Order ID |
53563633773 |
Type |
Essay |
Writer Level |
Masters |
Style |
APA |
Sources/References |
4 |
Perfect Number of Pages to Order |
5-10 Pages |
Description/Paper Instructions
Examination of Ethical Issues in Finance Discussion Paper
Examination, Ethical, Issues, Finance, Discussion, Paper
After reading the “Ethical Issues” box on page 330 of the required text, devise a plan that will minimize or reduce the impact of these cash flow estimation biases on effective decision-making.
The CFO of a firm you just started working for claims “we always have, and always will, use the weighted average cost of capital (WACC) as the rate to discount future expected cash flows from our proposed capital budgeting projects”. What do you think of this strategy?
Read section 11-4, pages 399 – 404 in the required text carefully.
Submission Instructions:
Your initial post should be at least 200 words, formatted and cited in current APA style with support from at least 2 academic sources. Your initial post is worth 8 points.
You should respond to at least two of your peers by extending, refuting/correcting, or adding additional nuance to their posts. Your reply posts are worth 2 points (1 point per response.)
ETHICAL ISSUES
Cash Flow Estimation Biases
The estimation of the cash flows associated with an investment project is the most important step in the capital expenditure evaluation process. If the cash flow estimates associated with a project are inten- tionally or unintentionally biased, a firm’s resources are unlikely to be allocated to the set of investment projects that will maximize shareholder wealth.
There are several reasons why managers might produce biased cash flow estimates when preparing capital expenditure project proposals. First, a manager might be tempted to overestimate the revenues or underestimate the costs associated with a project if the manager is attempting to expand the resource base over which he or she has control.
By biasing the estimates of a project’s cash flows upward, a manager is likely to receive a larger share of the investment resources of the firm. Because managerial compensa- tion is sometimes tied to the span of job responsibili- ties, managers may be tempted to expand this span of control at the expense of other areas in the firm.
Second, some firms tie employee compensation to performance relative to stated objectives—a compen- sation scheme often called management by objective. If a manager is confident that the best estimate of the cash flows from a proposed project is sufficiently large to guarantee project acceptance, the manager may be tempted to reduce these cash flow estimates to a level below the “most likely outcome” level, con- fident that the project will continue to be viewed as an acceptable investment and that it will be funded.
How- ever, once the project is under way, the project man- ager will feel less pressure to meet projected performance standards. The downward bias in the cash flow estimates provides a cushion that permits suboptimal management of the project while achiev- ing the objectives enunciated when the project was first proposed.
What impact does intentionally biasing cash flow estimates for investment projects have on achieving the goal of shareholder wealth maximization?
Post by classmate 1
Firms with higher leverage and capital intensity might not have a financial analyst or oversee the cash flow estimation process as most of the forecast could be executed by a simulation method based on past experience or market behavior through software. Firm’s use both types of estimates and measure of financial and operating risks might also need to benchmark themselves against the standard cash flow related ratio like liquidity ratios additionally to estimate risk free cash flow positions.
The more the economic life of a project the more uncertain would the pay-back period become and the timing of the discounted cash flows gain importance. More than multiple methods of forecasting, it is important to accurately estimate the discounting rate and cash flow streams over the economic life of the project.
The strategy of using WACC as a discount rate to discount the future expected future cash flows from the proposed capital budgeting projects is correct. The free cash flow to the firm must be discounted using WACC, while free cash flow to equity must be discounted using cost of equity.
Post by classmate 2
After reading the “Ethical Issues” box of the required text, I believe seeking diverse outside opinion to counter the overconfidence will lessen the impact of these cash flow estimation biases on effective decision-making. In addition, having a fresh pair of eyes or thoughts can help because it can provide a different perspective.
This can be vital when estimating cash flow. Another plan that can be used is to challenge the decision-making process. These plans can only be accomplished by realizing that one can influence and are influenced by the format of the information given.
WACC is a financial metric and is commonly used to provide a discount rate for a financed project. This is because the cost of financing the capital is a fairly reasonable price tag to put on the investment.
I believe the CFO strategy of using WACC as a discount rate to discount the future expected future cash flows from the proposed capital budgeting projects is right. When reading about the materials in this module, one thing that I learned was that the free cash flow to the firm must be discounted using WACC, while free cash flow to equity must be discounted using the cost of equity.
References
McConnell, J. &. (1975). McConnell, J., & Sandberg, C. (1975). The Weighted Average Cost of Capital: Some Questions on Its Definition, Interpretation, and Use: Comment. The Journal of Finance, 30(3), 883-886.
Moyer, R. C., McGuigan, J. R., & Rao, R. (2018). Contemporary financial management. Mason, OH: Cengage-Southwestern.
