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Financial Management and Manipulation

1. In light of the many scandals regarding manipulations of financial reports, are there still merits in analyzing financial statements of public companies? Also, the three major causes of financial statement fraud are rationalization, opportunity and pressure. Read the following article 'http://www.ogfj.com/index/article-display/297744/articles/oil-gas-financial-journal/volume-4/issue-7/features/detecting-financial-statement-fraud-what-every-corporate-manager-needs-to-know.html'>http://www.ogfj.com/index/article-display/297744/articles/oil-gas-financial-journal/volume-4/issue-7/features/detecting-financial-statement-fraud-what-every-corporate-manager-needs-to-know.html

How can the pressure to show short-term gains and stock value increases be relieved?

2. Using the Excel spreadsheet one can easily compute the NPV of a stream. Place the initial investment number in cell A1(using a negative, such as -1000 ), and then the cash flow that emanates from the investment in cells B1, C1 and so on (or you may chose to list the amounts vertically). Then use the NPV function to compute the NPV (be sure you place the rate and values in the correct place) Consider the following example: Investment of 1000 (now), followed by net cash flow of 580 in one year and another 580 in two years. consider a cost of capital or a discount rate of 0.08 (8%). Use the Excel spreadsheet to compute the NPV of the investment. Then please use a simple calculator to do the same computation. Do you get the same result? Are you sure? Tell me what you think of this little exercise

3.How important is the financing decision in your organization? What are the difficulties in making financial decisions?

Financial decisions are often about the composition of the financing or the "financial package". Does it matter if the organization uses short term loans, long term loans, foreign currency loans, shareholders' money (equity) to the value of the shares or the value of the company?

4. When investing in IT an organization is making a long-term financing decision. The organization can use debt or equity financing. Discuss the challenges of each. Also, what are the tradeoffs between the two?

5.What are your thoughts about the use and role of IT in general as we work our way through and out of the economic recession?

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Solution Preview

1. Pressure to shown short-term gains and stock value increase can be relieved by stopping the demand to hit numbers that meet Wall Street expectations. This pressure can also be reduced by delinking compensation under management incentive plans. The pressure can be relieved by changing the tone at the top. The implicit messages from the top management to show short-term gains and stock value should be stopped. The emphasis, proportion, and frequency of messages from top to hit numbers that satisfy Wall Street expectations should be reduced drastically. The implicit messages from the top that cutting corners is acceptable should stop. Further, the pressure can be relieved if the management examines the opportunities and pressures in their organization.

2. When I used the excel spreadsheet to compute the net present value of the investment, the answer was $31.75. The investment was $1,000 now followed by net cash flow of $580 in one year and another $580 in two years. When I used a simple calculator to do the same computation, I get $533.6 for one year and $490.91 for the two year period. This means a total of $1024.51. The NPV is $1,000 less $1024.51 equals $24.51.

I think this exercise shows that using a spreadsheet and its formulae gives a slightly different result than the actual number.

3. Financial decisions in my company are important. The most important decisions are the forecasting of the working capital ...

Solution Summary

The answer to this problem explains several aspects of financial management. The references related to the answer are also included.