2014

3a. Explain why operating leverage decreases as a company increases sales

and shifts away from the break-even point.

At progressively higher levels of operations than 1the break-even point ,the

percentage change in operating income as a result of a percentage change in unit
volume diminishes. The reason is primarily mathematical - as we move to
increasingly higher levels of operating income, the percentage change from the higher
base is likely to be less.

When you are considering two different financing plans, does being at the level where
earnings per share are equal between the two plans always mean you are indifferent as
to which plan is selected?

The point of equality only measures indifference based on earnings per share. Since
our ultimate goal is market value maximization, we must also be concerned with how
these earnings are valued. Two plans that have the same earnings per share may call
for different price-earnings ratios, particularly when there is a differential risk
component involved because of debt.

3bWhat does risk taking have to do with !he use of operating and financial
leverage

Both operating and financial leverage imply that the firm will employ a

heavy component of fixed cost resources. This is inherently risky because

the obligation to make payments remains regardless of the condition of the

company or the economy.

4a) What Is the Time Value of Money (TVM)

-The time value of money (TVM) is the concept that money available at the present
time is worth more than the identical sum in the future due to its potential earning
capacity.

-This core principle of finance holds that, provided money can earn interest, any
amount of money is worth more the sooner it is received. TVM is also sometimes
referred to as present discounted value.

6b) Why is trend analysis helpful in analyzing ratios.

-Trend analysis shows changes in a particular ratio over time and allows one to she the
changes that occur in profitability, asset utilization etc. over time. 

 This is even better when the trend analysis includes an analysis of trends within the –
industry.  

-As the industry may be subject to cyclical fluctuations.  Competitive pressures in the

industry might change as might the general business environment.

Definition

Trend analysis helps the public make sense of what goes on behind a company's
closed doors, historically speaking.

By reviewing the organization's financial statements, investors not only see whether
the business made money during the year under review, but also whether it has been
generating cash over a longer period -- such as three, five or 10 years.

A full set of financial reports includes a balance sheet, an income statement, a cash-
flows statement and a statement of retained earnings.
Importance

Trend analysis is important when examining a firm's financial statements, because

financial analysts can see how company assets have grown over time.

In the competitive landscape, the topic of asset growth is often preeminent, especially
in industries requiring substantial upfront investments -- such as oil and gas, mining
and the military.

By evaluating performance trends, corporate analysts also can tell whether an

organization is adeptly managing its money and investing it wisely.

There are primary methods to analyze trends while sifting through financial
statements. These are ratio analysis, vertical analysis and horizontal analysis.

2018 May

1a

Differences Between Profit Maximization and Wealth Maximization

The fundamental differences between profit maximization and wealth maximization is

explained in points below:

1. The process through which the company is capable of increasing earning

capacity known as Profit Maximization. On the other hand, the ability of the
company in increasing the value of its stock in the market is known as wealth
maximization.

2. Profit maximization is a short term objective of the firm while the long-term
objective is Wealth Maximization.

3. Profit Maximization ignores risk and uncertainty. Unlike Wealth

Maximization, which considers both.

4. Profit Maximization avoids time value of money, but Wealth Maximization

recognises it.
5. Profit Maximization is necessary for the survival and growth of the enterprise.
Conversely, Wealth Maximization accelerates the growth rate of the enterprise
and aims at attaining the maximum market share of the economy.
Extra
Definition of Profit Maximization

Profit Maximization is the capability of the firm in producing maximum output with
the limited input, or it uses minimum input for producing stated output. It is termed as
the foremost objective of the company.

It has been traditionally recommended that the apparent motive of any business
organisation is to earn a profit, it is essential for the success, survival, and growth of
the company. Profit is a long term objective, but it has a short-term perspective i.e.
one financial year.

Profit can be calculated by deducting total cost from total revenue. Through profit
maximization, a firm can be able to ascertain the input-output levels, which gives the
highest amount of profit. Therefore, the finance officer of an organisation should take
his decision in the direction of maximizing profit although it is not the only objective
of the company.

Definition of Wealth Maximization

Wealth maximizsation is the ability of a company to increase the market value of its
common stock over time. The market value of the firm is based on many factors like
their goodwill, sales, services, quality of products, etc.

It is the versatile goal of the company and highly recommended criterion for
evaluating the performance of a business organisation. This will help the firm to
increase their share in the market, attain leadership, maintain consumer satisfaction
and many other benefits are also there.