RUBRIC
QUALITY OF RESPONSE |
NO RESPONSE |
POOR / UNSATISFACTORY |
SATISFACTORY |
GOOD |
EXCELLENT |
Content (worth a maximum of 50% of the total points) |
Zero points: Student failed to submit the final paper. |
20 points out of 50: The essay illustrates poor understanding of the relevant material by failing to address or incorrectly addressing the relevant content; failing to identify or inaccurately explaining/defining key concepts/ideas; ignoring or incorrectly explaining key points/claims and the reasoning behind them; and/or incorrectly or inappropriately using terminology; and elements of the response are lacking. |
30 points out of 50: The essay illustrates a rudimentary understanding of the relevant material by mentioning but not full explaining the relevant content; identifying some of the key concepts/ideas though failing to fully or accurately explain many of them; using terminology, though sometimes inaccurately or inappropriately; and/or incorporating some key claims/points but failing to explain the reasoning behind them or doing so inaccurately. Elements of the required response may also be lacking. |
40 points out of 50: The essay illustrates solid understanding of the relevant material by correctly addressing most of the relevant content; identifying and explaining most of the key concepts/ideas; using correct terminology; explaining the reasoning behind most of the key points/claims; and/or where necessary or useful, substantiating some points with accurate examples. The answer is complete. |
50 points: The essay illustrates exemplary understanding of the relevant material by thoroughly and correctly addressing the relevant content; identifying and explaining all of the key concepts/ideas; using correct terminology explaining the reasoning behind key points/claims and substantiating, as necessary/useful, points with several accurate and illuminating examples. No aspects of the required answer are missing. |
Use of Sources (worth a maximum of 20% of the total points). |
Zero points: Student failed to include citations and/or references. Or the student failed to submit a final paper. |
5 out 20 points: Sources are seldom cited to support statements and/or format of citations are not recognizable as APA 6th Edition format. There are major errors in the formation of the references and citations. And/or there is a major reliance on highly questionable. The Student fails to provide an adequate synthesis of research collected for the paper. |
10 out 20 points: References to scholarly sources are occasionally given; many statements seem unsubstantiated. Frequent errors in APA 6th Edition format, leaving the reader confused about the source of the information. There are significant errors of the formation in the references and citations. And/or there is a significant use of highly questionable sources. |
15 out 20 points: Credible Scholarly sources are used effectively support claims and are, for the most part, clear and fairly represented. APA 6th Edition is used with only a few minor errors. There are minor errors in reference and/or citations. And/or there is some use of questionable sources. |
20 points: Credible scholarly sources are used to give compelling evidence to support claims and are clearly and fairly represented. APA 6th Edition format is used accurately and consistently. The student uses above the maximum required references in the development of the assignment. |
Grammar (worth maximum of 20% of total points) |
Zero points: Student failed to submit the final paper. |
5 points out of 20: The paper does not communicate ideas/points clearly due to inappropriate use of terminology and vague language; thoughts and sentences are disjointed or incomprehensible; organization lacking; and/or numerous grammatical, spelling/punctuation errors |
10 points out 20: The paper is often unclear and difficult to follow due to some inappropriate terminology and/or vague language; ideas may be fragmented, wandering and/or repetitive; poor organization; and/or some grammatical, spelling, punctuation errors |
15 points out of 20: The paper is mostly clear as a result of appropriate use of terminology and minimal vagueness; no tangents and no repetition; fairly good organization; almost perfect grammar, spelling, punctuation, and word usage. |
20 points: The paper is clear, concise, and a pleasure to read as a result of appropriate and precise use of terminology; total coherence of thoughts and presentation and logical organization; and the essay is error free. |
Structure of the Paper (worth 10% of total points) |
Zero points: Student failed to submit the final paper. |
3 points out of 10: Student needs to develop better formatting skills. The paper omits significant structural elements required for and APA 6th edition paper. Formatting of the paper has major flaws. The paper does not conform to APA 6th edition requirements whatsoever. |
5 points out of 10: Appearance of final paper demonstrates the student’s limited ability to format the paper. There are significant errors in formatting and/or the total omission of major components of an APA 6th edition paper. They can include the omission of the cover page, abstract, and page numbers. Additionally the page has major formatting issues with spacing or paragraph formation. Font size might not conform to size requirements. The student also significantly writes too large or too short of and paper |
7 points out of 10: Research paper presents an above-average use of formatting skills. The paper has slight errors within the paper. This can include small errors or omissions with the cover page, abstract, page number, and headers. There could be also slight formatting issues with the document spacing or the font Additionally the paper might slightly exceed or undershoot the specific number of required written pages for the assignment. |
10 points: Student provides a high-caliber, formatted paper. This includes an APA 6th edition cover page, abstract, page number, headers and is double spaced in 12’ Times Roman Font. Additionally, the paper conforms to the specific number of required written pages and neither goes over or under the specified length of the paper. |
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