Finance and Economics for Business Growth

This assignment examines the crucial roles of finance and economics in driving business growth. It delves into various financial theories, including Net Present Value (NPV) calculation with a practical example for Project B. Furthermore, it explores key economic concepts like inflation and their impact on businesses. The assignment concludes by emphasizing the significance of implementing appropriate theories for achieving optimal growth.

Financial and Economic
Literacy for Managers

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Assessment Questions......................................................................................................................1
1. Business economics concepts and providing relevant theories..........................................1
2. Demand and Supply and monetary policy of Bank to Housing market of UK..................3
3. Discussing macroeconomic indicators in UK over past years...........................................4
4. Leverage and current account management to facilitate decision-making of managers....5
5. Financial terms and calculation of investment appraisal technique...................................6
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Finance and Economics are crucial for country and company to have good growth in all
spheres. The present report deals with Morrisons Plc engaged in supermarkets sector. Moreover,
financial ratios and investment appraisal technique is applied. Various economic concepts and
theories are explained helping management to facilitate decision-making in effective manner.
Assessment Questions
1. Business economics concepts and providing relevant theories
Market structure
Market structure plays important role in the competitive market when firms try to
compete with another to attain desired market share. There are four types of marketing structure
such as perfect competitive, monopolistic competition, oligopoly and monopoly. Each of the
market structures have varied characteristics and assumptions regarding the market. In this
approach of market structures, theories can be explained to show evidence of business economic
concepts. Neoclassical and modern theory may be discussed by referencing evidence.
Morrisons Plc which is engaged in supermarkets sector faces perfect competition from
the rivals present in the market. Neoclassical theory explains that supply and demand of products
is achieved through consumer satisfaction and his ability to achieve utility by paying money for
the goods purchased by him (Lusardi and et.al, 2017). This means that customer perceives value
of product which directly affects demand and supply of Morrisons Plc's commodities. On the
other hand, modern economic theory is concerned with income and employment determinants,
analysis of utility of customer satisfaction from goods purchased which affects economic
decisions. Moreover, it includes macro and micro analysis.
Small and Medium Enterprises (SME)
SME's are important part of the country so that it may be able to inject overall growth of
the company in effective way. These business are quite helpful for initiating growth in the
country and fosters development quite effectually. This help nation to grow in the best possible
way by adding efficiency to GDP (Gross Domestic Product) of UK. In relation to this, two
theories can be listed such as Barnard-Simon Theory of Organisational Equilibrium and
Evolutionary Theory of Economic change by Nelson and Winter.
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Starting with the first theory which states that important resource of SME is its
employees which are small in numbers. This theory implies that participants are an integral part
of company. All participants provide its efficiency to enhance productivity and as such, the
company pays for the contribution made by them. This is the relevant theory in SME so that it
may retain employees which injects economic condition of the company. On the other hand,
Theory of Economic change by Nelson and Winter is that firm outreach profitable business by
outreaching successful organisation by implementing well-structured strategy and as such,
organisation is motivated to attain profit maximisation objective in the best possible way. This
help SME to have adequate profits (Bianchi, 2018).
Multinational Corporations
Multinational corporations provides higher productivity to country in effectual manner.
The theories associated with these corporations are Eclectic Paradigm theory given by Dunning
and Vernon’s International Product Cycle are important in this aspect. The first theory states that
company follows paradigm related to FDI (Foreign Direct Investment). This is quite useful for
multinational corporations as they try to extract advantage from investment. On the other hand,
Vernon's International Product Cycle theory is based on the economic concept that in
international trade, products are made and moves away from the originating point to across the
world. This model applies to capital goods which cater to demands of high income group.
Growth strategy
The growth strategy has immense importance in carrying out the adequate results in the
best possible way. This adds to economy of the country in that way which help to increase GDP
in quite effectual manner. In this business economic concept, two theories based on growth
strategy can be explained such as Resource based theory and other one is market development.
These strategies play vital role to Morrisons Plc in quite effective manner. Resource based theory
is based on the concept that organisation should have strategic resources so that competitors may
not imitate them in any manner. In this aspect, strategic resources include valuable, rare, difficult
to imitate and non-substitutable elements which others cannot easily copy (Resource-Based
Theory, 2018). Thus, this theory injects revenue and growth of the organisation in the best
possible way. On the other hand, market development theory is another growth strategy that
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identifies new markets to sell existing products of the company. This theory is derived from
Ansoff Matrix consisting of various elements for initiating growth of organisation.
2. Demand and Supply and monetary policy of Bank to Housing market of UK
The demand and supply are important part of the economical concept. UK housing
market is basically regulated by Bank of England implementing various interest rates in quite
effectual way. The main purpose of the bank is to set interest rate on housing prices which
directly affects cost of mortgage which is the best example of UK housing market. Thus, overall
housing market is impacted which affects supply and demand of services. Mortgage lending is
also primary activity of banks and its provides risk to UK economy when people default on
repaying the same (Horwitz and Briar-Lawson, 2017). Housing price inflation is however
become low in UK as depicted by the financial reports of Bank of England. Moreover, interest to
be paid on availing house loan is currently less than 1 % applied by the apex bank. This On the
other hand, theories on demand such as consumer demand and Theory of Money demand by
Keynes.
