Assessment questions Textbook

Question 1

Define sale and lease-back.

Answer 1

Sale and lease-back is a financial transaction where a business sells an asset and leases it back from the buyer, allowing the business to continue using the asset while freeing up capital.

Question 2

Outline a working capital management strategy businesses can use to control current liabilities.

Answer 2

One working capital management strategy is controlling accounts payable by taking advantage of early payment discounts or delaying payments until they are due to retain cash longer.

Question 3

Discuss the use of factoring as a cash flow management strategy.

Answer 3

Factoring involves selling accounts receivable to a factoring company at a discount, providing immediate cash flow to the business and transferring the risk of collection to the factoring company.

Question 4

Explain two cash flow management strategies that could assist a business experiencing cash flow problems.

Answer 4

Two strategies are:
1. Discounts for Early Payments: Offering customers discounts for early payment to accelerate cash inflows.
2. Factoring: Selling accounts receivable to a factoring company to quickly improve cash flow.

Question 5

Assess the impact of two global financial management strategies.

Answer 5

Two global financial management strategies are:
1. Economic Outlook: A positive economic outlook can encourage businesses to invest and expand, while a negative outlook may lead to cautious spending and reduced investments.
2. Availability of Funds: High availability of funds can lower borrowing costs and increase investment, whereas low availability can raise costs and limit access to capital.

Question 6

Analyse how leasing could change the working capital position of a business.

Answer 6

Leasing can improve working capital by avoiding large capital expenditures for asset purchases, thereby preserving cash and maintaining liquidity. It also converts fixed costs into manageable periodic payments.

Question 7

Describe one influence of government on financial management.

Answer 7

One influence of government on financial management is company taxation, which affects a company’s net profit and financial decisions. The tax rate on net profit impacts the amount of funds available for reinvestment or distribution to shareholders.

Question 8

Define an overdraft.

Answer 8

An overdraft is a short-term borrowing facility that allows a business to overdraw its bank account up to an approved limit, paying interest only on the overdrawn amount.

Question 9

Explain how two global market influences could impact the planned acquisition of a Japanese company by an Australian company.

Answer 9

Two global market influences are:
1. Economic Outlook: A positive global economic outlook can encourage investment and acquisition activities, whereas a negative outlook might lead to caution and reduced willingness to engage in such transactions.
2. Interest Rates: Lower global interest rates reduce the cost of borrowing, making it easier for the Australian company to finance the acquisition. Higher interest rates increase borrowing costs and could deter acquisition plans.

Question 10

Recommend one long-term source of funds the business can use for the planned acquisition.

Answer 10

One long-term source of funds for the planned acquisition is issuing debentures, which provide a fixed interest return to investors and are secured against the company’s assets, ensuring long-term capital for the acquisition.

Question 11

Recommend one source of debt finance and one source of equity finance for DrinkUp Ltd’s expansion.

Answer 11

Two sources are:
1. Debt Finance: DrinkUp Ltd can use a mortgage to finance the purchase of new facilities or equipment, leveraging the property as security for the loan.
2. Equity Finance: DrinkUp Ltd can issue new ordinary shares to raise capital from investors, providing funds for expansion without increasing debt.

Question 12

Analyse the impact a new issue would have on the business as well as on existing owners.

Answer 12

Issuing new shares can dilute the ownership percentage of existing shareholders but provides the business with additional capital for growth and expansion. This can potentially increase the company’s overall value and the value of existing shares in the long term.

Question 13

Outline the strategic role of financial management.

Answer 13

The strategic role of financial management is to manage the financial resources (debt/equity) both efficiently and effectively in order to achieve the triple bottom line.

Question 14

Outline one potential conflict between a short-term and long-term financial objective.

Answer 14

One potential conflict is between profitability (short-term) and growth (long-term). Pursuing short-term profitability may require cost-cutting measures that can limit the resources available for long-term investments necessary for growth.

Question 15

Distinguish between the objectives of liquidity and profitability.

Answer 15

Two objectives are:
1. Liquidity: The ability of a firm to meet its short-term financial obligations as they fall due.
2. Profitability: The ability of a firm to generate profit from its operations, which is the difference between revenue and expenses.

Question 16

Explain how finance is interdependent with operations. Use an example to support your answer.

Answer 16

Finance is interdependent with operations as operations require funds to purchase inputs and carry out transformation processes. For example, the finance department must allocate adequate funds for operations to purchase raw materials and maintain production, which in turn generates revenue for the business.

Question 17

Recommend a strategy a manufacturer could implement to achieve the financial objective of efficiency.

Answer 17

A manufacturer could implement a just-in-time (JIT) inventory system to minimize storage costs and reduce waste, ensuring that materials are only ordered and received as needed for production.

Question 18

Analyse the relationship between the financial objectives of growth and profitability.

Answer 18

Growth and profitability are interrelated as growth often leads to increased profitability through economies of scale, market expansion, and enhanced brand value. However, focusing too much on growth can sometimes lead to reduced short-term profitability due to the costs associated with expansion and investment in new projects.