It has been universally accepted that the fundamental goal of the business enterprise is
to increase the wealth of its shareholders, as they are the owners of the undertaking,
and they buy the shares of the company with the expectation that it will give some
return after a period. This states that the financial decisions of the firm should be taken
in such a manner that will increase the Net Present Worth of the company’s profit.
2A: Explain the importance of cash flow statement

- Cash can come from both internal and external sources.

- Statement of Cash Flow helps companies and investors separate and observe
the differences and extent of the cash inflows and outflows.

- Internal, as opposed to external cash sources, provide a company with

successful attributes and assurances that include:

1) preventing and monitoring company debt

2) preventing unnecessary expenditures from interest, late payment penalties

and debt costs

3) ensuring timely investment and cash available for investment opportunities

4) ensuring timely payment of expenses and debts

5) and most importantly – ensuring a level of regular business income without

relying on outside investment or cash borrowing.

2b) Discuss the common cash problems and the strategies to overcome the problem

1. DISORGANIZED BOOKS

Lots of small business owners put their bookkeeping to one side because they’re so busy with
the huge work load of setting up a business.

Method

a. Look a close look at his invoicing system and methods of collecting

payment from customers. Some of the problem areas found were:
inconsistent invoice numbering, and no proper record of which customers
had paid.

b. spent time reconciling his overlooked invoices, only to discover significant

sums of money had never been received.
 c. For most businesses, the only real way to get the books in order is to use an
accounting system and to make a point of keeping it up to date.

Bad debts: Amounts owed by customers that cannot be recovered.

Method

To reduce the likelihood of bad debts, some of our clients conduct

credit checks on their customers before offering them credit.

For example: you discover a customer with a poor credit record, and
you want to take them on as a client. You can ask for a deposit up
front or issue partial invoices they can pay as portions of the work
completed.

OUT-OF-SYNC CREDIT TERMS

 The credit terms you have set your customers are out of sync with the credit terms set by
your suppliers, negative cash flow can build up and worsen over time.

Method

To renegotiate terms with your customers and/or suppliers. 

Factoring: This is where a financial institution lends your business short-term cash that is
secured against the value of the invoices you have issued.

Early Settlement Discounts: You could offer early settlement discounts on your invoices
which will give your customers a financial incentive to pay you early. This is typically
around a 2-3% reduction in the total invoice value.

PROFIT PROBLEM

Lack of profit will lead to a lack of cash.

Method
If your business is losing cash, it’s essential to uncover the cause of any losses and address
them as soon as possible. Possible solutions to becoming profitable may be to increase your
prices, increase sales or gain better control over your expenditure.

LACK OF CASH FLOW FORECASTING

Cash flow forecast enable us to see which months you can expect to see a cash deficit, and
which months you can expect a surplus.

Method

In finding discrepancies, you can adjust your forecasts so they are more accurate going
forward.

GROWING TOO QUICKLY

Most people want to grow their business, but sometimes growing too quickly can cause cash
flow issues that can hurt the business.

Method

Access a line of credit from the bank, such as an overdraft or short term loan. In many cases,
this is a viable option because banks are more willing to lend to a business if they can see a
draft service contract or letter of intent.
2017

5a Explain why the bad debt percentage or any other similar credit control percentage
is not the ultimate measure of success in the management of account receivable. What is
the key consideration ?

5bExplain how rapidly expanding sales can drain the cash resources of a firm.

To support the rapidly growing sales, there is more and more need for investment in current
assets and most of this increase in current assets will be permanent in nature. There will be
need for more raw material purchases and stock, more work in progress inventory and more
finished goods inventory. Rapid growing sales will also lead to substantial increase in
receivables. Hence, rapidly expanding sales needing a buildup in assets to support the growth
will drain the cash resources of the firm.

2016

What is Internal Rate of Return (IRR)?

Internal rate of return (IRR) is the interest rate at which the net present value of all the cash
flows (both positive and negative) from a project or investment equal zero.

Internal rate of return is used to evaluate the attractiveness of a project or investment. If the

IRR of a new project exceeds a company’s required rate of return, that project is desirable. If
IRR falls below the required rate of return, the project should be rejected.

Typically, the higher the IRR, the higher the rate of cash inflow a company can expect from a
project or investment.
IRR allows managers to rank projects by their overall rates of return rather than their net
present values, and the investment with the highest IRR is usually preferred. This
easy comparison makes IRR attractive, but there are limits to its usefulness.

 In addition, IRR does not measure the absolute size of the investment or the return. This
means that IRR can favor investments with high rates of return even if the dollar amount of
the return is very small.