Managing Finances and strategic Decision Making Question Answer 2022

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Managing Finances and strategic
Decision Making

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Table of Contents
Question 1..................................................................................................................................3
a).............................................................................................................................................3
b)............................................................................................................................................4
c).............................................................................................................................................4
Question 2..................................................................................................................................5
a).............................................................................................................................................5
b)............................................................................................................................................6
c).............................................................................................................................................7
Question 3..................................................................................................................................7
a).............................................................................................................................................7
b)............................................................................................................................................8
c).............................................................................................................................................8
Question 4..................................................................................................................................8
Question 5..................................................................................................................................9
Question 6..................................................................................................................................9
Question 7................................................................................................................................10
Question 8................................................................................................................................10
Question 9................................................................................................................................10
References................................................................................................................................12

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Question 1
a)
i) Payback period
Year Project
A
Cumulative cash
flows
Project
B
Cumulative cash
flows
0 -130000 -130000 -130000 -130000
1 30000 -100000 55000 -75000
2 10000 -90000 5000 -70000
3 30000 -60000 40000 -30000
4 70000 10000 40000 10000
5 20000 30000 20000 30000
Payback period 3.86 3.75
ii & iii) Net present value and IRR
Year Project
A
PVF @ 9% PV Project B PVF @ 9% PV project B
0 -130000 1 -130000 -130000 1 -130000
1 30000 0.917 27522.94 55000 0.917 50458.72
2 10000 0.842 8416.8 5000 0.842 4208.4
3 30000 0.772 23165.5 40000 0.772 30887.34
4 70000 0.708 49589.76 40000 0.708 28337.01
5 20000 0.650 12998.63 20000 0.650 12998.63
NPV -8306.37 -3109.909
IRR 6.72% 7.99%
iv) ARR
Year Project
A
Depreciat
ion
Net
profits
Project
B
Depreciat
ion
Net profit
project B
0 -
130000
-
130000
1 30000 26000 4000 55000 26000 29000
2 10000 26000 -16000 5000 26000 -21000
3 30000 26000 4000 40000 26000 14000
4 70000 26000 44000 40000 26000 14000
5 20000 26000 -6000 20000 26000 -6000
Average
investment
26000 26000
Average profits 6000 6000
ARR 23.077
%
23.077%

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v) Project selection
All the calculations have been made by using various tools and techniques which are
available and on the basis of that project B will be selected and the investment will be made
in the same. This is because of the lower payback period in the same and also the net present
value is negative but lower than the other project. The IRR of project B is also higher which
is also beneficial and so project B will be chosen among both otherwise none of them will be
selected because of negative NPV.
b)
Limitations of ratio analysis:
Ratio analysis is an important technique that is used for the evaluation of business
performance and position but also includes some limitations. There are various changes that
take place in the price because of inflation and they are ignored in the same (Omar et al.,
2014). The historical cost is used to make the calculation which is also a disadvantage as an
accurate position is not identified. All companies use various policies and comparing them on
the basis of ratios ignores the impact of policies.
c)
The weighted average cost of capital is the rate in which all the sources of capital are
considered in a proportionate manner on the basis of weights (Krüger, Landier and Thesmar,
2015). The calculation of WACC is made in the following manner.
Assume;
Debt= 600000
Equity= 400000
Cost of equity = 10%
Cost of debt = 6%
WACC = (we*Ke) + (Wd * Kd) /We + Wd
WACC = (0.4*.1) + (0.6*0.06)/(0.4+0.6)
WACC = 0.04 + 0.036
WACC = 0.076 or 7.6%

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Question 2
a)
Profitability:
Particulars Formula 2017 2018
Gross profit margin gross profit/sales*100 36.08% 33.10%
Net profit margin Net profit/sales *100 6.93% 2.02%
There is a decline in the profitability of the company as the ratios are reducing and this is
because of the decline in revenue and also the costs which are incurred such as marketing,
sales and distribution costs have increased. By this, the profits have declined affecting the
overall profitability.
Investment ratios:
Particulars Formula 2017 2018
Earnings per share Net earnings/total number of shares 6.4 1.7
Price earnings
ratios
MPS/EPS 0.56 1.50
The earnings which are made on each share are declining due to the reduction in the amounts
of profits. This is not good for the company as the investors' returns will decline which will
not attract them. There is an increase in PE that shows the higher expectations of investors
and the stock prove is overvalued in the market.
Efficiency ratios:
Particulars Formula 2017 2018
Asset turnover ratio Sales/total assets 1.82 1.62
Inventory turnover
ratio
COGS/Inventory 3.47 3.13
There is a decline in the efficiency of the management with the reducing ratios. The decline
in the assets turnover is because of the declining sales and increasing assets. There is a
decline in the COGS and an increase in inventory which resulted in a decline in ratio. This is
not beneficial as it shows the inefficient use of assets and inventory by management.
Liquidity ratios:
Particulars Formula 2017 2018
Current ratio Current assets/current liabilities 7.70 9.41

