Financial Management Case Study Example | Topics and Well Written Essays - 2000 words

Financial Management - Case Study Example Every foreign exchange market is in a position to mitigate the risk of uncertainty occurred due to the variations in the exchange rates on cash flows of both payables and receivables. â€Å"Under the hypothesis of efficient foreign exchange markets, the validity of the Purchasing Power Parity theorem may take care of the company’s uncertainty with respect to the mean value of its foreign currency portfolio. The remaining uncertainty, i.e. the variance of the value of the foreign currency portfolio around its mean, can be reduced by hedging† (Soenon 2006). Under this kind of marketing, generally, there should be equilibrium between the estimated cost of hedging and the actual cost. In addition, the chances of risks and uncertainty will be higher in case of exchange rates and its variations. It is necessary to consider the uncertainty caused by fluctuating exchange rates on cash flows both payable and receivable. This is due to the fact that one of the important tools with the finance manager to determine the changes in cash in hand and at bank is the cash flow statement. The statement of cash flows, both inflows and outflows can be analyzed to reveal significant relationships. Cash generating efficiency is the ability of an organization or a company to generate cash from its current or continuing operations. To evaluate this, fundamentally, certain ratios are used. Similarly, free cash flow is significant in this regard. It is the amount of cash that remains after deducting funds a company must commit to continue operating as its planned level. Such commitments must cover current continuing operations, interest, income tax, dividend, and net capital expenditures. When the free cash flow is positive, it means that the company has met all its planned commitments and has cash available to reduce debt or expand. A negative free cash flow would mean that the company needs to sell investments, borrow money or issue stock, in a short term, to carry on its finance at the planned levels. Besides measuring the cash efficiency and free cash flow with the help of cash flow statement, the financial analyst also calculates various ratios on cash figures rather than the earnings of the company. Such major ratios are- 1. Price per share/free cash flow per share 2. Operating cash flow/Operating profit 3. Self financing investment ratio, which is the internal funding/ Investment activities (net). It helps to indicates how much of the funds generated by the business are reinvested in assets. It is evident that the concepts of investment and risk are related to each other. Every business entity aims to maximize its returns. The business that deals with the investment in different securities by the investors is beneficial to a great extend but at the same time is quiet risky. More