Financial strategy essay

Document Type:Coursework

Subject Area:Finance

Document 1

A manager has alternative investment projects to evaluate and the best decision is made based on the profitability. Since most huge projects are financed through debt and equity, it is important to analyse a project’s risk and return. A capital investment may involve investing in financial markets or plugging in capital to purchase tangible or fixed assets. These investment tend to generate a positive return to an investor or add value to the capital invested. Capital investment involves a series of processes whereby a rational decision must be arrived before the investment. The rationale behind this is to determine whether the project will add profit to the project in the long run (Duru et. al. A number of techniques are used in evaluating alternative investments.

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Financial feasibility helps evaluate whether a project is financially viable. It also helps in determining whether the cash flow will be sufficient to pay the principal and the interest payments made on the debt used in making an investment. al. An organization should, therefore, provide a conducive and organizational culture which favors rewards for this activity. Since a company has long term plan of implementing the project, strategic capital budgeting decisions must be done. Managers, therefore, need to gather information and scan the environment to identify the best possible investment project. The stage will also involve a gathering of non-financial information. In this phase, the manager will choose the model to use when analyzing the investment project. Based on the analysis, the project is either rejected or accepted.

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The fourth step of capital budgeting involves control. The stage occurs after the project has been selected. Control provides the various assumptions which have been applied to the project. The identification of risk is an important aspect when making investment decisions. A risk is the uncertainty of future events. When a manager borrows money, the value may change in the future due to the risk premium. The capital investment projects involve multiple stakeholders who may have different views. The project will, therefore, have to be scrutinized before it is implemented. The technique also ignores the overall profitability of an investment. A manager would, therefore, prefers Net Present value. NPV shows the difference between cash inflows and outflows over a certain period of time.

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A project with positive NPV is preferred since it indicates that the cash inflows exceeds the anticipated costs. NPV considers the time value of money and considers issues like inflation and discount rates. al. Question 2 Most of the US investors hold their stock in the country’s stock. These investments represent are less than a half of the global value. Recently, unavailability of international exchange-traded funds and mutual funds made it difficult for investors to diversify their investments across the borders. Despite this, various barriers have been eliminated which makes investors to have a large stock portfolio. The method estimate and predict how the price of a stock fluctuates over time. Basically, a project which shows a higher beta coefficient indicates that an investment project will be riskier.

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Other qualitative risk factors that managers should focus on include bond ratings and geographical risks. The second procedure includes identifying the right international exchange-traded funds. It also involves determining the best domestic and EFTs which help in exposing these assets. Managers may gather this information through reading fund prospectuses and issuer websites. It is important to read the information to make an informed decision. The third step involves rebuilding and rebalancing the global portfolio. This process is determined by computing the number of shares to buy and attain the appropriate asset allocation. The stage ensures that an investment has a sufficient purchase and capital to build the portfolio (Kuepper, 2018). The best way of creating a diversified global portfolio is following the steps outlined by Betterment or Wealthfront.

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Problems Financial and capital markets are common investment opportunities in international markets. These investments are mostly governed by the foreign regulations and standards which raises a lot of concerns. Foreign securities investment helps in diversifying the investment portfolio. These types of investments are commonly found in Europe, the US, and Japan. However, some countries do not follow GAAP when preparing their financial statements. Some of these differences evolve around assets valuations, which forms a critical factor in the investment decision. When reading the financial statements of other companies may be interpreted differently especially when different standards or rules have been used in preparing financial statements. Before arriving at a conclusion, it is important to verify whether a foreign company’s statements were audited by an independent auditor.

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Some countries use different ways of making information available to investors. It is also possible to get a favorable price when a manager trade with foreign companies. Most foreign investments are utilized in diversifying domestic investments since different economies vary (Schmitz, 2012). Different countries may also have different stages of development and business cycles. For example, the US has established a market economy while other countries have emerging market economies with low capitalization. Due to these, low economies have less experience in matters pertaining to economic patterns. Sometimes the rate will fluctuate in a medium, low or large rate (Schmitz, 2012). The exchange rates are mostly affected by inflation rates especially when the economic growth rates are different between the two countries. When a manager wants to invest abroad, it is important to factor in the time the initial investment will be recovered.

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