Finance Assignment Solution: Business Decisions and Analysis

This finance assignment solution analyzes a hypothetical scenario involving the Woolworths Group, a major retail business. The solution addresses key financial decisions, including financing, expansion, and liquidity management. It contrasts the advantages and disadvantages of the company form of business structure. The assignment also explores potential agency issues that may arise when hiring managers and suggests methods to mitigate these risks. Furthermore, it covers crucial factors to consider before acquiring a business, such as cash flows, contracts, and technological upgrades. The solution includes calculations and recommendations based on net present value (NPV), risk assessment, and financial ratios, offering a comprehensive understanding of business operations and financial management principles. The assignment also covers topics like compounding, annuities, holding period return, and the Capital Asset Pricing Model (CAPM).

FINANCE

Answer 1
One of the business organisations that I would like to work with is the well renowned
Woolworths Group. The company is majorly engaged in the retail business. The business
segments of the entity include the supermarket food, merchandise, liquor, hotels, pubs and
others, in Australia and in New Zealand. It has also expanded in the area of Financial
Services and Insurance. The entity operates through its numerous subsidiaries and brands.
Some of the chief brands of the entity in the supermarket sector are the Delicious Nutritious,
Essentials, Frey, Macro, Gold and others.
Answer 2
Some of the major financial decisions that would be required to be taken as the owner
manager of the business are listed as follows. The first decision is financing decision that is
the components in the capital structure of the debt and equity depending upon the factors of
risk and ownership. The second decision is expansion decision as per the financial feasibility
of the projects. An estimate of present and future cash flows would be required to be analysed
to review the mergers, acquisitions and similar expansion decisions. Lastly, the decision
would involve the maintenance of the liquidity for the conduct of the day to day business
operations.
Answer 3
The organisation functions through the company form of business structure. The advantage of
such a business structure is that the liability of the owners is limited to the extent of the
amount remaining unpaid on the shares bought in such business (Research Guides, 2020).
Thus, the personal assets are secure. Moreover, as the large numbers of shareholders are
associated, there is an advantage of large capital base which further allows efficient conduct
of business. However, the company form of business structure has limitations as well. The
management of the company is complex and involves numerous legal formalities such as
maintenance of accounting records, filling of returns, and others. In addition, the ownership
and control over the affairs of the business is diluted.
Answer 4
As the company management is complex, it is significant to hire the professional managers
for the conduct of business. The potential agency issues that may be faced can range from the

conflict of interest leading to accounting frauds, leakage of crucial business information in
the market, unauthorised use of the resources of the entity and business decisions taken for
the personal benefits. The means that can be adopted to counter such agency issues are
efficient and clear formation of the contracts, implementation of efficient control measures
such as incentive systems, code of business conduct and undertaking disciplinary measures
wherever necessary.
Answer 5
The three key factors that must be considered before the decision to acquire a business are
position of the existing cash flows, profitability and assets; existing contracts and standing
liabilities; and the levels of technology upgrading and training of employees.
Cash flows, profitability and assets: It is important to examine the financial mileage in
terms of the products and services offered product mix, working capital approach, types and
amounts of the assets to assess the efficiency of the business operations.
Existing contracts and standing liabilities: It is important to review the existing contract,
liabilities, on-going legal proceedings, regulatory actions and other supplementary financial
information. In addition the motive of the sale of such business must be reviewed.
Levels of technology upgrading and training: In the changing and complex business
environment of present times, it is important that the rival business leads to economies of
scale and that is possible when the same is in line with the modern technologies and the
employees are updated.
Answer 6
Option 1 NPV: 156417
Option 2 NPV: 117224
Option 3 NPV: 129021
As per the comparison of the options, it is recommended that the option 1 must be chosen
over the others. This is because the said option has the highest net present value than the
others.

Answer 7
One of the major risks faced by the businesses in the business transfers is that of the agency
risk. It is denoted as the managers of the acquired company may not work in the best interests
of the company leading to profitability and efficiency of the business being diminished. It is
significant for the managers to engage themselves in the ethical behaviour for the conduct of
the interest whereby the interests and goals of the organisation and the stakeholders must be
considered primarily than the personal interests.
Answer 8
Option c would lead to the highest interest to the tune of $ 867.
Answer 9
The compounding leads to the increment in the overall value of the investment. The
compounding leads to the accumulation of the interest on the principal amount as well as the
earlier interest charges. Thus, the overall interest increases more rapidly.
Answer 10
a) Payment of the rents for the business property is most common type of annuity
payment.
b) PV = $1,71,189.57
Answer 11
a) The EAR is a better measure to quote the interest rate because it considers the effect
of compounding and thus depicts the true cost of borrowing. In contrast to this, the
APR is based on the simple interest only and is not useful to ascertain true borrowing
cost.
b) EAR = 16.08%
Answer 12
The two key components of holding period return are the capital appreciation component and
the income component.

Computation of the holding period return
Purchase Price = $ 61.00
Sales Price = $ 65.50
Dividend = $ 2.50
Time = 3 months
Holding period return = (2.50 + (65.50 - 61)) / 61
Holding period return (amount )= 7.00
HPR (percentage) = 11.48%
Annualised Return = 3.65%
Answer 13
Return Probability Expected Returns
25000 0.40 10000
50000 0.20 10000
100000 0.10 10000
15000 0.30 4500
Total = 34500
Answer 14
Equities or the shares are generally the most risky asset class, as the returns are volatile as to
the external changes in the market as well as the business performances of the company
(Brigham and Houston, 2012). The historical data supports the fact, for instance during the
global financial crisis of 2008, the stock markets had crashed leading to huge losses in the
shares. The second risky asset class is that of the property. This is also subjected to the
changes in the markets. The least risky asset class is that of the bonds because the same
involves a fixed payment of returns to the investors.
Answer 15
The CAPM model disintegrates the risk of the investment in stock to two categories that is
the systematic risk and the unsystematic risk (Reilly and Brown, 2011). The systematic risk
related to the entire market and which cannot be avoided, because the same is due to the
change in the macroeconomic factors. The unsystematic risk relates to specific company or
the stock and can be managed through diversification of the portfolio.

References
Brigham, E.F. and Houston, J. F. (2012) Fundamentals of financial management. Boston
MA: Cengage Learning.
Reilly, F. K. and Brown, K. C. (2011) Investment analysis and portfolio management. Boston
MA: Cengage Learning.
Research Guides (2020) Companies In Australia: Business Structures, [online] Available
form: https://guides.slv.vic.gov.au/companies/structures [Accessed on: 16 April 2020].