MBA504 Accounting & Financial Management: Ratio Analysis & Advice

This assignment provides solutions to questions related to financial management concepts. It covers the maturity-matching approach for funding assets, the importance of ESG reporting with a focus on car distributors like Toyota, and a detailed analysis of financial ratios (current ratio, quick ratio, debt-to-equity, inventory turnover, and return on assets) for two car manufacturers to determine investment recommendations. Further, it evaluates historical cost and fair-value accounting methods, performs breakeven and profit/loss calculations for a hotel business considering last-minute deals, and discusses the advantages and disadvantages of equity shares and debentures as long-term financing sources, including an explanation of the Weighted Average Cost of Capital (WACC) and its relevance in capital budgeting. Desklib offers a platform to access similar past papers and solved assignments.

MBA504 Accounting & Financial Management
NUMBER OF QUESTIONS: Six (6) Questions (attempt five (5))
VALUE: 50%
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QUESTION 1
What is the maturity-matching approach that should be adopted by firms sourcing funding for their
asset portfolio? Define this approach and explain how it works in practical terms. What are the risks
of not following this approach? (10 Marks)
QUESTION 2
The level of voluntary Environmental, Social and Governance (ESG) reporting by large corporations
is increasingly exponentially. Discuss your opinion of the increasing expectation that large car
distributors in Australia, like Toyota, disclose information on their environmental and social
performance. Where might you expect this information to be disclosed? Provide examples of social
performance information that the customers of Toyota might be most interested in. (10 Marks)
Ans
Initiatives in the areas of environmental, social, and governance (ESG) are fueling the upcoming
retail revolution. Retailers must successfully, profitably, and efficiently integrate ESG into their
larger sourcing and supply chain strategies as customers, regulatory bodies, and governments put
more pressure on companies to show their commitment to sustainability and ethical labour
standards.
The importance of ESG has increased as businesses from all industries adopt the triple bottom line
philosophy, which holds that social and environmental concerns should be given equal weight to
financial concerns. Environmental, social, and governance factors are all being examined more
closely.
Concerns about the environment are speeding the drive for sustainable finance, a concept that is
permeating corporate culture and prompting companies across all industries to reassess both their
internal procedures and their investment choices. Similar to this, businesses understand the need to
create sustainable supply chains that address social and environmental hazards.
Businesses' social concerns range from modern slavery to issues like employee diversity, where
performance is increasingly in the spotlight. The advantages of inclusive and diverse enterprises can
be seen throughout the organisation and in leadership.
QUESTION 3
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Financial Statement analysis provides important insights relating to the position and performance of
an organisation. Provided below are some key financial ratios for Car Manufacturer 1 (CM1) and
Car Manufacturer 2 (CM2). Both organisations manufacture and sell car and car parts
internationally.
Electrical Goods Retailer 1 (R1) Electrical Goods Retailer 2 (R2)
Ratio 2021 2020 2019 2021 2020 2019
Current Ratio 1.02 1.03 1.13 1.04 0.98 0.94
Quick/Acid Test
Ratio
0.83 0.85 0.86 0.67 0.63 0.58
Total Debt/Equity 1.06 1.12 1.12 1.46 1.69 1.69
Inventory Turnover 9.69 10.22 times 10.77 6.42 6.59 6.68
Return on Assets 5.01% 3.79% 4.85% 4.51% 3.81% 3.90%
Discuss what the data in the above table reveals about the firms’ short terms liquidity, long term
solvency and efficiency. Give advice as to which firm you would invest in and justify your choice.
(10 marks)
Ans.
On the basis of the above data, the following data has been revealing information about the
company’s short-term liquidity, long-term solvency, and efficiency performance:
Short-term Liquidity: The current ratio and acid test ratio are the two significant financial ratios
that reveal the liquidity performance of the company in a short period. Based on the above table, it
has been identified that the current ratio in the year 2021 of car retailer 1 is 1.02 while car retailer 2
is 1.04. This indicates that car manufacturer 2 has more capability to pay off its liabilities on time
by converting current assets to cash. Further, on the other hand, it has been also identified from the
above data that the acid test ratio of both car manufacturers in the year 2021 is 0.83 and 0.67 for car
manufacturers 1 and 2 respectively. This means car manufacturer 1 short-term liquidity
performance is better as compared to car manufacturer 2. Hence, it would be advisable for investors
that they should invest in Electrical goods retailers 1.
Long-term Solvency: On the basis of above table, it is identified that the retailer 2 is better as
compared to retailer 1.
Long-term efficiency: On the basis of above table, it has been identified that efficiency performance
of retailer 1 is better. Hence, the investors should invest its money in retailer 2 company.
