(a) Areas in which government action affects financial management:

Credit controls
This could be achieved through legislation and through the guidelines of the Central Bank of Zamunda. The amount of funds available to the banks for commercial credit and the interest rates are directly regulated by the government through the Central Bank of Zamunda. The effects will be to make borrowing more difficult since credit controls will affect the cost and availability of funds, the share values, and the profit levels.

Taxation
Government policies on taxation will have an impact on the company’s cash flow by way of withholding tax on interest, dividends, etc., sales tax, capital allowances claimable, and balancing charges. Company taxation via allowances claimable could restrict or encourage investment in fixed assets (qualifying capital expenditure) and will determine the acceptance or rejection of certain projects as well as the method of financing such ventures. Personal income taxation affects corporate funds since it reduces personal disposable income or may encourage savings/investments. Both personal income and capital gains taxes affect shareholders’ preference for dividends against retentions and vice versa, hence posing dividend decision problems for the financial manager, especially where the company has a wide spread of shareholders.

Custom duties, tariffs, and other trade barriers
These can encourage or discourage imports/exports. Complete bans of products or high custom duties or tariffs will affect investment decisions covering these products and their close substitutes. This may also encourage backward integration and local sourcing of imported raw materials and spare parts.

Control of income, prices, dividends, etc.
The effect of Productivity Prices and Incomes Boards guidelines through restriction of dividends and wage/price increases is a shortage of funds otherwise available for an increase in the cost of capital, and diversion of income-seeking investors’ funds into non-equity stocks.

Exchange controls
For a country like ours that is heavily dependent on overseas trade, exchange controls will have serious effects on foreign exchange available and the prevailing exchange rates. With the second-tier foreign exchange market, most financial managers are finding it extremely difficult to plan adequately for the purchase of foreign exchange. In addition, the rationing of foreign exchange in ZFEM has restricted investment in projects that require imported heavy-duty machinery and equipment.