common products and speciality departmental stores, fuel and liquor vents, home upgrading and office equipment; coal production plus export; gas handing out and supply; insurance; chemicals as well as energy and fertilisers; manufacturing and safety artefact supply. The following is the company’s trading information under the Australian Securities Exchange (ASX): Company Name: WESTFARMERS LIMITED, ASX Code: WES, Company Office Address: 11th floor, Wesfarmers building, walkway 40, Perth, Western Australia, Australia, 6000, Company Website Address: http://www.wesfarmers.com.au, and Company GIS Industry Group: Food & Staples Retailing (Westfarmers, 2014a). The current Chief Finance Officer (CFO) of Westfarmers is Terry Bowen. He joined the company in 2009. The role and responsibilities of the CFO at Westfarmers rotates around three key areas: (1) General Management, (2) Financial Reporting, and (3) Internal Control and Assurance (Westfarmers, 2014b). General Management General management entails debt management, equity management, dividend policy, capital management, and risk management. The CFO is tasked with instituting proper debt management so as to attain and maintain a strong investment-grade rating. Westfarmers issues bonds so as to raise capital that is intended to finance its activities. This will help the company to expand its investment portfolio and provide enough capital to fiancé its operations. As regards equity management, the CFO has got to ensure that the company issues stable shares to the public (Westfarmers, 2014b). The CFO also has to ensure the company adopts the most-fitting dividend policy. This will drive the company’s objective of growing dividends over-time (stable dividend policy). The policy also reflects the company’s profitability, projected cash flows, as well as available franking credits. This will also attract potential investors. In capital management, the CFO is tasked with ensuring that Westfarmers upholds a proficient capital structure. The capital structure maintained by the company should be in such a way that it permits financial flexibility as well as growth. Shareholders should also benefit from strong capital management through capital returns, which returns excess capital to shareholders (Westfarmers, 2014b). The CFO must also put in place stable risk management policies. This has got to be enabled through maintaining and adhering to clearly defined policies that covers market risk (interest rate risk, foreign exchange risk, and commodity price risk), liquidity risk as well as credit risk. The risk management should not take on speculative trading in financial instruments. Westfarmers is exposed to foreign exchange risk through selling coal abroad and buying inventory, mainly in US dollars. The CFO is required to cut down its currency exposure through forward contracts. It is also the objective of the company to manage interest rate risk through fixed rate debt and interest rates as well as currency interest rate swaps. The CFO should fulfil the company’s objective of putting in place a structure so as to evaluate the general risk and take on apposite risk mitigation strategies (Westfarmers, 2014b). Financial Reporting On the second responsibility of financial reporting, the CFO has got to supervise the preparation of the company’s financial statements and keep full and proper records following the required reporting and accounting standards. The company is mainly concerned with two key statements; the balance sheet and the cash flow statement. It is the objective of the company to maintain a strong balance sheet and strong liquidity. In cash flows, the company lays emphasis on strong cash generation (Westfarmers, 2014b). Internal Control and Assurance As regards internal control and assurance, the CFO has got to maintain an internal audit function within the company that is separate from its usual business operations. The audit function is managed and controlled through the board’s audit committee to ensure proficient risk management and internal control structures. The CFO is supposed to fulfil the company’s objective of developing a combined assurance framework and apply a risk-based technique so that Westfarmer’s risks are reviewed properly and on a regular basis (Westfarmers, 2014b). The Importance of Ethics to Business Ethics is a set of rules defining “what is right or wrong”, or “what is good or evil.” It entails moral values such as integrity, honesty, respect, and fairness, among others. Ethics has an importance both to an individual and the society. It enables people to get along with each other and conduct themselves with good manners. The society does judge people mainly on their moral standing rather than their personal values. That’s why it is sometimes quite difficult to make decisions that conflict personal values with moral rules. Ethics vary from one person, situation and culture to another. However, the society has set minimum standards for decorum and respect of others (Rugman & Collinson, 2009). Businesses also demand ethics that are closely tied to society as well as individual ethics. Business ethics entails recognized principles of what is right or wrong in conducting business. In business, ethics mainly entails choosing between making a profit against what