Financial and Economic Literacy for Managers

This report discusses the growth strategy of Iceland, determinants of housing demand and supply, and macroeconomic indicators of UK. It covers topics like product differentiation, innovation, convenience, advertising, and value. It also talks about interest rate, availability of mortgage, cost of renting, population, economic growth, income, construction of new houses, profitability, and restriction on housing planning. The report provides insights on real GDP, GDP growth rate, inflation rate, and unemployment rate in UK.

Running Head: FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
Financial and Economic Literacy for Managers
Name of the Student
Name of the University
Author note

1FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
Table of Contents
Answer 1....................................................................................................................................2
Introduction............................................................................................................................2
Iceland; supermarket chain....................................................................................................2
Growth strategy of Iceland.....................................................................................................2
Conclusion..............................................................................................................................5
Answer 2....................................................................................................................................5
Introduction............................................................................................................................5
Determinants of housing demand...........................................................................................5
Determinants of housing supply.............................................................................................6
Monetary policy of Bank of England.....................................................................................7
Conclusion..............................................................................................................................7
Answer 3....................................................................................................................................8
Introduction............................................................................................................................8
Gross Domestic Product.........................................................................................................8
Inflation................................................................................................................................10
Unemployment.....................................................................................................................11
Conclusion............................................................................................................................11
Answer 4..................................................................................................................................11
Answer 5:.................................................................................................................................13
Answer A:............................................................................................................................13
Answer B:.............................................................................................................................15
Answer C:.............................................................................................................................16
References................................................................................................................................17

2FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS

3FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
Answer 1
Introduction
In the UK economy, along with big enterprises small and medium sized enterprise
hold an important position. These sectors have significant contribution in enhancing
economic growth and provide several Job opportunities. The small and medium sized
business are motivated to invest in innovation to match the level of competition
(smallbusiness.co.uk 2018). Iceland, operating in UK’s supermarket chain though has a
comparatively small share in value chain but has interesting strategies to maintain its unique
place in the supermarket chain. The report analyzes the growth strategy of one of the UK’s
grocery retailer, Iceland.
Iceland; supermarket chain
The Iceland Food Ltd, known by the name Iceland operates in supermarket chain in
UK. The company puts emphasis on selling of frozen food, prepared vegetable and meal.
Apart from this, the company also engages in selling grocery items like meat, dairy and dry
goods. In the supermarket chain of UK, Iceland captures a market share of 2.2%
(iceland.co.uk 2018).
Growth strategy of Iceland
The grocery supermarket in UK has characteristics similar to that of an oligopoly
market. Oligopoly is a market that has few large market players capturing a major share in
the market The four major players in UK supermarkets are Tesco, Morrison, Sainsbury and
Asda (Sparks 2016).

4FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
Figure 1: Share of different grocery retailers in UK
(Source: Sparks 2016)
In order to sustain in such an oligopolistic market structure Iceland has to design
special growth strategy.
Product differentiation
In the oligopoly market, product differentiation is one of the most common strategy
used by the market players. Product differentiation is the mechanism for making own product
different from competitors (Sloman and Jones 2017). Higher the differentiation lower is the
elasticity of the product. The retailers in the oligopolistic market therefore focus on
specializing in a certain area and differentiate its product from the existing retailers. The area
that Iceland choses to specialize is in the supply of frozen food. It is the specialist retailer of
frozen food in UK. In this way, the company emphasizes on making a key difference from its
competitors.
Innovation

5FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
In order to differentiate product, company needs to invest in innovation. Innovation
helps to improve existing product by adding new features to the product. For several years.
Iceland has remained a leading brand in frozen food through extensive investment in
innovation. The company invests in innovation in new product line to satisfy its customers.
Advertising
Advertising is one of important marketing strategy in the oligopoly market. The
customers come to know about new product, specific feature of the product, price offers and
other attractive features of the product. When more and more people have information about
the competitors’ product, the market concentration reduces (Smit and Trigeorgis 2015). In
order to promote it product, Iceland designs marketing campaign. The marketing campaign
known as Power of Frozen to uplift shoppers’ view about frozen food. Overtime the company
has changed its advertising pattern to attract attention of more and more customers. From
initial store based campaign, the company gradually shifts to advertise in TV and in other
social media.
Convenience
Iceland provides a convenient means of shopping to its customers. The frozen food
offered in the stores is easy to cook and involve minimal waste. Customers can easily shop
from the local stores of Iceland whenever needed. The retailers also provide home delivery
service for purchasing above an amount of £20 (iceland.co.uk 2018). Customers can shop
online as per their convenience.
Value
The brand price of Iceland is benchmarked to ensure that it can offer same quality
product at a lower price or offer a combination of a better quality and a relatively low price.

6FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS

7FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
Conclusion
Iceland is one of the leading frozen food seller of the UK grocery supermarket. The
company though has a comparatively small share in value chain but has interesting strategies
to maintain its unique place in the supermarket chain. Product differentiation, innovation,
convenience, advertising and value are the focus areas of the concerned company.
Answer 2
Introduction
Real estate market is an integral part of any economy. Price in the housing market is
determined from the interplay of demand and supply side factors. Since 1990s, the UK
housing market has undergone drastic changes (Wilcox and Perry 2014). A major change is
observed in the ownership status of houses, which gradually shifted towards public
ownership through because of intervention of Bank of England and local authorities. The
report briefly discusses demand and supply side factors in UK housing market and the
associated monetary policy of Bank of England.
Determinants of housing demand
Interest rate
One primary determinant of housing demand is the rate of interest for mortgage
repayment. Lower interest rate encourages people to take loan because of a lower cost of
interest. Conversely, during tight monetary policy people have a lower demand for loan. This
intron determines affordability of housing. In 1992, the prevailing interest rate in UK was as
high as 15% (Campbell and Roskelley 2018). In response to high interest rate, the housing
demand declined significantly. However, BOE took a policy of monetary easing during 1990s
and 2000s. This encouraged people to buy more houses.

8FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
Availability of mortgage
Associated with interest rate, another determinant of housing demand is the
availability of mortgages that is bank’s willingness to lend deposits as mortgage. When bank
offers mortgages with multiple of bigger income then this increases effective demand of
housing. The availability of mortgage varies with interbank strength of the financial sector
(Oliner 2016). During global financial crisis, the economy has experienced a sharp increase
in cost of lending which lead to a decrease in available funds for lending mortgages. This
interrupted housing demand.
Economic growth
In times of economic expansion, people experience a rise in their real income. This
increases housing affordability and hence, housing demand.
Renting cost
If renting cost rises continuously then people have a higher tendency to buy own
house. The mortgage payment might seem cheaper than the renting cost. In housing market of
UK, renting cost if comparatively higher encouraging people to buy new house and thus
boosting demand for housing (Campbell and Roskelley 2018).
Population
The strength of population helps to determine housing demand. Along with
population, the size of household is also important in determining housing demand.
Determinants of housing supply
The effective supply of housing depend on construction of new houses in the
economy. In UK, the number of new house construction varied in different years. During

9FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
1960s, the housing market had more than 400,000 new houses per year. This number has
declined to 150,000 in the late 1990s and 2000s (Wilcox and Perry 2014).
One factor contributing to a decline in construction of new houses is restriction placed
on housing planning in land identified as green-belt land. Builders are interested in
constructing new houses only when it seems profitable to them (Oliner 2016). During boom
in housing market, supply of new house increases while in phase of declining housing price,
housing supply declines.
Monetary policy of Bank of England
Bank of England uses monetary policy tools to stabilize housing market and tries to
prevent any crash to occur in the housing market. The BOE regulates banks and interest rate
to control mortgage loan in the property market. In the last few years, the housing price in
UK has risen sharply in response to a higher demand. To restrict housing demand BOE has
imposed a cap on the borrowing. The objective of this cap is to control flow of credit once
housing price rises above expectation (McCrone and Stephens 2017). Banks in UK suffer
severe loss when borrowers are unable to repay loans once the value of the house fell below
the repayment amount. To prevent this, BOE lends money depending on the proportion of
borrowed money to the value of houses. Restriction has also been placed in relation to
income.
Conclusion
The major factors determining housing demand in UK include interest rate,
availability of mortgage, Cost of renting, population, economic growth and income. On the
supply side, the main determining factors are construction of new houses, profitability and
restriction on housing planning. The Bank of England has imposed restriction on borrowing
to control housing demand and housing price.

10FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS

11FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
Answer 3
Introduction
The key macroeconomic indicators of an economy are Gross Domestic product and
associated growth rate, inflation rate, unemployment rate, interest rate and such others. All
these together determine macroeconomic state of a nation. The report focuses on performance
of key macroeconomic indicators of United Kingdom for the past few years.
Gross Domestic Product
Gross Domestic Product is an overall measure of nations’ output. It indicates the total
monetary values of all goods and services in the economy. There are two approaches to
compute GDP of a nation. One is to use market value of the current year. This is known as
nominal GDP. One better measure is to use market price of a stable base year. This is known
as real GDP (Bernanke, Antonovics and Frank 2015). The real GDP is a more accurate
measure of output performance as it is adjusted for inflation.
Figure 2: Trend in Real GDP in UK
(Source: fred.stlouisfed.org 2018)
As seen from the above graph, real GDP in UK has constituted a sharp increase in
GDP for the last two decades. A break is observed in 2008 when GDP fell the following

12FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
global financial crisis. The worth of real GDP in 2016 was 2647.90 billion USD. The average
GDP in UK from 1960 to 2016 is 1137.23 billion USD. The GDP of UK reached to the
highest level in 2007 when GDP was 3074.36 billion USD (tradingeconomics.com 2018).
GDP growth rate
Growth in real GDP is computed as a percentage change in real GDP from one year to
another (Heijdra 2017). The real GDP growth rate is the measure of country’s economic
growth rate.
Figure 3: Real GDP growth rate
(Source: tradingeconomics.com 2018)
The trend in real GDP growth rate shows a fluctuating trend. In 2017, the growth has
slowed down to 1.7 percent. The negative external balance put a significant drag on
economy’s growth rate. The fixed investment has increases as against a decline in business
investment. The fixed capital formation is an important contributor of UK’s GDP.

13FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
Inflation
Inflation is the measure of movement of price level. It is a situation when price level
shows a continuous upward trend. Inflation can be caused due to both demand side and
supply side factors. When upward pressure on price is due to the increase in aggregate
demand, then it is called demand side inflation (Bernanke, Antonovics and Frank 2015). On
the other hand, when inflation resulted from an increased production cost and therefore a
shortage of supply then it is called cost-push inflation.
Figure 4: Inflation rate in UK
(Source: inflation.eu 2018)
In UK, the price level has remained at a stable state. The rate of inflation even fell to
2.7 percent in the first quarter of 2018 (tradingeconomics.com 2018). Price increases at a
slower rate for industries like transportation, hotel and restaurant, food and non-alcoholic
beverages. Price level has increased slightly for clothing and footwear while it has remained
fairly unchanged for housing, electricity, water, fuels and for miscellaneous goods and
service.

14FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
Unemployment
Figure 5: Unemployment rate in UK
(Source: ons.gov.uk 2018)
The rate of unemployment in UK has declined overtime. However, in recent years
following an increase in interest rate unemployment has increased slightly with jobless rate
remaining unchanged at 4.3 percent (theguardian.com 2018). There is sudden slowdown in
creation of new jobs, which worsens the condition of labor market.
Conclusion
The main indicators for measuring economic performance include GDP and its
growth rate, inflation and unemployment rate. The real GDP in UK has increased overtime
though fluctuation is observed in the growth. The price level as indicated from the inflation
rate has settled at a stable level. The performance of labor market worsen in recent years
because of tight monetary policy of BOE.
Answer 4
Financial leverage can be defined as the degree up to which the securities that are
having fixed amount of income and preferred stock are used as organization capital structure.
The managers make the use of the financial leverage when the assets bought by them are

15FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
within the debt capital to derive the earnings higher than the cost of debt that is used to
finance them. Financial leverage is used by the managers as the medium of increasing the
profit of the company (Atrill and Mclaney 2017). As the capital structure is considered as the
vital element for any organization therefore the primary reason of leverage is to make
decision relating to the amount of capital required to operate the business activities.
On ascertaining the amount to operate the business functions the managers make the
use of financial leverage to assess the financial markets so that they can determine the
medium through which an entity can raise capital. In the process of decision making raising
capital is vital since the prevailing environment in the market might limit the ability of the
firm to issue debt securities and common stock to attract the investors. Due to this, on solving
the query the managers of an entity can project appropriate capital structure and construct the
financial instrument that the business is required to sell the investors (Atrill, McLaney and
Harvey 2014). The managers on adhering to the systematic procedure implement the decision
relating to the long run strategic planning and the medium through which the managers would
desire to grow the company.
For instance, ABC ltd has the capital structure that consists of 100 per cent equity
based. As a result of this the return on equity is expected to fall between the range of 15.6%
and 23.4% depending upon the level of an entity profit before tax. Correspondingly, when the
ABC capital structure is re-engineered consisting of 50% and 50% of equity, the return on
equity of the entity would increase significantly between the range of 27.3 per cent to 42.9
per cent.
The managers of the small business owners use the current account as the medium of
decision making since they face the regular or day to day business activities. The information
pertaining to the current account is used by the managers for monitoring the day to day

16FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
business activities and generating reports in order to provide with them with the in depth
understanding of business functions (Besley and Brigham 2013). The in depth business
functions include gaining an understanding of profit margin and appropriate use of labour.
The primary objective of applying the current accounting decision is to provide the managers
with the in depth understanding of the input that are driven by data so that the managers can
make the day to day decisions.
The managers of both the small and big can leverage the powerful tool of calculation
in order to enhance the decision making capability over the period of time so that the business
can gain higher amount of profit and greater degree of comparative advantage. The
information of current account is used by managers to determine what a business should sell
(Williams 2014). For example, the managers of an entity may remain uncertain regarding the
area of focus. To examine the uncertainty, the accounting managers might assess the cost that
give rise to each product and commonly related products.
The information relating to current accounting provide managers with the data
regarding the means of employing tools for business growth (Warren and Jones 2018).
Therefore, the managers place the focus on the current account information to continuously
improve the business functions and justify the intelligent analysis of the organization data.
Answer 5:
Answer A:
Tesco Plc
2016 2015
Liquidity Ratios Current Ratios
Current Assets 14,828 11,958
Current Liabilities 19,714 19,810
0.75 0.60
Market Value Ratios Earnings Per Share 2016 2015

17FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
0.05 -2.12
Asset Management Ratio Fixed Asset Turnover 2016 2015
Net Sales 54,433 56,925
Fixed Assets 33025 36791
Less: Accumulated Depreciation 15125 16351
Total Fixed Assets 17900 20440
3.04 2.78
Debt Management Ratio Debt Ratio 2016 2015
Total Liabilities 35,278 37,143
Total Assets 43,904 44,214
0.80 0.84
2016 2015
Profitability Ratio Net Profit Margin
Net Profit 138 -5,741
Total Revenue 54,433 56,925
0.25 -10.09
Morrison
2016 2015
Liquidity Ratios Current Ratios
Current Assets 1,308 1,228
Current Liabilities 2,747 2,273
0.48 0.54
Market Value Ratios Earnings Per Share 2016 2015
9.51 -32.63
Asset Management Ratio Fixed Asset Turnover 2016 2015
Net Sales 16,122 16,816
Fixed Assets 7,161 7,252
Less: Accumulated Depreciation 3423 3391
Total Fixed Assets 3738 3861
4.31 4.36
Debt Management Ratio Debt Ratio 2016 2015
Total Liabilities 5,543 5,577
Total Assets 9,299 9,171
0.60 0.61

18FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
2016 2015
Profitability Ratio Net Profit Margin
Net Profit 222 -761
Total Revenue 16,122 16,816
1.38 -4.53
The current ratio reported by Tesco Plc stood 0.60 for the year 2015 which
subsequently increased to 0.75 in 2016. The EPS for Tesco Plc during 2015 stood negatively
to -2.12 however it gained strength during the financial year of 2016 to 0.05. The assessment
management ratio includes the Fixed asset turnover where Tesco Plc reported a total fixed
asset turnover of 2.78 in 2015 and grew further in 2016 to 3.04 representing the company is
generating greater revenue from its assets. The debt ratio stood stable with 0.84 and 0.80 in
2015 and 2016 respectively. The net profit margin for Tesco Plc stood negatively in 2015 to -
10.09 while it improved in 2016 to 0.25.
Morrison reported a falling trend in current ratio of 0.54 and 0.48 in 2015 and 2016.
The EPS stood negatively in 2015 to -32.63 whereas in 2016 it improved to 9.51. The total
fixed asset of the company though remained stable with 4.36 and 4.31 in 2015 and 2016
relatively. The debt ratio too represented a stable trend with 0.61 and 0.60 in 2015 and 2016.
The net profit margin for Morrison Plc stood negative during 2015 at -4.53 due to the poor
market demand however with stable market conditions the Morrison reported net profit
margin of 1.38 in 2016.
Though Morrison reported a strong net profit margin in 2016, the overall performance
of Tesco has been better in the chain of retail supermarket.
Answer B:
Computation of Present Value
Interest Rate 4.50%
Year Start Principal Start Balance Interest End Balance End principal

19FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
1 £ - £ - £ - £ 650.00 £ 650.00
2 £ 650.00 £ 650.00
£
29.25 £ 1,329.00 £ 1,300.00
3 £ 1,300.00 £ 1,329.00
£
59.82 £ 2,039.07 £ 1,950.00
Answer C:
Initial Investment Amount -50,000
Total Number of Years 5 NPV
Project A Years Project B
Number of Years Annual Cash Flow 0
Year 0 -50,000 -£ 50,000.00
Year 1 £ 26,000.00 1 £ -
Year 2 £ 17,625.00 2 £ -
Year 3 £ 15,000.00 3 £ -
Year 4 £ 10,000.00 4 £ -
Year 5 £ 32,000.00 5 £ 99,500.00
Npv £ 23,811.83 £ 8,387.92
On considering the above stated NPV of both the project a recommendation can be
provided by stating that Project A must be selected instead of project B.

20FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
References
About.iceland.co.uk. (2018). Our Strategy – About Iceland. [online] Available at:
https://about.iceland.co.uk/our-strategy/ [Accessed 31 Mar. 2018].
Atrill, P., McLaney, E. and Harvey, D., 2014. Accounting: An Introduction, 6/E (Vol. 6).
Pearson Higher Education AU.
Atrill,P and Mclaney, E., 2017. Accounting and finance for non-specialists. Pearson
education limited.
Bernanke, B., Antonovics, K. and Frank, R., 2015. Principles of macroeconomics. McGraw-
Hill Higher Education.
Besley, S. and Brigham, E.F., 2013. Principles of finance. Cengage Learning.
Campbell, R. and Roskelley, K., 2018. International Housing Returns and the Financial
Crisis: Disentangling Credit Supply and Demand Shocks.
Fred.stlouisfed.org. (2018). Real Gross Domestic Product for United Kingdom. [online]
Available at: https://fred.stlouisfed.org/series/CLVMNACSCAB1GQUK [Accessed 31 Mar.
2018].
Heijdra, B.J., 2017. Foundations of modern macroeconomics. Oxford university press.
McCrone, G. and Stephens, M., 2017. Housing policy in Britain and Europe. Routledge.
Media, T. (2018). Historic inflation Great Britain – historic CPI inflation Great Britain.
[online] Inflation.eu. Available at:
http://www.inflation.eu/inflation-rates/great-britain/historic-inflation/cpi-inflation-great-
britain.aspx [Accessed 31 Mar. 2018].

21FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
Oliner, S.D., 2016. Housing conundrum: a shortage of demand or supply?. Business
Economics, 51(3), pp.161-165.
Ons.gov.uk. (2018). Employment and labour market - Office for National Statistics. [online]
Available at: https://www.ons.gov.uk/employmentandlabourmarket [Accessed 31 Mar.
2018].
Partington, R. (2018). UK unemployment rises at fastest rate in almost five years. [online] the
Guardian. Available at: https://www.theguardian.com/business/2018/feb/21/uk-
unemployment-rises-at-fastest-rate-in-almost-five-years [Accessed 31 Mar. 2018].
Sloman, J. and Jones, E., 2017. Essential Economics for Business (formerly Economics and
the Business Environment). Pearson Higher Ed.
Small Business. (2018). The importance of small businesses in the UK economy. [online]
Available at: http://smallbusiness.co.uk/the-importance-of-small-businesses-in-the-uk-
economy-2492626/ [Accessed 31 Mar. 2018].
Smit, H.T. and Trigeorgis, L., 2015. Flexibility and games in strategic investment.
Sparks, L., 2016. 14 Spatial-structural change in food retailing in the UK. A Stakeholder
Approach to Managing Food: Local, National, and Global Issues, 4, 200.
Tradingeconomics.com. (2018). United Kingdom GDP Growth Rate | 1955-2018 | Data |
Chart | Calendar. [online] Available at: https://tradingeconomics.com/united-kingdom/gdp-
growth [Accessed 31 Mar. 2018].
Warren, C.S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.
Wilcox, S. and Perry, J., 2014. UK housing review. Coventry: Chartered Institute of Housing.
Williams, J., 2014. Financial accounting. McGraw-Hill Higher Education.