Corporate Finance Profitable Investment Decisions

Question: Describe about the Corporate Finance for profitable Investment Decisions. Answer: Introduction: Corporate finance deals with the money related decisions of the business. The most important factor to run a business is money. The money needs to be invested in profitable investments. Corporate finance helps in making effective decisions about the investments, the financial factors, and the dividends. That means the study of corporate finance shows the ways to allocate all the financial resources in such a way that optimal returns can be obtained (Brealey et al. 2012). Corporate finance includes the business decisions of a Chief Financial Officer (CFO) of an organization. The first part of the study shows the three essential responsibilities of the Chief Financial Officer (CFO) of Diversa Limited, Australia and the impact of his decisions on the ultimate objectives of the company. The second part of the study shows the relationship between Effective Market Hypothesis and the pension fund management. This portion analyses how a pension fund manager should cope-up with the Effective Market Hypothesis theory. A: This part of the study shows the three responsibilities of Mr. Angus Craig, the Chief Financial Officer (CFO) the Company Secretary (CS) of Diversa Limited. Company Background of DIVERSA LIMITED: Diversa Limited is an Australian nonfinancial business. This company deals with all types of financial products in the market. Deversa offers several management and consulting services regarding the maintenance of the financial funds. There are three segments of services in the company. They are Superannuation Services, Trustee Services, and Tranzact Financial Services. The primary function of Superannuation Services is to work as a promoter and administrator to manage the superannuation funds and the risks involved. The segment Trustee Services operates as a third party service provider to the superannuation funds. This segment also provides investment services to the clients of the company. Diversa Limited has fifteen types of funds to invest in. The third segment Tranzact Financial Services acts as an administrator, promoter and management service provider to the Superannuation clients of Diversa Limited. This company assists to take in-house financial decisions to two Australian Companies named as The Managed Australian Retirement Fund and LESF Super. Diversa Limited is a listed company in Australian Stock Exchange. After the establishment, this company was listed on the ASX. About the CFO, Mr. Angus Craig: Mr. Angus Craig is the Chief Financial Officer (CFO) as well as the Company Secretary (CS) of Diversa Limited. He was appointed as the CFO of Diversa Limited in the year of 2007, and he has been in this company since then. Before Diveras, he was the Company Secretary of Virotec International from the year 2001 to 2007. And before Vitorec, he acted as the Senior Companies Officer in Australian Stock Exchange from the year 1994 to 2000. Mr. Craig is a vastly experienced person. He has tremendous knowledge in the area of corporate governance, company secretarial work, rising of capital, due diligence, corporate finance, etc. He also helps the company as the corporate advisor and financial analyst (Diversa.com.au. 2016). Three responsibilities of Mr. Angus Craig: According to Hope (2014), a Chief Financial Officer cannot restrict his/her responsibilities in a certain area. As a Chief Financial Officer of Diversa Limited, Mr. Angus Craig has a lot of responsibilities to take care of. Among all the responsibilities, there are three major responsibilities of Mr. Angus Craig in the organization. They are: To act as an administrator of the company. To act as a financial decision maker for the company. To act as a risk management expertise. The first responsibility of Mr. Angus Craig is to act as an administrator of Diversa Limited. An administrator is a person who is responsible for the smooth running of the organization. As an administrator, Mr. Angus Craig has a lot of roles to play. Mr. Craig has to formulate strategies with the other member of the boards for the future direction of the company (Bedard, Hoitash and Hoitash 2014). After making the plans, he needs to take necessary actions to implement those strategies correctly. He needs to monitor those strategies on a regular basis so that there is not any gap in them. The strategies include financial strategies, taxation strategies, etc. After the making and implementation of the strategies, Mr. Craig needs to develop a method or criteria which help to measure the overall performance of those strategies (Engel, Gao and Wang 2014). The second general responsibility of Mr. Craig is to take care of the financial matters of Diversa Limited. Financial matters include managing capital, making the budget, taking care of security and exchange board, taking good care of various financial information, help in making the financial report of the company and much more (Cocco 2015). Mr. Craig needs to take care of the management of capital. He needs to observe whether there is sufficient amount of capital exists in the organization. If not, then he has to arrange the capital. In that case, he needs to be very careful about the mediums by which he finances the capital. It is totally on him whether he will go for equity financing or debt financing after considering the risk factors. Then comes the preparation of the annual budget. It is Mr. Craigs responsibility to help the management team to make the annual budget of the company. As he has access to the various financial information of the company, it is his duty to provide all necessary information to the auditor at the time of the annual audit. And the most important responsibility is to make the financial report of the company. A financial report reflects the financial position of the company. So Mr. Craig has to make the financial report of the company with the help of all realistic data and information (Graham, Harvey and Puri 2015). The third responsibility of Mr. Craig is Risk Management. Risk management is a most crucial aspect. It determines the success of the organization. According to Lam (2014), a company is exposed to risk when financing from the market. It is the prime responsibility of Mr. Craig to evaluate all factors involving risk before investment. Evaluation of risk factors involves a proper study of the current investment market. Mr. Craig needs to take proper strategies to avoid risk factors, and he should