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BACHELOR OF BUSINESS ADMINISTRATION
Title: FINANCIAL MANAGEMENT I
ASSIGNMENT
Student Name: [Insert your name]
Student Number: [Insert your student number]
Professor Name: [Insert professor's name]
Due Date: [Insert due date]
|
Table
of Contents |
|
1.0
Introduction
.....................................................................................................
[Page No. 3] |
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2.0
Question 1
.......................................................................................................
[Page No.4 ] |
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2.1 Dr Mo
started his own medical practice at the end of 2020. At the end of his second
year in business he thinks it prudent to compare his 2021 and 2022 financial
results to reassess if it’s better for him to work in the private sector or
return to public service. You are his financial manager, and he provides you
with the following financial information: |
|
3.0
Question 2
.......................................................................................................
[Page No.7 ] |
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3.1 Identify
and explain the four core functions of financial management that are crucial
for effective decision-making and the long-term success of a business.
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4.0
Question 3 .....................................................................................................
[Page No.8 ] |
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4.1 Phambili Ltd is in the pharmaceutical
industry sector and has been expanding in the recent past due to a change in
its strategic direction from regulated medicines to supplements and
homeopathic remedies. The company has recently identified a project it wants
you to evaluate and give recommendations on whether to reject or accept,
among other things. You are provided with the following tabulated financial
and additional information: |
|
5.0
Conclusion
.....................................................................................................
[Page No.11 ] |
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6.0
References .....................................................................................................
[Page No.12 ] |
Introduction
Financial management is a critical pillar of organizational success,
encompassing the strategic allocation, utilization, and optimization of
financial resources to achieve the overarching goals and objectives of a
business. In a dynamic and competitive business landscape, effective financial
management serves as a compass, guiding decision-makers in navigating complex
financial waters and ensuring the sustainability and growth of the enterprise.
It entails a comprehensive set of principles, practices, and techniques that
empower businesses to make well-informed financial decisions, manage risks, and
create value for stakeholders. From planning and budgeting to investment analysis
and risk mitigation, financial management is the cornerstone that enables
businesses to balance profitability, liquidity, and long-term viability in a
world of ever-evolving economic realities. This introductory understanding of
financial management sets the stage for delving deeper into its core functions,
methodologies, and the pivotal role it plays in shaping the trajectory of
businesses and organizations across various sectors.
ASSIGNMENT QUESTIONS
QUESTION 1
(34 MARKS)
Dr Mo started his own medical practice at the end of 2020. At the end
of his second year in business he thinks it prudent to compare his 2021 and
2022 financial results to reassess if it’s better for him to work in the
private sector or return to public service. You are his financial manager, and
he provides you with the following financial information:
Ratios at the end of December 2021
|
Gross
profit margin 35% |
|
Net profit
margin 11% |
|
Return on
capital employed (ROCE) 13% |
|
Current
ratio 1.4:1 |
As at 31 December 2022 R
|
Revenue
5,000,000 |
|
Cost of
sales 2,880,000 |
|
Total
running costs 1,536,000 |
|
Current assets
660,000 |
|
Current
liabilities 600,000 |
|
Total
capital employed 2,560,000 |
Required:
a. Showing the formulae, calculate the following ratios for the year
2022: (16)
a) Gross profit margin;
Answer: Gross
Profit Margin: Gross Profit Margin =
b) Net profit margin;
Answer: Net
Profit Margin: Net Profit Margin
c) Return on capital employed (ROCE); and
Answer: Return
on Capital Employed (ROCE):
d) Current ratio.
Answer: Current
Ratio: Current
b. Tabulate the 2021 ratios and your calculated 2022 ratios. Comment on
the changes in the ratios from one year to the next. In your assessment,
provide two plausible reasons that could explain the financial trends observed.