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quick ratio quick assets/current liabilities 3.11 4.12
The company is maintaining high current assets in comparison to the liabilities which made
the rise in the ratios and shows high liquidity. This is far more than the set standards and
shows that the company is not making proper investment and the assets are not being
invested in a proper manner which needs improvement.
Gearing ratios:
Particulars Formula 201
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2018
Debt ratio Total liabilities/total assets 0.59 0.56
Debt to equity
ratio
total liabilities/total equity 1.41 1.30
There is a decline in the gearing ratios the liabilities are declining and assets and equity are
increasing. It is good for the business as there is more asset and fewer amounts are borrowed
which will help in reducing the financial cost.
b)
i)
There are various budgets that are formed such as incremental which is made by adding
something to the previous budget, zero-based are made from the beginning and activity
budgets are made on the basis of various activities which are performed (Pyhrr, 2012).
ii)
They are used to control the performance as they act as standard and all the operations are
performed on their basis by complying with them. They help in maintaining the expenses to
the required level.
iii)
Participation is effective for managers as they will be able to have complete knowledge and
can take effective decisions for the betterment of the business. Also, they will form
communication with employees which helps in motivating them to perform well.

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c)
Debt is important to the source of financing and the main advantage is that it can be raised at
any time and there will be the availability of required funds but it will result in increasing
finance cost which is its demerit (Coleman, Cotei and Farhat, 2016). Equity is important as
by this the funds will be raised without any additional cost but this can be made in limit due
to the ownership issues which act as its disadvantage.
Capital structure is important as it regulates and controls the cost of the finances and capital
which is raised by the company. The higher equity leads to higher dividends and higher debt
affects the cost of capital and due to that balance is to be made otherwise the overall profits
are affected.
Question 3
a)
Sales Revenue: Budge
t
Actual Varianc
e
Favourable/
unfavourable
Product A 3880 4423.2 -543.2 favourable
Product B 1480 1598.4 -118.4 favourable
Product C 2300 2024 276 Unfavourable
Total Sales Revenue 7660 8045.6 -385.6 favourable
Costs:
Direct Materials 1115 1226.5 -111.5 Unfavourable
Direct Labor 1830 1976.4 -146.4 Unfavourable
Administration Expenses 585 585 0 Constant
Rent 620 620 0 Constant
Salaries 1135 1225.8 -90.8 Unfavourable
Marketing 715 679.25 35.75 favourable
Electricity 275 291.5 -16.5 Unfavourable
Selling and Distribution
Expenses
390 421.2 -31.2 Unfavourable
Other Overheads 275 264 11 favourable
Total Costs 6940 7289.6
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-349.65 Unfavourable
Profit 720 755.95 -35.95 favourable
Variance analysis is beneficial as the difference between the actual and budgeted values will
be identified which will help in improving the situation and taking steps to eliminate

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deviations (D'Onza, Greco and Allegrini, 2016). The budget is made on the basis of historical
data which does not match the actual performance and future aspects are not considered in
the same and it is the main limitation of this method.
b)
The payback method is important as by that the period in which funds will be recovered is
identified. The main disadvantage is that the time value of money is not considered.
In the case of NPV present value is calculated this shows the current value and helps in
making the correct decision (Hunjra et al., 2012). With the help of this project with the
different values and periods will not be compared and it is a limitation.
The internal rate of return is helpful to identify the rate which shall be made at a minimum to
make the gains. In this, future cost and duration are not considered which act as its demerit.
ARR is useful to identify the average return which will be made to take the relevant
decisions. The time and external factors are not considered which acts as a disadvantage for
the same.
c)
The three main financial statements are the income statement, balance sheet and cash flow
statement and all are related as they provide the financial performance and position of the
business. The net income from the income statement is used in the balance sheet to identify
the retained earnings. Net income is also shown in cash flow and due to this, all are
interrelated. Cash flow is important as by that all the events which lead to a change in cash
position are identified (Bhandari and Iyer, 2013).
Question 4
The externalities are involved and in that there are two sides that are available involving the
sufferers and causers. The resources will be used efficiently by proper bargaining. The
government will be making the proper practices and policies by which regulation in the