have sufficient insurance coverage. He also needs to make sure that Diversa Limited complies with all the rules and regulation of the stock exchange board. At the time of annual Audit, Mr. Craig needs to report them all the risk factor issues. The Impact of Responsibilities of CFO on the Objectives: The objectives of a company reflect the mission and vision statement of that company. The most important objective of any company is to earn revenue and profit by satisfying the customers needs (Hall, Mikes and Millo 2015). Diversa Limited also has this objective, but they want to achieve more other than earning revenues. As per the vision and mission statement of Diversa Limited, they aim to deliver excellence with their services and want to establish a long relationship with their clients. The responsibilities of Mr. Angus Craig as a Chief Financial Officer help to achieve the objectives of Diversa Limited in various ways. As an administrator of Diversa Limited, his role is to make strategies for the smooth running of the company. Effective strategies have a great impact on the objectives of the company. They help to satisfy the needs of the clients and also help to retain the customers. As per the financial report of Diversa for 2015, the company has been successful to create an attractive market. There has been significance growth in the superannuation services. The method applied by Mr. Craig to measure the overall performance of the strategies can give the scope to improve. By the methods, the loopholes in the strategy can be easily detected and corrected. It will help to achieve the overall objectives of the company (Van Deventer, Imai and Mesler 2013). According to the financial report for 2015, the balance sheet of the company has become improved. The sector has witnessed growth in last year. These factors indicate the success of Mr. Craig as the Chief Financial Officer. The strategies taken by a financial manager helps to achieve the financial objectives of the company. It has been seen that Diversa has improved its leverage over the last twenty-four months. This statistic shows the impact of financial strategies on the objectives of the company. The role of Mr. Craig as the risk management expert helps the company to avoid the risk factors in the market. Risk results in a loss for the company. It is desirable for a company to take the moderate amount of risk. Here, the Chief Financial Officer is the person who analyses the risk factors and takes corrective measures to avoid the risks. Due to low risks, the investors get a higher return. This helps to create goodwill of the company. These are the ways by which the responsibilities of the Chief Financial Officers affect the overall objectives of a company (Baxter et al. 2013). B: To answer this question, one needs to know what are Efficient Market Hypothesis and the role of pension fund managers. Efficient Market Hypothesis: Efficient Market Hypothesis (EMH) is a theory or idea about the buy and sell of shares. EMH theory was developed by Eugene Fama in the year 1960. According to this theory, the share market cannot be defeated. The reason is that the share prices includes and reflects all the information about the share market. In details, one cannot predetermine the share prices and the trend of the share market at any cost. It means, buying and selling of securities is purely a game of luck, there is no function of skill required. One cannot bargain the share prices (Frahm 2014). The idea of EMH is a controversial one as many people opposed to this theory. According to them, one can predetermine the price of securities by studying the past price trends and the past trend of the security market. This method is called Technical Analysis (Menkhoff and Schlumberger 2013). Role of the Pension Fund Managers: Pension fund managers have vast roles to play. These roles differ based on the type of organizations. But there are some common roles which every pension fund managers to play. They are: To develop pension packages To formulate pension fund strategies and structures To make sure the effective operations of the schemes To observe the performance of the pension schemes To recruit the employees of the pension department and to train them To deal with typical pension fund issues To develop promotional strategies for the promotion of pension benefits To provide necessary information to the clients To prepare pension scheme report and to help in preparing the financial report by providing necessary information about the pension schemes (Kacperczyk, NIEUWERBURGH and Veldkamp 2014). Analysis: According to the Efficient Market Hypothesis concept, the prices of shares reflect all the information about that shares and the security market. As per the theory, one cannot predict the share prices and the trend of share market. In this situation, it is easy for a pension fund manager to select a portfolio for the investment of the pension fund. The pension fund is a kind of firm where the pensioners are bound to get a certain amount of return irrespective of the condition of the security market. As the share prices reflect all the information, the pension fund managers can easily choose the portfolio with the highest return (Grleanu and Pedersen 2015). However, the Efficient Market Hypothesis theory is not accepted in the recent era. There are a lot of criticisms about this theory. Nowadays people believes in Technical Analysis which says that the trend in share prices and security market can be predicted by studying the past data and information. But this is not a cent percent correct approach. In this situation, it is very tough for the pension fund managers to choose the correct portfolio with high return and low risk. They have to take the high amount of risks to choose the portfolio (Yalcin 2016). As per the above discussion, it can be said that in todays diversified market, the pension fund managers cannot choose the portfolio based on the Efficient Market Hypothesis theory. References: Baxter, R., Bedard, J.C., Hoitash, R. and Yezegel, A., 2013. Enterprise risk management program quality: Determinants, value relevance, and the financial crisis.Contemporary Accounting Research,30(4), pp.1264-1295. Bedard, J.C., Hoitash, R. and Hoitash, U., 2014. Chief financial officers as inside directors.Contemporary Accounting Research,31(3), pp.787-817. Brealey, R.A., Myers, S.C., Allen, F. and Mohanty, P., 2012.Principles of corporate finance. Tata McGraw-Hill Education. Cocco, J., 2015. 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