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QUESTION 4
Whilst conventional accounting claims objectivity in the preparation of corporate accounts the way
in which a firm values its assets in the balance sheet may be subjectively selected. The traditional
approach to valuation was the use of historical cost under which assets were valued in the accounts
at the price at which they were purchased. Under Fair-value Accounting (FVA) assets may be
valued at the price for which they would be exchanged between knowledgeable and willing parties.
Critically evaluate the advantages and disadvantages of each approach to valuing assets in corporate
balance sheet from the point of view of a prospective investor. (10 Marks)
Ans.
The two approaches of valuing assets are as follows:
Historical cost: The purchase price or the item's initial monetary worth are referred to as the
historical cost of an asset in accounting. According to the historical cost concept, a business usually
records its transactions at their historical costs. The cost principle, which emphasises that assets,
equity investments, and liabilities should be documented at their respective purchase costs, goes
hand in hand with the notion.
Advantage:
 It is straightforward to produce.
 Accounts do not record gains until they are realized
 It is still used in most accounting systems.
Disadvantage:
 No indication of current value of assets.
Fair value: The assets and liabilities that are presented on the company's financial statements are
measured using fair value accounting. The Financial Accounting Standards Board (FASB) adopted
the valuation concept to standardise the calculation of financial instruments by taking into account
their historical cost.
Advantage:
 Accurate valuation
 True income
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Disadvantage:
 Value reversals
 Market effect
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QUESTION 5
Donald has recently lost his job as the President of a large North American country and has returned
to the family hotel business. Their most prestigious hotel Tramp Tavern has been closed for two
years whilst it has undergone refurbishment and the hotel is about to be re-launched.
The hotel runs conventionally and has a number of cost centres such as Reception, Concierge,
Repairs and Maintenance which are relatively fixed. The hotel also has variable costs relating to
cleaning and servicing rooms. You have been provided with the following data regarding the re-
furbished Tramp Tavern:
Available Rooms 400
Average Room Tariff (per night) $450
Fixed Financing Costs $10 million
Fixed Operating Costs $15 million
Variable Operating Costs (per night when occupied) $50
Required
a) What is the breakeven point (in total room rentals for the year) for the Tramp Tavern? Show
the percentage of occupancy that the hotel must achieve in order to break even (show all
calculations) (2.5 marks)
b) Donald expects the property to achieve 70% occupancy over the year. What will be his Net
Profit (Loss) for the year if they achieve that level of occupancy? (2.5 marks)
c) Hotel rooms (like airline seat tickets) are services that are referred to as ‘perishable’ in that
they expire if they are not used on a certain date (they cannot be stored). Donald has
determined that he can increase the hotel’s occupancy from 70% to 95% by subscribing to a
last-minute deals’ provider. However, should he do so the average room tariff Tramp Tavern
will receive will fall from $230 per night to $190 per night. Provide the profit calculation to
demonstrate whether Donald should or should not go ahead with the offer from the last-
minute deals provider to sign. (2.5 marks)
d) Briefly discuss any other business issues that Donald should consider before making up his
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mind whether to proceed with the last-minute deals’ agreement. (2.5 marks)
Ans.
(a) Calculation of break-even point (in units)
Break-even point formula = Fixed Cost / unit contribution margin
= $25 million / $400 per rooms
= 0.0625 rooms
Fixed cost = Fixed financing costs + Fixed operating costs
= $10 million + $15 million
= $25 million
Unit contribution margin = Unit selling price – Unit variable cost
= $450 - $50 = $400
Break-even point in sales
= Break-even point in the number of rooms * the average daily rate
= 0.0625 * $450
= $28.125
Percentage of occupancy in the hotel room to achieve breakeven:
Formula = Break-even point in sales / ADR * 365
= $28.125 / $450 * 365
= 22.8125%
(b) Net profit and loss on 70% level of occupancy
70% level of occupancy = 400 rooms * 70%
= 280 rooms
Profit and loss statement
Sales 280 * 450 126000
Less Variable cost 280 * 50 14000
Contribution 112000
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Less Fixed operating cost 15
Less Fixed financing cost 10
Net profit 111975
(c)
In case they do not opt for last minutes offer:
70% occupancy
70% * 400
= 280
Sales 280 * 230 64400
Less Variable cost 280 * 50 14000
Contribution 50400
Less Fixed operating cost 15
Less Fixed financing cost 10
Net profit 50375
In case they go for last-minute offers
= 90% occupancy
= 90% * 400
= 360
Profit =
Sales 360 * 190 68400
Less Variable cost 360* 50 18000
Contribution 50400
Less Fixed operating cost 15
Less Fixed financing cost 10
Net profit 50375
On this basis, it is advisable for Donald that they can opt for last minutes offers as well because they
will earn the same profit in last minutes offer that they are earning previously.
