Free Cash Flow and Shareholder Certainty Assignment Sample

Subject Name : Accounting and Finance, Economics

Free cash flow is the amount that is readily available to a corporation for disbursing to any shareholders or creditors (Guizani & Abdalkrim, 2022). In view of Forcefield Energy, having more amount of free cash flows will fetch more certainty for shareholders as now the corporation will have more capital for any uncertainties.
The 3 properties of the cash flow of the company are operating costs, sales revenue and taxes, and needed new investment in the form of operating capital.

Three advantages are –

The company can exist even after the death of the original owners.
Easy transferability of ownership interest
Loss incurred by the company is limited to the original funds being invested.

Two disadvantages are –

Earnings of a company are taxed at two stages, first at the corporate level and then at the stockholders' level.
The complex process involved in filing multiple federal and state reports for compliance.

In the company, the owners or shareholders cannot act as managers of the corporation. This indicates that the owners cannot do anything to prevent managers n acting in their own best interest rather in the interest of the owners. This problem is known as the agency problem (Chod & Lyandres, 2021). To mitigate this issue, there is a set of guidelines that govern the behaviour of managers, directors, creditors, shareholders, employees and the community. This set of rules is known as corporate governance.
The fundamental goal of maximizing the wealth of shareholders might be good in the short term. However, if the company make use of any illegal or unethical means and raise the price of its shares to fulfil this goal, then such an approach may do more harm than good and therefore, be considered as bad for the society at large.

4 instances that may harm the goal of maximizing shareholders’ wealth are –

Fraudulent accounting
violation of the security and safety code of conduct
Incapable to meet environmental standards
the exploitation of monopoly power of the company in their domain

Three attributes that Forcefield Energy Inc. must have to be successful are listed below –

The corporation must understand that owners of stock are society.
Corporations must act in the best interest of the customer.
The company must work towards employee benefits.

Corporate financing is significant as firms often require capital to execute their growth plans or to fund the existing debt (Graham, 2022).
To help the company to accomplish the stated objectives, Sabatino must –

Have the efficiencies to understand cash flows and manage them according to the expectations of the market.
Comprehend social and economic policies that impact the cost of money.
Comprehend the forms of stock market transactions.
Comprehend the several forms of financial instruments and their impact.
Deeply understand the moral obligations of being a financial manager and working in the best interest of the corporation by following corporate governance.

Four main financial instruments that can be used to raise the required long-term capital are –

Corporate bonds
Commercial loans
Municipal bonds
US treasury notes and bonds

Four economic conditions are listed below –
Federal budget surplus or deficit – Federal government will cut the deficit either by selling treasury securities or printing money. In both scenarios, the supply of long-term inflationary pressure would rise and interest rates would rise.
Level of business activity – In a recession, there is a slowdown of demand that keeps the corporations from rising prices and decreases price inflation.
The difference between exports and imports of the nation can be direct to trade surplus or deficit.
Federal Reserve uses open market operations to buy treasury securities, which led to more loanable funds lowering the interest rates.

References

Chod, J., & Lyandres, E. (2021). A theory of ICOs: Diversification, agency, and information asymmetry. Management Science, 67(10), 5969-5989.

Graham, J. R. (2022). Presidential address: Corporate finance and reality. The Journal of Finance, 77(4), 1975-2049.

Guizani, M., & Abdalkrim, G. (2022). Board gender diversity, financial decisions and free cash flow: empirical evidence from Malaysia. Management Research Review, 45(2), 198-216.