is generally regarded as appropriate. However, companies are usually required to make decisions after looking at a given situation from the perspective of a customer or competitor (Rugman & Collinson, 2009). The main ethical considerations that organisations face include employment practices, environmental issues, human rights, corruption along with other overall moral obligations. For instance, consider a human-drug manufacturing company that intends to venture into a business line that entails testing whether a particular poisonous medicine will work. The company expects to make huge returns should the experiment be successful. However, the drug has to be tested on human beings and it can cause serious harm to these people. Now the question is whether to continue with the venture seeing as the company will generate huge profits but knowing that it may well harm people. There is an ethical dilemma here. Ethics requires that businesses not to focus on profits but consider the effect of their venture on individuals and society. Therefore, the company should not undertake this experiment (Rugman & Collinson, 2009). So as to uphold ethics in their day to day operations, use a code of ethics to guide their actions. The code of ethics comes in handy should trouble and conflicts arise. It also gives the company a common approach to problems. Ethics promotes fair practices. Considering that the opposite of bad ethics is increased regulation, ethics provides a way of promoting compliance pertinent with laws as well as government rules and regulations. Ethics protect a company’s good and legal business interests that include opportunities and confidential information. Ethics also deters wrongdoing from the part of individuals, society and businesses (Rugman & Collinson, 2009). New Castle Coal Mine Refer to the excel file. Bond Analysis Price of Bond The price of the bond will be given by; Where c = Coupon rate, F = Face value, r = Market rate, and t = Time Therefore, = $2,347.53 Interest Rate and Bond Price = $3,436.77 The interest rate and price of a bond have an inverse relationship. This means that when the interest rates go up, the price of a bond goes down, and when the interest rates go down, the price of a bond goes up (He & Westerhoff, 2005). Equal coupon rate and the required rate, 9 per cent If the coupon rate and the required rate are 9 per cent, it means that there is no difference between the coupon rate and the required rate. Therefore, the bond can neither be sold at a discount nor at a premium, meaning that the market price of the bond will not change in any direction (He & Westerhoff, 2005). Bond price Where C = Coupon rate, Y = Yield to Maturity (YTM), and n = Periods = 2,340.12 Interest Rate and Yield to Maturity A bond’s Yield to Maturity shows how much an investor’s money will earn if the bond is held until it matures. When the interest rates go up by 5 per cent, the market price of a bond goes down. However, as the price falls down, the yield to maturity goes up. On the other hand, when the interest rates go down by 5 per cent, the market price of a bond goes up. However, as the price increases, the yield to maturity goes down (Philippon, 2009). Yield to Maturity The Yield to Maturity (YTM) on the bonds will be; Where C = Coupon rate, F = Face value, P = Price, and n = Years to maturity = 1.76% Bond Rating Bond rating is the assignment of grades to bonds, indicating their credit quality. According to Standard and Poor, the Australian government bonds have better rating (AAA). Given that the Australian government bonds have a high rating; this means that the principal and the interest rates are to some extent guaranteed, hence the interest rates will be lower. This is expected to give a lower yield. For the Spanish government, bonds, their credit rating (BBB) offers adequate protection but will attract much higher interest rates. Therefore, they are expected to return a higher yield (Choudhry, 2010). References Chiappetta, B., Shaw, K., Wild, J. 2009, Principles of Financial Accounting. 19th edn. McGraw-Hill/Irwin. Choudhry, M. 2010, An Introduction to Bond Markets, 4th ed. John Wiley & Sons Deegan, C, 2009, Financial accounting theory, 3rd edn, McGraw-Hill, North Ryde Drury, C, 2004, Management and Cost Accounting, London, Thompsons Learning Edmonds, C, Edmonds, T, Olds, P, and Schneider, N, 2006, Fundamental Managerial Accounting Concepts, New York, McGraw-Hill Irwin. Gallegati, M., Ramsey, J. and Semmler, W. 2011, Bond Prices q: With or without Equity Market’s q? New School University, New York, 1-25. He, X.-Z., and Westerhoff, F.H. 2005, Commodity markets, price limiters and speculative price dynamics. Journal of Economic Dynamics and Control, 29(9): 1577-1596. Philippon, T. 2009, The Bond Markets, Quarterly Journal of Economics, 124 (3): 1011-1056. Rugman A., and Collinson S. 2009, International Business. 5th edn, Pearson Education Limited, McGraw-Hill Inc., England. Ryan, R. 2006, Corporate Finance and Valuation, Thomson Learning, London. Semmler, W. and Mateane, L. 2012, Equity Market or Bond Market—Which Matters the Most for Investment? Revisiting Tobin’s q Theory of Investment, Technology and Investment, 3(4): 203-209. Westfarmers, 2014a, Management Team Westfarmers, 2014b, Annual Report 2013 Read More