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market will be carried. The pollution will be controlled with the help of direct regulations and
emission taxes (Lipsey and Chrystal, 2011). There will be tradable permits in which the low
pollution abatement companies will sell their rights to high abatement firms by which the
total cost will be reduced. There will be tradable emission permits by which emission limits
will be set to reduce the overall emission.
Question 5
The various factors which affect the demand and supply include price fluctuation,
competition, incomes, and commercial advertising. The change in the population, technology,
inflation and physical capital stock affects the aggregate demand and supply (Economics
help, 2019). This is linked to the macro environment as all the factors are from the external
market and by that whole economy will be affected.
Figure 1 change in aggregate demand and supply
(Source: Economics help, 2019)
The graph shows all the movement in the aggregate demand and supply with the inflation and
by that complete relation can be understood.
Question 6
There are various circumstances in which the free market may fail and they include perfect
competition in the market, unequal job opportunities and goods distribution, focus on profits,

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individual judgment and monopolies growth (Gillingham and Palmer, 2014). There is a
concept that is involved and according to that if the resources and goods will not be
distributed appropriately then they will lead to market failure. If the individual will be
thinking of the personal benefit then also the failure of the complete market will be made.
Question 7
There are various reasons for which mergers and acquisitions occur and the main among
them is to gain a competitive advantage and also the larger share is gained in the market.
There will be a better network of marketing that will be made and various types of mergers
take place including horizontal, vertical conglomerate, product extension and market
extension (Phillips and Zhdanov, 2013). The merger affects all the stakeholders as the prices
will experience volatility and that will affect the return on shareholders. The customers will
be having various new products and their choices will be affected. The employees will have
to shift and their salary and working atmosphere will be affected.
Question 8
The pricing strategy is affected by the market structure as there are various strategies and
they are chosen on the basis of market structure and will be using a profit maximization
strategy. In the case of monopoly, the seller will be controlling pricing decisions (Abrate,
Fraquelli and Viglia, 2012). In the case of oligopoly, there are few sellers and in such a
market the leader of the price will take the decision. The monopolistic market involves
various sellers and so all are free to set their own price and can use penetration pricing to
capture the market.
Question 9
There are various market structures and they include the following:
Monopolistic market: In this, the one seller is involved and has all the control and will be
deciding the pricing strategy and entry barriers which are high. Healthcare will use the same
and will charge the rate by which the profits will be increased (Frech et al., 2015). There will
be the use of high technology which is not available with others and will create a barrier for
others in this form and attract people.

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Perfectly competitive market: In this, there are many sellers and so the market share is small.
To capture the market penetration strategy will be used. There is a low barrier to entry as
anyone can enter the market offering a lower price or new product. The health care company
will offer various plans in which regular treatment at affordable prices will be offered.

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References
Abrate, G., Fraquelli, G. and Viglia, G. (2012) Dynamic pricing strategies: Evidence from
European hotels. International Journal of Hospitality Management, 31(1), pp.160-168.
Bhandari, S.B. and Iyer, R. (2013) Predicting business failure using cash flow statement
based measures. Managerial Finance, 39(7), pp.667-676.
Coleman, S., Cotei, C. and Farhat, J. (2016) The debt-equity financing decisions of US
startup firms. Journal of Economics and Finance, 40(1), pp.105-126.
D'Onza, G., Greco, G. and Allegrini, M. (2016) Full cost accounting in the analysis of
separated waste collection efficiency: A methodological proposal. Journal of environmental
management, 167, pp.59-65.
Economics help. (2019) Causes of Inflation. [Online] Available at:
https://www.economicshelp.org/macroeconomics/inflation/causes-inflation/ [Accessed 6
January 2020]
Frech, H.E., Whaley, C., Handel, B.R., Bowers, L., Simon, C.J. and Scheffler, R.M (2015)
Market power, transactions costs, and the entry of Accountable Care Organizations in health
care. Review of Industrial Organization, 47(2), pp.167-193.
Gillingham, K. and Palmer, K. (2014) Bridging the energy efficiency gap: Policy insights
from economic theory and empirical evidence. Review of Environmental Economics and
Policy, 8(1), pp.18-38.
Hunjra, A.I., Shaheen, I.B., Niazi, G.S.K. and Rehman, I. (2012) Investment appraisal
techniques and constraints on capital investment. Actual Problems of Economics, 2(4).
Krüger, P., Landier, A. and Thesmar, D. (2015) The WACC fallacy: The real effects of using
a unique discount rate. The Journal of Finance, 70(3), pp.1253-1285.
Lipsey, R. and Chrystal, A. (2011) Economics. 12th ed. United states: Oxford university
press Inc, New York, pp. 283-286. [Accessed 6 January 2020].

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Omar, N., Koya, R.K., Sanusi, Z.M. and Shafie, N.A. (2014) Financial statement fraud: A
case examination using Beneish model and ratio analysis. International Journal of Trade,
Economics and Finance, 5(2), p.184.
Phillips, G.M. and Zhdanov, A. (2013) R&D and the Incentives from Merger and Acquisition
Activity. The Review of Financial Studies, 26(1), pp.34-78.
Pyhrr, P.A. (2012) Zero‐Based Budgeting. Handbook of Budgeting, pp.677-696.