Case Study: Global Financial Strategy Critical Assessment

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[. . .] These structural assessments should also focus on the determination of the legal and management programs to understand the various components in the achievement of goals and objectives of globalization. It is essential for the organization to understand the structures: economic, social, communications, transportation, and political in order to develop and implement appropriate mechanisms in the management of the issues. This indicates that the organization will have the opportunity to meet its targets by aligning its mechanisms with the relevant structures in the country.

Debt indicators

Another important risk factor is analysis of the debt indicators thus enabling the organization to focus on improvement of liquidity of its shares. This will enable the organization to accumulate capital globally through development and establishment of secondary shares' market. Debt indicators are also vital in the determination of the pricing mechanisms thus the opportunity for the organization to maximize its financial resources while minimizing the costs and relevant risks.

Credit Ratings

Credit ratings will determine the amount of profits or financial resources the organization will be able to accumulate from the global perspective. It is essential to focus on the credit rating in order to adopt and integrate adequate measures enabling the organization to maximize the opportunities in relation to shares' transactions. Credit ratings will also determine if the organization will venture into the territory or global boundary with the aim of establishing secondary markets for the shares.

Access to bank finance

Banking system is an important factor to any organization aiming to enhance its financial performance and accumulation of capital. In order to venture in global marketing or transaction, it is essential for the organization to adopt and integrate effective measures in the evaluation of accessibility of the banking facilities. Bank finance is essential in the growth and development of an organization. This is because of the critical role it plays in the realization of the goals and objectives of an organization though capital injection. Accessibility of banking finance will determine the ability or capacity of an organization in relation to performance (Chana & Yap 2011, p. 579).

Access to capital markets

The main aim of globalization is to enhance maximization of the capital markets and relevant opportunities in across the globe. It is, therefore, essential for an organization to focus on the examination of the global accessibility to capital market. This will facilitate projection and implementation of effective marketing strategies to improve the prices of the shares. Accessibility of the capital markets will also determine the level of participation of an organization in the global market. This is through establishment of the secondary market shares with the aim of improving the liquidity of the available and new shares in the accumulation of capital in the context of globalization.

Use the factors you identified in Part b) to undertake a country risk analysis of your allocated country

In the analysis of Chad republic, it is essential to consider factors such as political risk, economic performance/projections, structural assessment, credit ratings, access to bank finance, and access to capital markets.

Political Risks

In terms of political scenario, it is essential to note that there are elements of uncertainties. This indicates lack of stability in the political aspect of the country (Country Conditions 2013, p. 3). In such cases, it is risky for the organization to implement its investment mechanisms because of the political uncertainties and relevant negative impacts to realization of the goals and objectives of the firm (Chad 2013, p. 2).

Economic Performance/Projections

Political aspect is an essential context in the examination of the economic situation. Unstable economic situations indicate or illustrate uncertainties within the development of the economy. This makes it essential for the organization to relate the concept of political stability and economic performance. Chad republic faces economic uncertainties thus inappropriate for improvement of the financial benefits (Chad 2013, p. 2).

Structural Assessment

Chad republic has extensive structures such as taxation systems, legal contexts, and business regulations to determine quality interactions between consumers and business entities. These structures are also essential in the determination of the objectives of the organization thus the ability to enable the firm seeking to maximize aspects of globalization to develop quality mechanisms (CIA 2011, 134).

Credit Ratings

Credit ratings in this country are very low because of uncertainties relating to issues such as political and economic instabilities. The country does not have sufficient authority at the helm to offer adequate management mechanisms to minimize the aspects of instability. This makes it difficult for the shares to fetch sufficient or higher prices in the context of globalization.

Access to Bank Finance

There is relatively appropriate accessibility to bank finance thus the ability to enhance accumulation of capital by the organization. The country experiences quality financial infrastructures thus facilitating accumulation of capital and maximization of opportunities in the credit or shares market.

Access to Credit Market

There is also relatively appropriate accessibility to credit market despite the essence of uncertainties relating to political and economic spheres within the country. This offers the opportunity to improve the conditions experienced by the organizations in the form of economic uncertainties.

The senior management is not sure what cost of capital should be used to estimate Net Present Value. One of the directors attended a short course on finance recently and came across the term Capital Asset Pricing Model that can be used to estimate cost of equity. Obtain financial data for a company of your choice from 250 listed companies, using their published beta, estimate its cost of equity and weighted cost of capital as an example to explain to senior management how the cost of capital is determined.. Furthermore, provide a critical evaluation of the suitability of the net present value and the capital asset pricing model techniques for assessing potential target companies in the manner proposed by the Finance Director. Note that the total return for investors in UK equities was around 13% in 2012 and the risk free rate is 2%.

Net Present Value (NPV) or Net worth Present Value represents the difference between cash inflows and cash outflows at present value based on initial costs. Net Present Value represents one of the methods used to calculate the gain of an investment or a project by companies. Net Value is a fundamental concept in making significant company decisions on investments. Positive Net Present Value shows the ability of a project to generate a profit while a negative NPV predicts a loss from the project. To depict this, the following notations are applied. NPV > 0 meaning the project has a likelihood of generating a profit and the company can invest in it. NPV< 0 meaning investing in the project will accrue a loss hence the project and the firm should not invest in it. NPV=zero means that investing in the project will not bring a profit or a loss for the firm. The firm may decide to abandon the investment. The investment is a strategic investment for the future.

In calculating the net present value, the value of investments today and in the future plays a critical role. Inflation and the return on investment play a crucial role when making a decision in this regard. The steps involved in calculating the net present value involve Estimating the rate of return or cash flow of the project or investment. Add the expected return for each year, the year expected, and the discount rate as a decimal using the formula expected rate of return / (1+ discount rate) X year expected. Formulas used in calculating the Net Present Value include adjustment Present Value, which involves investments financed by ownership or share equity. Real Option assesses the value of management in NPV. Payback Period assesses the risk return factor based on time. The rate of return measures the value the project has without factoring in monetary gains. The Growth rate of return calculates the value of reinvestment in the same project. The Cost benefit calculates the non-cash value of the project.

The Capital Asset Pricing Model abbreviated as CAPM calculates the existing relationship between risk and the forecasted return rates of assets. The formulas suggest that the projected return rates of an investment are directly proportional to the rate on risk free asset. Weighted Average Cost of Capital calculates all capitals of a firm ranging from stocks, bonds to loans and the cost of capital with each clustered being weighted. In the scenario below, Turbo Power Systems is the point of reference in the calculation of the cost of equity using the Capital Asset Pricing Model and weighted cost of capital.

The Formula Capital Asset Pricing Model = Risk Free Rate + Beta of Security (Expected Return-RISK Free Rate)

Risk Free Rate - 2%

Beta of security- 0

Expected Return -13 percentage

As per the Capital Asset Pricing Model, 2%+ 0 X (13%-2%) =11.46%.

The net Present Value or the value expected from the asset is 2%.

The Firm did not issue dividends to share Holders and… [END OF PREVIEW]

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Global Financial Strategy Critical Assessment.  (2012, August 18).  Retrieved August 20, 2019, from

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"Global Financial Strategy Critical Assessment."  August 18, 2012.  Accessed August 20, 2019.