Financial management helps to make all the operational activities which help out in all the strategies in marketing. Industrial group (IG) and shipowner Investor- Private family owned (INV) is the company deals in order to increase the techniques and the profitability in the investments.
- Explanation of the nature and purpose of financial management functions of a business along with identifying an interrelationship with financial, corporate objective on their corporate strategy.
- Discussion on the role of management in fulfilling objectives formed by stakeholders with the use of agency theory.
Considering the financial management in each business operations there will be adequate determination of various operational creativities which will be useful for making the suitable changes in the operations as well as determination of effective project to be selected by Bank and financial institution. The analysis will be based in identifying the profitability through investment appraisal techniques such as NPV, IRR etc. which will be made on performance of Industrial group (IG) and shipowner Investor- Private family owned (INV).
Acceptability of the project
The acceptability of the project is based on IRR calculated for the vessels which is 15% but for more realistic decision rate for cost of capital shall be 10% because it depend on the debt equity ratio. With the present market scenario where there is a positive correlation between value of vessel and rate of freights and shipping is cyclical the present proposal can be accepted (Epstein, 2018). The other factors which can be considered are that form past 5 years the rate of T/c for handy max with life of 3 years ranges from 6500 to 12500 per day. For handyman whose life is 5 years ranges from 9000 to 9500 per day. The rate for current project is estimated to be 10000 per day with a life span of 10 years. As per the market analysis carried out by the bank it is possible to achieve the IRR of 155 in the 10 years as to make the project profitable. With consideration of all the above factors the project shall be accepted by the bank.
Items for further negotiation
Celling price: as only few ceiling prices were negotiated it is suggested that the ceiling price for the project shall be further negotiated. The suggested ceiling price by the bank is 22500000 for first year after delivery. For the further period the above amt. Shall be deducted by 1000000 and then paid.
Risk: the shipping risk will be managed and counter parted by the INV but the risk related to cash flows and employment are not yet considered (Akbas & et.al., 2017). It shall be further negotiated among the parties to the charter so that all risk are distributed and born equally among the parties. The burden of employment and cash flow risk will not fall upon bank alone.
Profit sharing ratio: the ratio between the parties of charter is 50:40:10. With bank a share of only 10%. The bank is also investing in the project and will bear the burden of risk also so the profit sharing ration shall be negotiated by the bank.
Risk involved in the project:
The general risk and concern related to the present project are:
- The project returns are majorly determined with the purchase and sales timing of the Vessels which involves a huge risk of certainty as market conditions prevails to change with time.
- An IRR of 15% is not easy to maintain for a period of 10 years and attracts huge interest bracket for the investors.
- Without any clear strategy of exit between the parties can tiger huge looses and failure of the project.
- The employment and cash flow risk related to the project shall be distribute between the parties to the charter equally. Some parties are ready to take the risk of vessel but not other, this will create a risk of uncertainties among the parties to the charterer (Kim, Kim & Qian, 2018).
- IG a party to the charter wants to secure the vessel for long term over a period of 10 year and it dies not posses ant experience in the field of handling and owning the vessels, and it will be a huge risk to hold ship for a long term and maintain the rate of 15%.
Options embedded in the project
The options enclosed in the project are the speciation conditions which are associated with the bonds and operational activities of the business (Furlong & et.al., 2017). However, there have been consideration over operations are equity, commodity and common bonds.
Factors affecting values of real options
Timing: As the project returns are determined on the time basis of purchase and sales which is not a real time consideration. The actual time of purchase ans sales are known before their occurrence at with a predetermination of that can change the figures as with change in market condition the time and value of sales and purchase can also change.
Rate If IRR: the IRR rate determined for the project is not very real, of the market conditions pre
Business risks associated with projects
Addressing outcome of IG and INV on which it can be said that there are various risks which are associated with the business operations (Akkermans & Van Oorschot, 2018). Therefore, concerning the several risks which will be associated with industries on which various risks are needed to be concerned and considered by them such as:
Performance risks: Determining the performance of these two industries on which there have been huge variations in their outcomes. IRR ration of INV in relation with this have outcomes has 111% in 1 year while IG has 1403%. As per ascertaining the performance and the return both the organization brings on their invested capital will need to be executed and managed (Epstein, 2018). It will be suggested that to manage the outcomes in project specification there will be appropriate control over the risks associated in the business performance.
Market risks: In relation with various environment risks like foreign exchange risks, commodity markets, interest rate risks and liquidity or credit risks which are needed to have appropriate management and execution by professionals of IG and INV.
Governance risks: Considering governance relevant factors such as ethics, market value of firm there are still various risks which are associated with the business activities.
Counterparty Risks: Ascertaining the impact of both the parties which are operating on the same segmentation have contractual obligations and which creates barriers in the operational practices (Akbas & et.al., 2017).
Information ratio Presenting a Hierarchy of risks relevant with the project
There have been influences of various risks which are associated with the proposed plan. Thus, IG wants to secure its vessels on the long-term basis and the estimated plan will be helpful in bringing them, the most favourable returns (Kim, Kim & Qian, 2018). In relation with such prospective it can be said that there are various risks associated with the operations. However, there have been consideration over various risks such as:
Elimination: It confers that the risks are to be eliminated by the business professionals such as removing those factors which are causing risks to the operations.
Substitution: These are the operations which will be effective as per controlling or replacing the factors which are causing risks. In relation with this there will be various alternative articles that will be used by business professionals as per controlling the operating costs (Akkermans & Van Oorschot, 2018).
Engineering Controls: Considering bring the technical changes in the business operations which will be appropriate in bringing promptness as well as reducing the costs incurred in activities.
Administrative controls: Records of all inflows and outflows such as material and funds which are to be monitored and managed as per meeting the goals in right time.
Presenting the available hedging tools for each risk such as Traditional and Financial
Traditional Hedging Tools: In relation with considering the traditional techniques of hedging where there will be ascertainment of exchange rates among banks and nations.
Financial Hedging tools: Considering the financial hedging which comprised with the consideration of rate of treasury bills, bonds and dividends payable by the organization. All the negotiable instrument has been considered by the stakeholders (Furlong & et.al., 2017). Thus, in relation with analysing the performance of these organizations there will be use of financial hedging which will be appropriate in determining the profitability of these organizations.
Justification based on opinion as per hedging tools
It can be said that, considering the financial hedging will be most effective and adequate as per making appropriate determination of the operational practices such as all the negotiable instruments like, bonds and various operational securities (Epstein, 2018). Thus, such determination will be effective and helpful as per proper valuation of the firm as ell as determination of the asset strength of entity. There can be revenue generation and management of operations which are in relation with making the appropriate control over operations.
On the basis of above report it can be said that there are various operational observation and determination of activities which are in relation with will be helpful and adequate as per meeting the goals and managing the operations. Further, the operational control on each activities will be appropriate and helpful in meeting the goals and preferring the suitable project. In relation with such outcomes and the various tools and technique which have been suggested to the professionals.