Financial Management Function of a Company

Magansett Corporation had a history of success. The company's development and operation, however, was heavily influenced by the managrial will of its founder and Chief Executive Officer (CEO), until that individual's retirement in 1976. Profit levels and return on equity deteriorated subsequent to his departure, and the downward trend continued through 1981, when a turnaround appeared to begin. Under the former CEO, the company observed a highly conservative financial strategy.

The major financial problem areas and issues confronting the company in early1983 concerned (1) working capital management, (2) capital structure, (3) capital budgeting, and (4) cash dividend payout. In the area of working capital management, the company carried an excessive level of nonproductive or low productive current assets, while, in the area of capital structure, the company failed to make a productive use of

1 2debt. With respect to capital budgeting, the company neglected cost of capital considerations in the development of investment priorities, relying instead on an overly restrictive payback period criterion. The company's policy on cash di

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mon stock. Fixedinterest debt refers to longterm debtthat with a maturity longer than oneyear (Conine, 1980a). This longterm debt may be in the form of bonds, preferred stock, or other fixedinterest debt instruments. Thus, the higher the leverage ratio, the greater the company is said to be leveraged, and vice versa. Another way of saying the same thing is that the more outside money is being used by a firm for longterm capital, the greater that firm is leveraged. Return on investment objectives more often than not are based on a return on total capital. Therefore, if two firms with comparable equity investments earn the same percentage return on total capital, the higher leveraged firm will have greater earnings than will the lower leveraged firm. To earn 6such a return, however, it is necessary that the earnings rate on the borrowed capital exceed the cost of the capital. There are both advantages and disadvantages to high leverage. A primary advantage, of course, is that high leverage permits a firm to, so to speak, operate on someone else's money. In finance, the process is called trading on the equity. Another advantage is that a firm can obtain additional capital at a time when it might be diffic
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Some common words found in the essay are:
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Approximate Word count = 2600
Approximate Pages = 10 (250 words per page)

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