Case Study: Financial Analysis - Financing, CEO Hiring & Discounts

This assignment presents a comprehensive finance case study, critically analyzing various financial decisions and strategies. It delves into the advantages and disadvantages of short-term and long-term financing, evaluating the implications of hiring a new CEO with a profit-sharing plan, and assessing the benefits and drawbacks of availing supplier discounts. Furthermore, the case study explores the adoption of a balanced scorecard approach and the implementation of activity-based costing, providing a thorough examination of their respective advantages and disadvantages. The analysis considers factors such as cash flow, profitability, risk management, and organizational impact, offering valuable insights into the complexities of financial decision-making in a business context. Desklib provides access to solved assignments and past papers to aid students in their studies.

SHORT MEMO
STUDENT ID:
[Pick the date]

Case 1
From: STUDENT NAME, Consultant
To: CEO & Audit Committee
Date: November 12, 2017
Subject: Critical analysis of short term & long term financing
Dear Sir
Financing is crucial for the smooth functioning and expansion of any business. With regards
to various sources of financing, some provide short term financing such as commercial papers
and working capital loans. On the other hand, there are others such as corporate bonds and
term loans which tend to provide long term financing. In order to choose which one to prefer,
it is imperative to indicate the respective advantages and disadvantages.
A key advantage of short term financing is that the interest rates are lower. Also, these are
quick to obtain and these enable resolving short term financing needs. These debts are also
typically repaid in short term from business cash flows and hence do not present high risk.
However, these financing sources are not suitable for capital expenditure targeted at
expansion. Also, the token size of these loans is typically small (Damodaran, 2015).
A key advantage of long term financing is that these funds are available for a long duration
and thereby allow funding of capital expenditure. Also, the repayment is gradual and hence
does not adversely impact the company cash flow in a given flow. However, the
disadvantages include higher interest rate (higher risk), leveraging of balance sheet and
greater default risk owing to large quantum of these loans (Parrino & Kidwell, 2014).
It is apparent from the above discussion that both short term and long term financing have
their respective pros and cons and usually suitable funding means is one which has
approximately the same maturity as the underlying asset it will be used to fund.
Yours Sincerely
STUDENT NAME

Case 2
From: STUDENT NAME, Auditor
To: Audit Committee
Date: November 12, 2017
Subject: Critical Analysis of hiring a new CEO
Dear Sirs/Madams
Owing to the significant underperformance of the company under the current CEO, it may
seem prudent to hire a new CEO with a profit sharing plan in a bid to enhance profits.
However, before hiring a new CEO, the respective advantages and disadvantages associated
with such a move need to be critically analysed.
The key idea of hiring a new CEO with a profit sharing plan is that it enhances the chances of
improved profitability as potentially new ideas would be brought by the new CEO. Further,
inventive would exist for the CEO to take decisions aimed at enhancing the profits. Besides, a
new CEO can also act as a change agent and take a fresh perspective at the business (Petty et.
al., 2015). However, there are certain downsides to the hiring of a new CEO with profit
sharing plan. It may happen that the new CEO may take risky decisions to maximise the
profits which may backfire. Also, the existence of profit sharing plan and the hiring of an
unethical or incapable CEO would imply increase in incidence of financial fraud (Drury,
2016).
From the above, it is apparent that hiring of a new CEO would be preferred only if a capable,
experienced candidate can be found who would be given time to understand the organisation
and perform rather than being obsessed with profit from the time of joining.
Yours Sincerely
STUDENT NAME