(d)
Other business issue should consider while making any decision are as follows:
 Demand in the market.
 Level of competition.
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 Price customer willing to pay for the rooms.
QUESTION 6
(a) Identify and explain the two main long-term sources of finance available to firms. Critically
evaluate the advantages and disadvantages of each source of funding. (5 Marks)
(b) What is a firms Weighted Average Cost of Capital (WACC) and why is it an important
consideration when a firm is making capital budgeting decisions? Discuss how the WACC is
related to a company’s required rate of return. (5 Marks)
Ans.
(a)
Two sources of finance are as follows:
Equity Shares: The practice of obtaining money through the selling of shares is known as equity
financing. Companies raise money because they can need it to pay expenses in the short term or
because they have a long-term objective and need money to invest in their expansion. A firm
effectively sells ownership in its business when it sells shares in exchange for money.
Advantage:
 No commitment to pay back the funds
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 There is no additional financial strain on the business.
Disadvantage:
 That must grant investors a portion of their business.
 Users must distribute their gains to investors.
 Anytime you make choices that will have an impact on the business, they must consult with
investors.
Debentures: Debt financing is the process through which a business sells debt instruments to retail
and/or institutional investors in order to raise funds for working capital or capital expenditures.
Individuals or organizations obtain a commitment that the main and interest on the debt will be
returned in exchange for lending them the money, becoming creditors in the process.
Advantage:
 A company can use debt financing to grow by leveraging a modest amount of capital.
 Tax deductions often apply to debt payments.
 A business maintains full ownership and control.
s
 Oftentimes, debt financing is less expensive than equity financing.
Disadvantage:
 Lenders must get interest payments.
 No matter how much money the business makes, the loan must be paid.
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 Debt financing poses risks for companies with erratic cash flow.
(b)
Weighted average cost of capital = The WACC establishes the rate at which a corporation must raise
capital from all sources. Bonds, other long-term debt, and both common and preferred stock are
included in this. It provides management with a picture of its overall borrowing costs and aids in
figuring out how much of a return on investment new projects or activities will need to generate to
cover their financing costs.
Importance of weighted average cost of capital:
 It is important for decision of company.
 It is also significant for evaluating the projects with the same risk as well as different risk.
 It is also valuable for calculating economic value added.
Relation of WACC with required rate of return:
Since it expresses the return that both bondholders and shareholders require in order to provide the
company with capital in a single value, the weighted average cost of capital is a popular method for
calculating the required rate of return. Because investors will want higher returns, a company's
WACC is likely to be higher if its stock is very volatile or if its debt is regarded as hazardous.
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Financial Table – Present Value of $1
Number Percent Per Period
Periods 1% 2% 3% 4% 5% 6% 8% 10% 12% 14% 16% 18% 20%
1 0.99
01
0.98
04
0.97
09
0.96
15
0.95
24
0.94
34
0.92
59
0.90
91
0.89
29
0.87
72
0.86
21
0.84
75
0.83
332 0.98
03
0.96
12
0.94
26
0.92
46
0.90
70
0.89
00
0.85
73
0.82
65
0.79
72
0.76
95
0.74
32
0.71
82
0.69
443 0.97
06
0.94
23
0.91
51
0.88
90
0.86
38
0.83
96
0.79
38
0.75
13
0.71
18
0.67
50
0.64
07
0.60
86
0.57
874 0.96
10
0.92
39
0.88
85
0.85
48
0.82
27
0.79
21
0.73
50
0.68
30
0.63
55
0.59
21
0.55
23
0.51
58
0.48
235 0.95
15
0.90
57
0.86
26
0.82
19
0.78
35
0.74
73
0.68
06
0.62
09
0.56
74
0.51
94
0.47
61
0.43
71
0.40
196 0.94
21
0.88
80
0.83
75
0.79
03
0.74
62
0.70
50
0.63
02
0.56
45
0.50
66
0.45
56
0.41
04
0.37
04
0.33
497 0.93
27
0.87
06
0.81
31
0.75
99
0.71
07
0.66
51
0.58
35
0.51
32
0.45
24
0.39
96
0.35
38
0.31
39
0.27
918 0.92
35
0.85
35
0.78
94
0.73
07
0.67
68
0.62
74
0.54
03
0.46
65
0.40
39
0.35
06
0.30
50
0.26
60
0.23
269 0.91
43
0.83
68
0.76
64
0.70
26
0.64
46
0.59
19
0.50
03
0.42
41
0.36
06
0.30
75
0.26
30
0.22
55
0.19
38
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