It can be referred to government statistical data of UK that retail sales are reduced up to
0.4 % which is important as it transforms monetary policy in the housing market. Inflation is
controlled as per February 2018 and as such, prices of loans have decreased by 0.75 % and
people are taking home loans.
Consumer demand theory is based on behaviour of customer when purchasing good. It
centrally focuses on satisfaction level of them which injects demand. While, Money demand
theory by Keynes states that consumers spend money for purchasing goods and services having
three motives such as transactions, precautionary and speculative motives. These motives play
important role in determining demand and supply of customers. The theory of supply can be
explained quite easily (Lyons, Grable and Zeng, 2017). It states that producer is ready to sell its
goods on the price set by him. This affects supply on the market for a particular time period. The
theory on supply states that when price of products increases, customers are not willing to
purchase and vice-versa. The theory on monetary policy is also given by Keynes stating three
aspects such as investment multiplier, marginal efficiency of capital and rate of interest
applicable on housing market and related concepts.
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3. Discussing macroeconomic indicators in UK over past years
The key macroeconomic indicators in UK comprises mainly of GDP growth, labour
market and inflation indicators are prominent in the nation. Starting from GDP of the country, it
can be said that UK has evolved throughout five years but has been slowed down in the year
2017 because of the influence of Brexit. The rate of currency is also marked its weak position
because of hike in prices of goods and consumers are not willing to spend money for purchasing
goods and services which has impacted growth of economy quite adversely. The economic
performance was reduced to 1.7 % in 2017 while it was 1.6 % in 2016. Household spending also
increased by just 0.3 % in late quarter of 2017. However, earlier GDP growth of the nation was
highly maximised but due to Brexit influence, performance lowered down.
Balance of payment (BoP) is another macroeconomic indicator of UK. BoP is record
made and has transactions that UK makes with Rest of the World. The current account deficit
has been increased as it was 96.2 million in 2015 and increased up to 32.6 billion in 2016. This
means that debt of the nation is increased and lower investment is another reason for increase in
deficit. In addressing this, Theory of Exchange on Balance of Payment can be explained which
means that in case of favourable BoP, value of currency on external basis is appreciated and
vice-versa. This means that currency of UK is based on its demand in another country.
UK inflation rate in the past several years is quite steady and as such, rate of inflation was
around 4.5 % and is decreased in 2017 to less than 1 %. Consumer price inflation can be
explained in this context. It is change of prices occurred in goods and services over a time period
bought by household people. The consumer price inflation was 2.53 % in the year 2013 and at
the end of 2017, it was 2.7 % which remained unchanged even in January 2018. The largest
downfall was observed in the change of price of motor fuels. The consumer price inflation is the
main essence of determining inflation rate of the country by carrying out price indices with much
ease. In relation to these macroeconomic indicators in UK, relevant theories can be described in
thus scenario. The theories are market theory of inflation, endogenous growth etc.
Market theory of inflation states that sellers of goods intentionally increase price with
reference to discussion with group which is way different from competitive price (Top 3
Theories of Inflation (With Diagram). 2018). It rises inflation and sellers earn huge profits by
selling to higher income group. They do not concern about the purchasing power of customers.
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On the other hand, endogenous growth is based on injecting economic growth with the help of
technological advancement of industries in effectual way. This theory was developed by Paul
Romer and Robert Lucas which laid emphasis on increasing capital and productivity of workers
to inject economic growth.
There are other theories on economic growth and inflation which are key macroeconomic
indicators in UK. These are Unified growth theory and Mark-up theory. Starting from unified
growth theory which is the extension of endogenous growth theory developed by Oded Galor.
The theory states that there are various characteristics of process of development in the country
which leads to achievement of economic growth in the best possible way. It states that
advantages of technological advancement is offset by population of people which is gradually
slows down economic growth quite adversely. The theory implies that transition from stable or
not moving has been lead to growth by the end product of development process.
Mark-up theory states that inflation never evolves only from demand and price of
products but also demand-pull and cost-push factors. Demand-pull means that inflation rises
because of excess of demand by customers. This eventually leads to increase in prices and costs
pushes up to high extent. Due to excess demand, shortages occur in the market which further
increases price of goods leading to inflationary situation in the nation. The future trend of UK
economy is that it will initiate growth as Brexit influence is reducing and economy will remain
stable. This will reduce inflationary situation and purchasing power of customers will increase.
This will gradually reduce unemployment rates and economy will inject higher growth in the
coming years (Eniola and Entebang, 2017).
