Which Of The Following Statements Is Most Correct? 748215

Which Of The Following Statements Is Most Correcta If A Firm Take

Identify the most accurate statement regarding financial management, short-term finance, and international finance concepts from the provided options, including implications of working capital management, trade credit, capital structure, foreign exchange, and investment decisions.

Evaluate statements about how actions such as reducing days sales outstanding (DSO), stretching accounts payable, payment terms on trade discounts, and managing receivables influence the cash conversion cycle (CCC). Analyze the relationship between debt ratios, bankruptcy costs, tax advantages, and leverage on firm value and cost of capital. Consider arbitrage opportunities based on forward exchange rates compared to market quotes, and understand strategies for hedging foreign currency receivables and payables. Examine net present value (NPV) calculations for international projects, implications of capital structure changes on firm value, and valuation methods for bonds, warrants, and convertible securities. Additionally, explore residual dividend policies and investment appraisals in the context of corporate finance.

Paper For Above instruction

The complexity of financial management requires a profound understanding of various interrelated concepts, including working capital management, capital structure, international finance, and investment decision-making. Among the key considerations is managing the cash conversion cycle (CCC), a vital measure of a firm's liquidity and operational efficiency. Actions that reduce the days sales outstanding (DSO) or accelerate collections typically shorten the CCC, improving liquidity, whereas delaying accounts payable can prolong the cycle, tying up cash longer. Properly managing trade credit—particularly the use of early payment discounts versus longer credit periods—can optimize cash flows and reduce working capital needs (Brigham & Ehrhardt, 2016).

Trade credit terms such as 2/10 net 30 are common incentives designed to encourage early payments. The nominal cost of trade credit or the discount rate forfeited by not paying early reflects an implicit financing cost that managers should compare with alternative sources of short-term capital (Ross, Westerfield, Jaffe, & Jordan, 2019). Similarly, in international finance, arbitrage opportunities exploitation through forward contracts relies on discrepancies between forward rates and spot rates. For example, when the forward rate implied by interest rate parity differs from the market quote, investors can engage in arbitrage by taking opposite positions in foreign currency and borrowing or lending in respective markets, generating riskless profits (Eun & Resnick, 2011).

Capital structure decisions significantly influence firm valuation and cost of capital. An increase in the debt ratio generally reduces the weighted average cost of capital (WACC) due to the tax shield benefits of debt but can also increase financial distress risk if leverage becomes excessive (Modigliani & Miller, 1958). Changes in bankruptcy costs or tax rates alter optimal leverage and can affect a firm's valuation, investment capacity, and financing strategies. Therefore, firms must carefully analyze these trade-offs to balance debt and equity efficiently.

International investment decisions involve estimating the net present value (NPV) of foreign projects, which necessitates adjusting cash flows for currency risk, interest rates, and exchange rate expectations. For instance, when evaluating a manufacturing plant in the UK, the discount rate should incorporate the risk-adjusted cost of capital, and cash flows converted at prevailing spot rates while considering forward rate forecasts to hedge currency exposure (Dunning, 1993). Similarly, bond valuation with warrants or convertible securities requires understanding their pricing, yield, and potential dilution effects on current shareholders.

Management's residual dividend policy affects dividend payout ratios and retained earnings to fund investment opportunities, balancing shareholders’ income preferences against growth prospects. In residual dividend policies, dividends are paid from residual earnings after funding all desirable projects (Berk & DeMarzo, 2017). Forecasting dividends involves analyzing projected net income, capital expenditure, and target capital structure, emphasizing the importance of maintaining financial flexibility.

In sum, proficient financial management integrates short-term liquidity techniques, capital market strategies, and international finance principles. Effective decision-making in these areas maximizes value, minimizes costs, and positions firms competitively in global markets, underpinning sustained growth and profitability.

References

• Berk, J., & DeMarzo, P. (2017). Fundamentals of Corporate Finance (4th ed.). Pearson.
• Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice (15th ed.). Cengage Learning.
• Dunning, J. H. (1993). Multinational Enterprises and the Global Economy. Addison Wesley.
• Eun, C. S., & Resnick, B. G. (2011). International Financial Management (6th ed.). McGraw-Hill.
• Modigliani, F., & Miller, M. H. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment. American Economic Review, 48(3), 261–297.
• Ross, S. A., Westerfield, R. W., Jaffe, J., & Jordan, B. (2019). Corporate Finance (12th ed.). McGraw-Hill Education.
• Westerfield, R., Jaffe, J., & Jordan, B. (2019). Corporate Finance (13th ed.). McGraw-Hill Education.