Capital Budgeting and Risk
- WACC calculation
- With changed data
As the invest risk increased, SVI’s after tax WACC reduced to 8.50% from 8.62%. However, the end result may not be as per the investor’s expectation (What is CAPM - Capital Asset Pricing Model - Formula, Example, 2017). Further, the higher leverage will lead to high amount of debt in capital structure. Moreover, as the pre-tax cost of all finance sources will go up, the deduction on the part of debt that went up, shall lead to reduction of SVI’s WACC (Weighted-Average Cost of Capital (WACC), 2017).
Role of the Financial Management in Connection to the ‘Not-For-Profit Organisation’
Numerous factors are crucial to the successful operations and the smooth running of an enterprise of any sort. The enterprise can be commercial as well as non-commercial. The factors under consideration might be exogenous in nature while completely endogenous to the enterprise itself. The former is involuntary and does not depend on operational techniques of the said enterprise. The endogenous factors, which are under the control of the enterprise management, are much more significant in comparison to others. It can therefore be said that the organisational management needs to take care of the endogenous factors. This is due to the fact that potential of the concerned enterprise possesses increment and it is necessary to obtain the long term as well as the short term targets of the particular enterprise. One of the most crucial endogenous factors which are of major importance and possessing valuable implications is the said enterprise’s financial management. The term “financial management” basically denotes the effective and proper management of the fiscal belongings as well as the organisational funds. This also includes the particular effective usage as well as the efficient and suitable allocation. This is done to achieve the objectives of the required organisation in a suitable manner.
For the proper operations of the organisations in the existent economy, the profit maximising enterprises as well as the non-profit entities require the effective fiscal management. This is necessary for the increased financial efficiency of the company. It is not unlikely to consider that the non-profit organisations do not require a financial management network for the effective operations in comparison to that of the profit based ones as the non-profit ones are not more or less concerned about the generation of revenue but in reality the situation is different. For non profit organisations as well the role of financial management is significant. The study of the variations between the profit as well as the non-profit organisations is also important. The most important goal for the profit enterprises is the accumulation as well as the earning of the profit in order to maximise the value of the shareholders’. Despite the earning of profit being the most important target for the for-profit organisations their main aim is a tad different. This is to deliver the socially desirable requisites on a continuous basis. The non-profit organisations depend on the money contributed for specific purposes that is bound to deprecate the elasticity of the organisations of not-for-profit nature. The for-profit organisations basically rely on the exchange transactions.
Based on the above discussions it can be said that the social welfare and the benefits to the society are causes that are catered to by the non-profit organisations. Due to this the majority of the financial resources come from their well-wishers as well as the donors who facilitate in the patronisation of their initiatives. In certain cases the organisations perform several production activities themselves with certain members in a small scale in order to earn revenue. This is in turn utilised for the organisational purposes. Thus, for this nature of organisations, the management of the fiscal resources is of huge importance as also is the correct spending. This is because, it is necessary to show the donors their earnings as also their expenses in a detailed manner. The economic management is also necessary for the non profit organisations because the amount of their cash inflow has a probability of being irregular as it is required to smoothen their expenses based on an irregular cash inflow.
The organisations consider the resources to be immensely important and they mostly come in the form of the donations. They are then kept as a reserve or as an asset by the organisations due to the scanty and irregular nature of inflow. The protection of the financial reserves as well as their efficient use is of huge importance for the non-profit organisations as the longevity and the sustainability depends on the existing resources. This indicates the importance of the proper fiscal framework of management in the non profit industries.
A different aspect of immense significance in case of the non profit organisations specifically is their reputation because almost all the successes as also the long term sustainability of the organisations depend on the goodwill that has been attained by the enterprise in the said economy. The amount of the donations that the not for profit organisations receive depend hugely on the amount of goodwill and the reputation they have achieved in the society (Sigman, 2017). There have been cases where the non profit organisations have wrongly utilised the funds or the donations they have received. As a result it has caused huge amount of loss of goodwill of the enterprise and dependence of the people on it. This is also bound to impact the collection of the funds and they may be diverted to the other organisations. In order to prevent this, the proper financial management needs to be implemented for the non profit organisations.
It often happens that the non profit organisations are involved in the production activities, the levels of the production being small and not completely industrialised by nature. Along with the development of a robust as well as a foresighted budget, it is hugely important to manage the funds as well as help in the facilitation of the revenue collection that assists the organisations to operate successfully in the long run.
The financial management helps in the formulation of the organisational budget which may prove to be beneficial depending on the proper planning of the budget. Thus, is absolutely clear from the above mentioned discussions that the fiscal management activities of the organisations are hugely significant for the non profit enterprises (Vaidya, 2017). The significance3 is more in certain cases than that of the profit targeting totally commercialised organisations. The appropriate management needs to be performed on a day to day basis in order to keep the operations of these organisations smooth and keeping them all free from controversies.
Sigman, K. (2017). Capital Asset Pricing Model (CAPM). www.columbia.edu. Retrieved 14 September 2017, from https://www.columbia.edu/~ks20/FE-Notes/4700-07-Notes-CAPM.pdf
Vaidya, D. (2017). Weighted Average Cost of Capital (WACC) | Formula | Examples. Free Investment Banking Tutorials | WallStreetMojo. Retrieved 14 September 2017, from https://www.wallstreetmojo.com/weighted-average-cost-capital-wacc/
Weighted-Average Cost of Capital (WACC). (2017). Macabacus.com. Retrieved 14 September 2017, from https://macabacus.com/valuation/dcf/wacc
What is CAPM - Capital Asset Pricing Model - Formula, Example. (2017). Corporate Finance Institute. Retrieved 14 September 2017, from https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-capm-formula/