Assignment 1 Discussion Questions Due By Thursday, September

Assignment 1 Discussion Questions Due by Thursday, September 12, 2013

Read the discussion question for the week and post your responses to both of them. Responses should be submitted as a Microsoft Word document, formatted in Arial 10 point font, 1.5 spaced. Must use the current APA standards when formatting the paper. All written assignments and responses should follow APA rules for attributing sources and references.

Paper For Above instruction

Discussion Question: For a company with several subsidiaries, would it be easier to maximize shareholder value in the face of capital constraints by shifting capital among the affiliates? If in that same company 60% of the financial manager's time is devoted to managing working capital, how will an increase in inventory costs affect the production capacity? Should the financial manager devote more or less time to managing working capital in this instance?

In multinational and diversified corporations, the management of capital across subsidiaries plays a crucial role in maximizing shareholder value, especially under capital constraints. Shifting capital among affiliates can indeed be a strategic approach to optimize overall corporate performance, provided that the subsidiaries' operations align with the broader corporate goals and the capital transfers are efficiently managed (Modigliani & Miller, 1958). This internal redistribution of capital allows corporations to leverage the strengths or mitigate the weaknesses of individual units, reducing the need for external financing that might be costly or unavailable (Myers & Majluf, 1984). By reallocating resources from less productive to more promising subsidiaries, companies can increase efficiency, improve profitability, and thus enhance shareholder value. However, effective oversight and transfer pricing mechanisms are essential to avoid misallocation or tax complications (Brealey, Myers, & Allen, 2017).

Regarding the impact of increased inventory costs, when a company's inventory expenses rise, the direct effect typically manifests in higher operational costs, which can strain the firm's cash flow and reduce liquidity. For a financial manager who devotes 60% of their time to managing working capital, an increase in inventory costs necessitates a reevaluation of how that time should be allocated. Higher inventory costs may require closer management to optimize inventory levels, reduce excess stock, and improve turnover rates. Failing to address escalating inventory costs could diminish production capacity since excess or unmanaged inventories tie up capital, reduce flexibility, and may lead to production delays or stoppages (Ross, Westerfield, & Jaffe, 2016).

In this scenario, the financial manager should likely devote more effort to managing working capital, particularly inventory management, to mitigate the negative effects of increased inventory costs. This may involve implementing just-in-time inventory systems, renegotiating supplier terms, or utilizing technology to enhance inventory tracking (Brigham & Ehrhardt, 2016). Conversely, reducing time spent on other aspects of working capital management may be necessary to ensure that inventory issues are addressed promptly and effectively. This strategic realignment helps sustain production capacity, maintain operational efficiency, and ultimately support the company's profitability and shareholder value (Higgins, 2012).

References

• Brealey, R. A., Myers, S. C., & Allen, F. (2017). Principles of Corporate Finance (12th ed.). McGraw-Hill Education.
• Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice (15th ed.). Cengage Learning.
• Higgins, R. C. (2012). Analysis for Financial Management (10th ed.). McGraw-Hill Education.
• Modigliani, F., & Miller, M. H. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment. American Economic Review, 48(3), 261–297.
• Myers, S. C., & Majluf, N. S. (1984). Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have. Journal of Financial Economics, 13(2), 187–221.
• Ross, S. A., Westerfield, R., & Jaffe, J. (2016). Corporate Finance (11th ed.). McGraw-Hill Education.