Financial Management: Measures of Return, Funding Options, and Ratios

FINANCIAL
MANAGEMENT
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Table of Contents
QUESTION 1...................................................................................................................................3
1.1 ................................................................................................................................................4
1.2 ................................................................................................................................................4
1.3.................................................................................................................................................6
Question 2....................................................................................................................................6
Question 3....................................................................................................................................7
3.3.................................................................................................................................................8
REFERENCES..............................................................................................................................11
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QUESTION 1
1.1
The measures of return which the directors should employee to consider the viability of
opening a new production division are,
Return on Investment :
ROI is a performance measurement tool that is used for the evaluation of the efficiency or
profitability of an investment. This is helpful for the comparison of the efficiency of a number of
different investments. ROI helps in directly measuring the amount of return on a particular
investment that is relative to the investment costs (Gao and Yu, 2020). For the calculation of ROI
the benefit of an investment is divided by the costs of investment that is able to express it is as a
percentage or ratio. This measure of examining the return does not take into account the holding
period or passage of time and hence it can miss the opportunity costs of investing elsewhere.
With the help of this comparison can be made for the different investments and it can be ranked
for the different projects or assets by the directors.
Net present value :
NPV is the difference between the present value of cash inflow and the present value of
cash outflows over the period. It is a capital budgeting method which can also be used by the
directors as a measure of return as it analyses the profitability of the projected investment for
new product considerations (What’s My Return on Investment and How Do I Calculate It?,
2022). NPV is the result of calculations which are used for finding the value of the future
payments. With the help of positive results in the NPV the directors are able to calculate the
current total value of future stream of payments (Wen, 2019). This is also the considered to be
the factor which is useful for the estimation of the future cash inflow for the new production
division.
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1.2
This company can fund its planned US development with the help of the retained
earnings, debt capital and equity capital. Out of these debts and equity funding are to be the fund
that needs to be planned by the company for its US development. Debt funding have the
following advantages and disadvantages,
Advantages Disadvantages
Retain control- The lending institution does not
have a say in the decisions made by the
business. This also improves the relationship
with the lender once the loan has been paid
back.
Qualification requirements- For being able to
gather the fund required the business requires
credit of rating to receive financing.
Tax advantage- The amount that is paid by the
organization in return of this investment is tax-
free and hence is an advantage for the
organization.
Discipline- For this organization needs to have
a financial discipline that will help it to make
the repayments in time. Not having discipline
can impact the image of the organization.
Easier planning- This is the most effective
form of funding for planning the future budgets
as in this method of funding the organization
knows in advance about the principles and
interest that has to be paid back each month.
Collateral- Through agreeing towards
providing a collateral services to the lender
some business can impact the assets and its
potential risk. This is considered to be the
guarantee of the loan that is potentially putting
the business at own risk (Bouri and Gupta,
2021).
Advantages and disadvantages of equity funding are,
Advantages Disadvantages
Less burden- This method puts the
organization in less burden as it does not have
to make any monthly payment for land and its
gives to the freedom to channel more money
Share profit- The shareholders also demand a
share of profit from the business.
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