Hypothesis and Emerging Capital Markets

Question: Discuss about the Hypothesis and Emerging Capital Markets. Answer: Since the name of the company should start with the first letter of my first name or last name, I have chosen the company named The Food Revolution Group which is a non-financial company listed on the Australian Stock Exchange (ASX). The food revolution group (ASX: FOD) is an Australian company in the public sector which operates state of the art fruit and vegetable processing units in New Zealand and Victoria. The products being manufactured by the company as of now include juices, fibers, high quality infused fruits and bio actives. The company has four major brands as of now namely, The Juice Lab, Hi Fi, Badu and Mixologist. The innovative foundation of the company lies in its extra efficient manufacturing process. It results in maximum yield from fruits and vegetables with minimal waste. It has also been recognized as it won the Victorian manufacturing Hall of Fame award for food and fiber processing in 2015. The company has recently raised $ 12 million in a heavily oversubscribe d offer. A CFO, short for Chief financial officer of a company is the senior most official in the company responsible for evaluating financial risk and overall financial control and planning of the firm or project. Accounting functions such as credit control, monitoring liquidity and expense, providing timely financial data to the CEO, coordinating fund raising are some of the functions which are directly looked after by the Chief financial officer. Over the years, the role of a CFO has emerged from outdated perceptions of being Business prevention units to being repositioned as Business enhancement units. Given their firm grasp on the fundamentals of finance and management qualities, a lot of CFOs have also started adding responsibilities such as IT (Information Technology) to their portfolios. In this essay, we will categorize overall responsibilities of a Chief financial officer into 3 broad heads and see how the decisions of a CFO would impact the overall business taking The foods revolut ion group as an example. The Chief financial officer is responsible for the following 3 major areas of responsibility: Accurate financial information: A CFO is responsible to maintain accurate financial records of the company by managing people under him. Not only the present but even the historical records are necessary to be maintained for various stakeholders. Erroneous numbers can lead to a lot of confusion and wrong decision making. For example, mismatch in numbers being maintained by the finance division and the operations division can lead to confusion and clashes while making decisions. The chief financial officer needs to ensure that the operations team is engaged and should understand how to collaboratively manage a conflict. The finance team needs to standardize metrics which the operational staff can understand with ease. At the same time, he or she should lead the organization to measure the performance of the organization objectively against those metrics. These metrics should be aligned with the goals of the company and should be a clear indication of the performance of the company. In the case of The food revolution group, the CFO needs to lead the entire finance team. He/she needs to ensure that proper financial records of each of the brands are being maintained and shared with all the stake holders. The operations team looking after manufacturing units would be maintaining its records for fixed and variable overhead costs to track their performance. It should be ensured that they are updated with correct data and flaws should be addressed well in time. Different departments might have different objectives and thus different ways of measuring performance. The financial parameters used as a measure of performance should be standardized under the guidance of the Chief Financial Officer. If this is not done, it might lead to unnecessary chaos and instability in the system to track performance of each of the departments. Capital Structuring: The CFO is responsible for the present financial condition of the company. This is why he or she must decide which projects to be approved, which investments to make taking liquidity, cash reserve and risk involved into consideration. Organizing the capital structure is one of the vital tasks of a CFO. Capital structure is how an organization finances its overall operations by using all types of funding it has. It can be a combination of debts (both short term and long term) and equity (both common and preferred). The Chief financial officer additionally needs to stay with the fittingly utilized, in order to give enough liquidity for all the operational needs, while additionally dealing with the budgetary dangers in order to assemble solid essentials. The CFO is a right hand to the CEO in the process of decision making. A CFO may specifically deal with the annuity store by utilizing a group in-house. He may likewise look for the administrations of an annuity reserve administrator or a consultancy who may deal with the asset for the benefit of the company. Likewise, he may join forces with the administration annuity plan or a protection plan for giving retirement advantages to the organization workers. Capital lock up charges from group to operating divisions is one of the tools that can be used so that the management feels the pain and takes accountability while managing cash of the company. Another area where a CFOs decisions can directly help the company in saving money is taxing. He or she needs to change the commercial focus of the organization to be tax efficient. In the case of The foods revolution group, the company might decide to increase the number of manufacturing units or it may decide to increase the number of brands which are presently 4 in number. The CFO plays a critical role in approving projects by taking the present liquidity and risk into account. The company might also decide to shut down some of its operations or brands which are non-performing over a period of time under the guidance of the Chief financial officer. Strategy and Forecasting: A firm needs to continuously analyze its future goals and requirements and take decisions accordingly. A CFO plays a major role in shaping the firms financial future. He or she needs to identify the areas which need