Case 3
From: STUDENT NAME, Consultant
To: Company CEO
Date: November 12, 2017
Subject: Critical analysis of availing supplier discount
Dear Sir
The objective of this memo is to critically analyse the advantages and disadvantages for the
company if it decides to avail the supplier discount for making cash payment within 10 days.
Based on this, a decision can be reached in this regards.
The obvious advantage of making the payment to supplier within the specified 10 days period
is that the company would be able to avail a 2% discount on the purchases which would
lower the cost of goods and enhance the gross profit margins. Also, it would help in forging
good relationships with suppliers since early cash would imply higher liquidity. However,
one disadvantage of indulging in early payment is that the company may face cash crunch
leading to higher working capital requirements which may erode the benefits (Petty et. al.,
2015). If company decided to avail the complete credit period, then the disadvantage would
be in the form of foregoing the discount. However, the advantage is that the risk of cash
crunch would be lowered and working capital management could potentially improve
(Brealey, Myers & Allen, 2014).
Hence, it is apparent that availing the discount makes sense when the company has enough
liquidity to meet the working capital requirements as it is imperative that cost of goods
should not be lowered at the cost of cash crunch in business.
Yours Sincerely
STUDENT NAME

Case 4
From: STUDENT NAME, Consultant
To: Company CEO
Date: November 12, 2017
Subject: Critical analysis of adopting a balanced scorecard approach
Dear Sir
In the recent times, performance measures have evolved and no longer only economic
parameters are expected to be sufficient. As a result, there is a trend where balance scorecard
is being increasingly deployed by companies so as to measure progress in key domains and
hence ensure a more holistic progress (Parrino & Kidwell, 2014).
One of the advantages of using a balanced scorecard is that it helps with framing strategy
since the objectives in various dimensions is apparent. Also, the alignment of the departments
and divisions can also be driven by balanced scorecard. Besides, it acts as a great
communication tool which makes it evident to employees as to what the key priorities of
company are and hence individuals can align accordingly (Bhimani et. al., 2017). On the flip
side, there can be issues with regards to implementation especially because everyone may not
be on board with the expanded definition of performance. Besides, strong support from top is
essential for implementation of this framework. Training needs to be taken care of managers
so that they can use the balanced scorecard (Drury, 2016).
From the above discussion, it can be concluded that balanced scorecard is useful but there are
challenges that need to be overcome particularly in the form of organisational support and
commitment to top management.
Yours Sincerely
STUDENT NAME

Case 5
From: STUDENT NAME, Consultant
To: Company CEO
Date: November 12, 2017
Subject: Critical analysis of activity based costing
Dear Sir
There is a shift from traditional costing system to activity based coting system. However,
before making the shift, it is imperative that the various advantages and disadvantages need
to be analysed that are associated with this shift.
One of the key advantages of shifting to activity based costing is that it leads to better
allocation of overheads across different products and hence promotes accurate costing. This
leads to improvement in pricing which becomes more competitive. Also, the management
decision making ability would improve through the use of activity based costing as accurate
costing data is available (Drury, 2016). However, one of the issues is that activity based
costing is complex system which requires manpower with specialised skills coupled with
time and money. Also training needs to be given to managers those who are involved in
decision making so that the information from activity based costing may be used effectively.
Further, the migration to activity based costing is not of use when there is only one product
that is produced (Damodaran, 2015).
From the above discussion, it is evident that migration to activity based costing makes sense
only when the company manufacturers multiple products and also is willing to dedicate
resources in the form of manpower, time and money for the implementation of this system.
Yours Sincerely
STUDENT NAME

References
Bhimani, A., Horngren, C.T., Datar, S.M. & Foster, G. (2017), Management and Cost Accounting 4th
ed. Harlow: Prentice Hall/Financial Times
Brealey, R. A., Myers, S. C. & Allen, F. (2014) Principles of corporate finance, 6th ed. New
York: McGraw-Hill Publications
Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York:
Wiley, John & Sons.
Drury, C. (2016) Cost and Management Accounting: An Introduction. 6th ed. New York: Cengage
Learning
Parrino, R. & Kidwell, D. (2014) Fundamentals of Corporate Finance, 3rd ed. London:
Wiley Publications
Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M. & Nguyen, H. (2015).
Financial Management, Principles and Applications, 6th ed.. NSW: Pearson Education,
French Forest Australia
.