Accounting for Decision Making - finanacial management

Running head: ACCOUNTING FOR DECISION MAKING
Accounting for Decision Making
Name of the Student:
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Author Note

1ACCOUNTING FOR DECISION MAKING
Table of Contents
Financial Management:................................................................................................2
1. Identifying the cost for each source of finance, while explaining the advantages
and limitations of both DDM and CAPM:......................................................................2
2. Determining the optimum cost of capital using Weighted Average Cost of Capital
for the target capital:.....................................................................................................3
3. Evaluating the total value and breakeven rate of the new operations:....................4
4. Analysing the sensitivity of the projected NPV:........................................................5
5. Providing for and against the suggestion of the account’s manager:......................6
Management Accounting:.............................................................................................7
1. Identifying the difference between absorption and marginal costing, while
detecting different profits:.............................................................................................7
2.1 Preparing the statement showing the highest profit available for the organisation:
......................................................................................................................................7
2.2 Highlighting the steps that could be used to improve profitability in light of the
labour shortage:............................................................................................................8
3.1 Calculating the variance for March, while using them to reconcile the budgeted
and actual profit figure:.................................................................................................9
3.2 Indicating how flexible budget of the company for identifying the budget variance:
......................................................................................................................................9
References:................................................................................................................10

2ACCOUNTING FOR DECISION MAKING
Financial Management:
1. Identifying the cost for each source of finance, while explaining the
advantages and limitations of both DDM and CAPM:
Particulars Value
Share price 40
Dividend per share 1.2
Growth rate 4%
Cost of equity DDM 7.12%
Particulars Value
Rf 3%
Rm 6%
Beta 1.15
Cost of equity
CAPM 6.45%
The information in the above table states about the cost of equity under
Dividend Discount Model and Capital Asset Pricing Model, as it helps in determining
the equity cost. However, the values under both the method is relevant different,
which is due to the assumptions and methodology of the formulas the DDM model
mainly focuses on detecting the value of cost of equity by utilising dividends, share
price and growth rate of the organisation. On the other hand, the CAPM formula
uses beta levels, market premiums and risk-free rate for understanding the cost of
equity level of a stock. Hence, under both the methods the overall cost of equity is
mainly derived, which the management uses for calculating WACC (Kisman and
Restiyanita 2015).
Advantages of DDM Disadvantages of DDM
Conservatism that is used in DDM is
considered as one of the advantages, as
investors are able to discount the future
earnings and determine the appropriate
The major limitation of the model is
based on its selectivity, where it only
focuses on factor and ignores non-
dividend factors such as brand loyalty,

3ACCOUNTING FOR DECISION MAKING
valuation of the company. customer retention and the ownership of
intangible assets.
The simplicity of the model is one of the
advantages, which could be used by
novice investors to understand the
current valuation of the company.
Sensitivity is also a major limitation
where without the key assumptions the
overall values of the DDM are no correct.
Hence, investors can only use the
formula on companies that provide
dividends to investors on constant basis.
Advantages of CAPM Disadvantages of CAPM
The CAPM eliminates unsystematic
risk
Too many assumptions
CAPM helps in detecting Systematic
risk
Assigning different variables to the CAPM
formula
CAPM value is used in investment
appraisal techniques
The focus of the CAPM is on using utilising
the risk-free rate
CAPM formula is ease of use Determining the project proxy beta
2. Determining the optimum cost of capital using Weighted Average Cost of
Capital for the target capital:
Particulars Value Particulars Value
Rf 3% Weight debt 40.00%
Rm 6% Weight Preferred equity 10.00%
Beta 1.15 Weight Common equity 50.00%
Cost of equity CAPM 6.45% Cost of debt 15.71%
Cost of preferred equity 10.42%
Particulars Value Cost of equity CAPM 6.45%
Current bond price 115 Tax 30.00%
FV 100 WACC 8.67%
Coupon rate 15%
Time 10
Coupon payment 15
Cost of debt 15.71%
Particulars Value
Average preferred
dividend 10
Preference shares 96