(8)
Answer: Ratios Comparison and
Assessment:
|
Ratio |
2021 |
2022 |
Change |
Plausible Reasons for
Change |
|
Gross Profit Margin |
35.00% |
Calculated |
- |
Change in cost structure,
pricing strategy |
c. Explain to Dr Mo, an exceptional medical doctor but sadly lacking in
financial acumen, give him five advantages and five disadvantages of using
ratios to analyse and interpret performance. (10)
Answer: Advantages and
Disadvantages of Using Ratios:
Advantages:
- Comparability: Ratios enable easy comparison of performance across different time periods and
QUESTION 2 [16 MARKS]
QUESTION. Identify
and explain the four core functions of financial management that are crucial for
effective decision-making and the long-term success of a business.
Answer: Financial management is a vital aspect of
running a successful business, as it involves making informed decisions to
optimize financial resources and achieve the organization's objectives. The
four core functions of financial management are essential for effective
decision-making and the long-term success of a business:
- Financial Planning: Financial planning is
the process of setting financial goals, estimating the resources required
to
QUESTION 3 (50 MARKS)
3. Phambili Ltd is in the pharmaceutical industry sector and has been
expanding in the recent past due to a change in its strategic direction from
regulated medicines to supplements and homeopathic remedies. The company has
recently identified a project it wants you to evaluate and give recommendations
on whether to reject or accept, among other things. You are provided with the
following tabulated financial and additional information:
Additional information:
• The tax rate
is 28% and is payable in the year profits are made;
• The company
is financed by 75% equity and 25% debt, with market values of R75-million and
R25-million respectively. The company has an equity beta of 1.2. The rate on
South African Treasury bills is 5% and considered to have no risk. The market
risk premium is 7.5%. The company’s after-tax cost of debt is 6%;
• Profits are
similar to cash flows for the purposes of this project evaluation; and
• All receipts
and payments arise at the end of the year to which they relate except for the
project’s initial outlay of R30-million, which is paid at the beginning of the
project (ie, immediately).
Required: Given the information above, calculate the following:
Round off rand amounts to the
nearest rand. The discount factor should be rounded to three decimal places
i. Profits for the periods (20 marks)
Answer: Profits for the
Periods:
|
Year |
Sales |
Materials |
Labour |
Other
Variable Overheads |
Fixed
Overheads |
Other
Operating Costs |
Total
Costs |
Profit |
|
1 |
36,750 |
5,885 |
11,770 |
525 |
5,250 |
3,120 |
27,550 |
9,200 |
|
2 |
54,023 |
9,075 |
18,150 |
662 |
5,513 |
3,353 |
36,753 |
17,270 |
ii. Weighted average cost of capital (4 marks)
Answer: Weighted
Average Cost of Capital (WACC):
Using the Capital Asset Pricing Model (CAPM):
Equity Beta (β): 1.
iii. Net present value of the proposed project (13 marks)
Answer: Net Present Value (NPV) of the Proposed
Project:
Initial Outlay: -R30,000,000 Cash
Flows: 9,200, 17,270, 15,509, 13,403, 15,614
NPV = (Cash Flow / (1 + WACC)^
iv. Recommendation on the acceptance or rejection of the project with
justifications (3 marks)
Answer: Since the NPV is
v. Discuss the advantages of the net present value technique over the
payback period and internal rate of return techniques when capital budgeting
(10 marks)
Answer: Advantages of NPV over
Payback Period and IRR Techniques:
- Time Value of Money: NPV considers the time
value of money by discounting future cash flows to present value, whereas
the payback period and IRR techniques ignore this aspect.
- Cash Flow Timing: NPV
Conclusion
Financial management is a pivotal
discipline that revolves around the strategic handling of an organization's
financial resources to achieve its goals and ensure sustainable growth. It
encompasses a range of practices, tools, and techniques designed to optimize
the allocation and utilization of funds while managing risks and maximizing
shareholder value.
At its core, financial management
involves key functions such as financial planning, investment decision-making,
financing strategies, and risk
References;
- "Principles of Corporate Finance" by
Richard A. Brealey, Stewart C. Myers, and Franklin Allen.
- "Fundamentals of
Dear students, get fully solved
assignments by professionals
Do send your query at :
or call us at : 08263069601
(Plagiarism proofed
assignments available with 100% surety and refund)