to be promoted so that the firm can capitalize on them. His analysis of the present condition of the company, the goals of the company combined with his or her experience in handling situations, he or she has an upper hand in identifying the investment areas which will contribute to maximum profitability of the firm. For example, the CFO needs to identify which brands among all are making maximum profits, the zones where they are performing best and the zones where they are not to make decisions regarding expansion of their manufacturing or sales. Further, he or she needs to understand their performance against the competitors using the available data to realize the scope of the market they are into. Thus, a CFO can help in predicting that which decisions will lead to what scenarios which can be utilized to make decisions for the company to help it achieve its goals. The CFO also takes advantage of the past and current money related execution reports and other accessible assets, investigating them completely in order to set reasonable and achievable targets. Very often, it is observed that the working capital of a company is poorly modeled in the forecasts which might result in upside opportunities. In order to ensure that there is better information about cash performance, it is quite imperative that the CFO implements a robust short term forecasts by taking inputs from various streams within the business. A CFO can leverage their broad perspective of the company, and their prior experience to ensure that every stake holder identifies and addresses relevant factors. Some of these factors are competitor, technological changes and market dynamics. In the case of The Foods Revolution Group, the CEO (Chief Executive Officer) has to keep himself in discussions with the CFO while deciding the future strategies. The present financial condition of the company is one essential factor influencing the future strategies. The CFO needs to provide inputs to the CEO as to what decisions must be made which given the liquidity and the risk of the market which would further increase the financial stability of the company. In the event that a CFO can't satisfy his previously mentioned obligations, it can affect the organization's advancement altogether. He ought to promptly have the capacity to satisfy any of the financing needs of the organization required to accomplish its goal and take the organization in the right direction. While giving assets to extension, CFO needs to guarantee that there are critical fluid assets accessible for smooth working of the disconnected business while additionally keeping sufficient money holds for urgencies. Otherwise, inefficient and poor decisions made by the chief financial officer and his team might hamper the growth of the company or even lead to bankruptcy of the company. Efficient Market Hypothesis: A market is said to be efficient if the current market prices reflect all available information about value. The efficient market hypothesis (EMH), also popularly known as Random walk theory, is a proposition that current stock prices contain all information about the firm and that there is no way to earn excess profits using this information which is contained in the stock prices. EMH was introduced by E.F. Fama who said in a financial paper that in an efficient market, on an average, competition will lead to instantaneous reflection of the full effects of information on intrinsic values in the actual prices. In other words, stocks always trade at the fair value based on all available information. Therefore, no investor can ever buy or sell an undervalued and overvalued stock respectively. This implies that there is no scope for the investor to beat the market in the long run by keep earning excessive returns offered by the market. Also, both a novice an d an expert advisor who holds a diversified portfolio will obtain similar returns regardless of their varying levels of expertise in the field. EMH exists in many forms weak, semi-strong and strong. The weak form of EMH states that current stock prices reflect all available information about market. It contends that excess returns can never be achieved using any form of technical analysis. Therefore, technical analysis is not a practical tool to be used to predict future price changes. To a higher degree, the semi-strong form of EMH assumes that current stock prices adjust quickly to the discharge of all new public information. It concludes that using fundamental analysis one cannot achieve excess returns. Since market prices already reflect public information, investors are not able to gain abnormal excessive returns. The strong form of EMH states that current stock prices reflect all public and private information. It contends that information related to markets, non-markets are contained in public information about the market. It winds up that excess returns cannot be achieved continuously. Role of pension fund manager: The role of a pension fund manager is to decide the strategy he or she would deploy for investment and also to manage its portfolio trading activities. The manager needs to ensure that the portfolio is diversified and also ensure that the risk is appropriate for its clients. For example, different clients might prefer different degrees of returns and risks which must be handled accordingly by the pension fund manager. It is incorrect that the correctness of efficient market hypothesis implies that portfolio selection by a pension fund manager should be done with a pin for several reasons. It is to be noted that a pension fund manager has definite target return goals as well as definite risk control goals. If he or she throws darts at the stock page, he or she may get a diversified portfolio but will not be able to control the return or risk of the resulting portfolio. Also, in case of a pension fund, he or she should be choosing safe investments that is choosing a portfolio with lower beta (lower risk) References International Federation of Accountants, 2013. The Role and Expectations of a CFO. Retrieved from https://www.ifac.org/system/files/publications/files/Role%20of%20the%20CFO.pdf Mian, S., 2001. On the choice and replacement of chief financial officers.Journal of Financial Economics,60(1), pp.143-175. Anderson, C. (2016). What Are the Top Ten CFO Responsibilities. 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