Financial Management: Principles And Applications Method Essay

Question:

Discuss about the Financial Management for Principles and Applications Method.

Answer:

Introduction:

Project A has been recommended because of the higher Equivalent as compared with Project B, which determines the annual yield for the same NPV of the project, having life disparity (Petty et al, 2011, p. 424). The four major risks associated with the Project A, as listed by Energy Efficiency Exchange, are mentioned below:
Financial Risk: Since, Project A is capital intensive, requiring huge investment initially; the risk is that whether the huge amounts of fund for machinery will be available. Also, in case of break-down of machine, whether the necessary repair and maintenance can be provided at an appropriate cost.
Strategic Risk: It has to be seen that the funds made available for the Project A will be properly invested in acquiring the equipments or not, for accomplishment of organizational goals because the most planned things can also run into trouble (Watt, 2014).
Operational or Breakdown Risk: Project requires various machineries to commence its operations and therefore, can suffer temporary breakdown due to some technical problem. Therefore, this may hamper the production and generating an operational risk.
Operational Safety Risk: It refers to the risk whether people working on Project A are not harmed or exposed to any type of conditions, that can lead to hazards (Health and Safety Authority, 2017).

As per Fama (1970), a market is said to be efficient which ‘truly and fully’ reflects the available information in the price of a security. The primary motive of an investor while investing funds in a security is to be able to view the activities that are taking place in the firm, whose securities are being invested in. Therefore, there lies a need to have a market where each and every decision is being reflected in the price of the security in the ‘real time’ so as to enable the investors to take an informed decision.

Efficient Market Hypotheses is a principle that makes sure that the information received by the market is correctly showcased in the pricing of security in a timely manner, so that there lays no undervalued or overvalued stocks. The principle works on the assumption that every stock price is equal to its respective intrinsic value.

The valuation of stock is directly linked with the investments that a company gets. At first, the value of security is determined by discounting the cash flows that an organization is expected to generate in near future. However, as the organization expands, there are various decisions being taken that can have effect on the stock prices and thereby, efficient mechanism came into force, whereby, every aspect can be seen in the analysed with fluctuation in price of security.

According to the Australian Securities and Investment Commission, credit is being offered to individual, who are in a capacity to repay the same. By the virtue of law, credit providers have the right to make enquiries about the organization and see to it, if the company is not indulging in a project that is non-profitable or that can affect a company’s financial position. The best way to identify the credit-worthiness of the company is to take a look at its security price that is being prevailing in the market, which is a result of efficient market.

Willingness and the ability to repay a loan have been considered as the two prominent factors while giving a loan (Chapman, 1940, p. 109). Similarly, an investor will invest his money in a firm, when it expects that his money is safe and will surely get a return, living up to his expectations. The returns are only possible when the company takes up a profitable opportunity and en-cash the rewards in optimum manner. Accordingly, the share prices will grow and more and more investors will be attracted to invest in the company and as a result, funds are gathered by the company for its operations.

Therefore, it can be said that Equator’s ability to borrow funds in a capital market which is highly efficient is quite relevant. The project that it chooses will have an impact on the price of its security and thereby, can improve or decrease its ability to get funds from investors as well as other financial institutions in the market. As soon as Equator chooses Project A over Project B, it is expected to increase cash flows in the near future, thus, improving the stock price of the company. Hence, it is evident that each and every step of Equator has a direct effect on its ability to borrow funds from the market.

References

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Chapman, John M. "Factors Affecting Credit Risk In Personal Lending". N.p., 1940. Web. 6 Jan. 2017.

"Efficient Capital Market - Complete Guide". World Finance. N.p., 2016. Web. 6 Jan. 2017.

Fama, Eugene F. "Efficient Capital Markets: A Review Of Theory And Empirical Work". The Journal of Finance 25.2 (1970): 383. Web. 6 Jan. 2017.

"Hazards And Risk - Health And Safety Authority". Hsa.ie. N.p., 2017. Web. 6 Jan. 2017.

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