Discuss about the Fundamentals of Corporate Finance Management.
Flames have a strong business and are engaged in production and sale of lamp fixtures. The cost and revenue are stable; however, the profit has been just adequate. Flames need to boost up the profit and looking for means to enhance the profit. For this, the company is negotiating with a Mexican firm called the Coron Company. The negotiation is for the benefit of the company because it will help the company is spreading business and attaining new ground.
The main players or the actors is the Flame company and the Coron company with which it wants to associate or join hands for the increment in the profits. The organizational forces are the production capabilities of Flames. With the help of Coron, the company is trying to enhance the position and going by the production capacity it is expected to save 20 percent of the production cost. Flames can use the assets if Coron is unable to full the obligations.
The external forces are the changes in the exchange rate. The exchange rate will influence the deal between Flames and Coron. It is expected by Flames that the cost to Coron will enhance because of the higher inflation rate in Mexico. Moreover, the price fluctuations in pesos will increase every three months (Parrino et. al, 2012). Payments to Coron will be stable because of the concept of purchasing power parity. The exchange rate is the only differentiating external force.
The theoretical perspective is that of the neoclassical theory. This theory sheds light on the perception of efficacy or utility of products. In this case, the theory aims at the perception of efficacy or utility that impacts demand and supply. In order to attain more profit, Flames is joining hands with Coron. The main finding from the case is that the products of Flame have a high demand and stable in nature. It is ready to sign the contract with Coron as the rate of inflation in the U.S is expected to be low (Bekaert & Hodrock, 2012).
The case study delivers a strong answer to the fact that the pricing of a product depends majorly on the external scenario that is the exchange rate. The influence of exchange rate increases or decreases the product prices. As is seen in the study that Flames have low liquidity and could face a shortage of cash if the expenses are higher than the anticipation. Therefore, the decision making should happen considering the exchange rate prevailing and anticipation in demand (Kieso et. al, 2010). When it comes to the functioning of Flames, the ethical consideration is that of the performance anticipation.
Overall, it can be recommended that the company should take the vital decision based on an internal and external scenario. The internal scenario can be tamed to a greater extent as compared to the external one (Deegan, 2011). Therefore, it is imperative for the company to take vital decisions knowing the fluctuations in the exchange rate. Further, the management must make provisions for the differences that can be observed when there are fluctuations in the exchange rate. This is due to the fact that the demand and supply get impacted.
Bekaert, G., & Hodrock, R. (2012). International financial management (2nd ed). Prentice Hall
Deegan, C. M. (2011) In Financial accounting theory. North Ryde, N.S.W: McGraw-Hill
Kieso, D., Weygandt, J., Warfield, T; Young, N., & Wiecek, I. (2010). Intermediate accounting. Toronto: John Wiley & Sons Canada.
Parrino, R, Kidwell, D., & Bates, T. (2012) Fundamentals of corporate finance. Hoboken, NJ: Wiley