4. Leverage and current account management to facilitate decision-making of managers
Management is entitled to take effective decisions so that company may be able to
achieve desired objectives in the best possible way. In this relation, financial leverage and
current account management plays important role in the company and as such, management is
required to take enhanced decision for the betterment of the organisation. In relation to this, there
are various theories of financial leverage and current account management. Starting with
financial leverage theories. This includes Net income approach and MM (Modiglani and Miller
Approach). This first theory is modern one while other is traditional approach to financial
leverage and also called as capital structure theories.
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Net income approach states that management should take decision to reduce overall debt
of company ie by decreasing WACC (Weighted Average Cost of Capital). This will enhance and
maximise value of firm in the best possible way. This theory was proposed by David Durand. He
analysed that capital structure is directly related to firm's value. In simple words, change in
capital structure will lead to change in overall value of the organisation in quiet effective way.
Financial leverage is quite useful for Morrisons Plc as it depends upon the capital structure of the
firm (Priya and Malhotra, 2017). For instance, if financial leverage of Morrisons Plc increases,
then value of shares maximised which leads to reduction in overall cost of capital of the
company. This enhances market value of shares. Thus, Net income approach should be
implemented as it facilitates in decision-making. Another financial leverage theory which helps
management in taking decision is MM approach. This is concerned with cost of capital is not
relevant to value of firm. This approach says that value of organisation is based on estimated
earnings to be made in the future. Another proposition implies that financial leverage boosts
value of the company but increases the value.
The current account management deals with various theories such as Contingency theory
and Chaos theory, Contingency plays crucial role in the company and as such, this theory is
concerned with that there are no prescribed procedures but in accordance to contingent situation,
decision should be made by the management. On the other hand, Chaos theory states that
changes occur in the company in every sphere. This means that organisation undergoes changes
and as such, more complexity is observed. Thus, management should make decisions by forming
new organisational structure so that overall efficiency can be obtained.
The current assets are integral part of working capital. Inventories, receivables are
required to be converted into cash. The theories can be applied here are conservative and
aggressive. Conservative theory of working capital means that low profitability is achieved as
low risk is taken for the purpose of financing. Aggressive theory states that company take more
risk and as such, more profitability is accomplished.
5. Financial terms and calculation of investment appraisal technique
A) Computation of financial ratios of Morrisons Plc
Particulars Formula 2016 2015
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Profitability ratios
Net profit margin Net income / sales 1.75 -4.53
Market value ratio
Earnings per share 0.09 -0.33
Liquidity ratio
Current ratio Current assets / Current Liabilities 0.48 0.5
Asset management ratio
Asset turnover ratio Net sales / Average total assets 1.75 1.69
Debt management ratio
Debt ratio Total Debt / Total Assets 0.60 0.61
It can be interpreted from above ratios that financial health of company is increased in
2016 year as comparison to 2015. This is evident from the fact that net profit is positive in 2016.
Moreover, earnings per share and asset turnover ratio is increased. While liquidity and debt ratios
are also good.
B) Present value can be calculated by using the formula,
= Cash flow/ rate of return + number of periods
= 650/(1+0.045)^3
= 569.59
C) NPV
Year Project A
Discounting factor @
11.25%
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0
1 26000 0.899
23370.7865168
539
2 17625 0.808
14240.6261835
627
3 15000 0.726
10894.0960524
505
4 10000 0.653
6528.29725989
55
5 32000 0.587
18778.0235790
251
73811.83
Initial investment 50000
NPV
23811.8295917
877
Year Project B
Discounting factor @
11.25%
0
1 0 0.899 0
2 0 0.808 0
3 0 0.726 0
4 0 0.653 0
5 99500 0.587 58387.9170660
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312
58387.9170660
312
Initial investment 50000
NPV
8387.91706603
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It can be said that Project A should be selected as it has higher NPV.
CONCLUSION
Hereby it can be concluded that finance and economics both are crucial for the company
and also the nation for achieving higher growth in the best possible way. Various theories should
be implemented by company to accomplish growth.
REFERENCES
Books and Journals
Bianchi, M., 2018. Financial literacy and portfolio dynamics.The Journal of Finance, 73(2),
pp.831-859.
Eniola, A. A. and Entebang, H., 2017. SME Managers and Financial Literacy. Global Business
Review, 18(3), pp.559-576.
Horwitz, S. and Briar-Lawson, K., 2017. A Multi-university Economic Capability-building
Collaboration. Journal of Social Work Education, 53(1), pp.149-158.
Lusardi, A. and et.al, 2017. Visual tools and narratives: New ways to improve financial
literacy. Journal of Pension Economics & Finance, 16(3), pp.297-323.
Lyons, A., Grable, J. and Zeng, T., 2017. Impacts of financial literacy on loan demand of
financially excluded households in China.
Priya, P. and Malhotra, N., 2017. Financial Literacy and Investor Awareness: Issues to Wealth
Management.
Online
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