Appraising the attractiveness of a project and evaluating how to finance the project
Xanadu Manufacturing Company is listed on the stock exchange with about 10,000 public shareholders..
Ben Graham, Finance Manager, is having a strategy meeting with Lisa Smith, Chief Financial Officer, to discuss the recent financial performance and looking at the future plans going forward.
Ben: Last year, our gross margins were down. I am wondering why is this despite the Company manage to realise better selling prices. It must be because of the higher salaries we paid to the CEO and his swanky new car.
Lisa: The drop in margins should have been expected considering the higher amounts we spent on the new sales campaign. And, of course, we also bought a new head office building in Downtown.
Ben: At least we did well on the cash flow front. For the year, we generated positive cash for the Company as a whole
Lisa: Maybe. But, I am worried that while we were cash flow positive in investing, we were cash flow negative in operating activities
1 Explain what process can Xanadu Manufacturing follow to identify what financial resources it would need in the near future? LOS 1.1 Identify the need for financial resources within a strategic plan.
2 Evaluate the Statements 1&2, by Ben and Lisa and comment who is making the right statement and have correct understanding of the methodology of financial resources allocation, management and control? Justify your answer. LOS 1.2: Appraise methods by which financial resources are allocated, managed and controlled.
3 Evaluate, what are the main reasons of decline in the Gross Margins despite an increase in selling prices and discuss the impact of decline in gross margin on the strategic business decisions? LOS 1.3 : Evaluate the impact of financial resource decision making on business strategy.
4 Please evaluate following decisions by the company and indicate the impact of these on the cash balance, whether it would increase or decrease? LOS 1.3 : Evaluate the impact of financial resource decision making on business strategy.
a. Bad debts for which a provision was made was written off
b. Obsolete inventory is disposed-off at cost
c. Conversion of bonds into equity capital through issuance of new shares
d. Taxes, for which provisions was made in the income statement, is now paid after completion of review by the Tax department
e. Change in the method of depreciation which resulted in increased provisions for depreciation and hence reduction in net profits
f. Purchase of raw material on account
g. In the coming year, the Company increases the discounts that it offers on early payments by customers in an effort to reduce levels of receivables
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