Problem set #5.edited

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University of Nairobi *

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ENV 101

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Management

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Nov 24, 2024

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a) What were Marvin’s long-term debt and total liabilities for 2020? Long-term debt = total assets - current liabilities –retained earnings – common stock =46800-13220-26580-2000 = $5000 Total liabilities = Current liabilities + long-term debt =13220+5000 = $18220 b. Sales are projected to increase by 25% over the 2020 sales figure. Determine the forecasted change in the company's sales over the forecasting period. Asset growth = 25/100*46800 =11700 Retained increase in growth =25/100*13220 = 3305 Company sales = 9000 + 36000 = $45000 c. Use the AFN equation to forecast Marvin's additional funds needed for the coming year to support the company's Growth. AFN = Growth in assets – Retained earnings growth – Current liabilities growth = (1.3*9000) – (0.2728*9000) – (0.0975*45000) (1 – 0.5743) -5000 = $2377.04 d. Explain how the following factors affect external capital requirements:

i) Payout ratio A payout ratio refers to dividends per share by earnings by share. It is considered directly proportional to dividends, and a less amount is left to help fund an increase in assets. This is critical in creating external capital, which drastically increases (Hariyani et al., 2019). Organizations, therefore, strive to maintain dividends that are stable or steadily increase the rate of dividends. In rare and extreme cases, organizations reduce dividends which leads to a minimal use of external capital. This is a critical method firm implement but in rare cases. ii) Capital intensity This is defined by the number of assets required per sale made in terms of dollars. This has a drastic impact on capital requirements. Firms with a high capital intensity require a large number of new assets to help increase sales, which increases the need for external financial sources (Faradisty). Suppose companies can generate this ratio at a minimum and ensure the forecasted growth level has been maintained with a minimum number of assets. In that case, the need for external capital will be in check and reduced. iii) Profit margin The profit margin is equal to net income by sales. The bigger the profit margin, the more a company can sufficiently have a budget to support purchases of new assets, which is reflected in reduced external financing. The profit margin can be increased by introducing new steps to increase sales or prove sales. If the strategies to be used by a company are used perfectly, it will lead to an elevation in Growth and a reduction in external capital (Faradisty et al., 2019). e. Calculate the required level of fixed assets for Marvin Industries if the company operates at no excess capacity with full capacity sales of $36,000 in 2020.

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2020 full capacity sales = $36000 Target fixed assets = Actual fixed assets / full capacity sales = (21600/3600)*100 =60% Required level of fixed assets = (Targeted fixed assets/sales)*projected sales = (60/100)*45000 = $27000 f. Define the term self-supporting growth rate. Determine the self-supporting growth rate for Marvin Industries. The self-supporting growth rate is the highest rate a company can attain without using external capital. Companies that have a high self-supporting capital have the characteristics of increased sales, focusing on items that are edge-cutting, creditor liabilities, and audit checks inventory. SGR = Profit margin * (1-Divided pay ratio) * (sales in the current year) * (Assets- liability) – profit margin * (1 –divided payout ratio) *sales SGR =9.75% * (1-60%)/ (46800 – 18220) – (9.75% 0.4 * 3600) (0.0975 * 040) / (28580 – 1404) (100) = 0.000144% g. Explain agency relationship and agency costs to the owners of Stevens Textile Co. An agent refers to an organization or an individual hired by a principal to decide the principal's interest. A principal is an organization or a person who designates an agent to decide

for them. An agency relationship is formed when a principal decides to hire an agent to complete such tasks (Kathleen et al., 2019). Agency cost is an indirect or direct expense that the principal undertakes when they decide to hire the services of an agent. h. Suppose Stevens Textile Company is very successful, and the founders cash out most of their stock and turn the company over to an elected board of directors. Neither the founders nor any other stockholders own a controlling interest (this is the situation in most public companies). List six potential managerial behaviors that can harm a firm's value. Some potential managerial behaviors that can harm the value of a firm include: They may hide or withhold some critical information from investors, which in the long run, can impact the company. Failure to dedicate enough time and instead wasting much time on unnecessary activities. They may decide to use the company's resources for their interests rather than for the stakeholders' interests. Managers may opt to take many risks due to overconfidence or failing to take enough risks when making a decision or performing certain activities. Managers may also procrastinate or postpone certain tasks, which may impact the company. Ignoring to return capital to investors by making more investments in marketable securities or making more payments for acquisitions than required.

i. What is corporate Governance? List five corporate governance provisions that are internal to a firm and under its control. Corporate Governance involves a set of practices, rules, and procedures in coordinating and dealing with an organization. The top management staff within an organization plays a significant part in breaking or making a corporate administration. When there is bad corporate Governance, it will raise some serious issues about the growth rate and tasks within an organization. Corporate Governance includes aspects of a moral way of behaving, ecological mindfulness, chance administration, and corporate technique (Aguilera et al., 2021). The corporate provisions internal to a firm include compensation plans, capital structure choices and divisions, discipline and monitoring by the board of directors, bylaws, and provisions that impact the likelihood of hostile takeovers and accounting control systems. j. Stevens Textile Co. might want to reduce the conflict of interest between corporate executives and shareholders by electing a board of directors to oversee the activities of the corporate executives. Identify five characteristics of the board of directors that usually lead to effective corporate Governance. Some of the characteristics of a board of directors that can lead to effective corporate Governance include: Board compensation is done based on their performance. There are a diversified group of experts who manage and evaluate their sector. Comparatively, the board is small, making it easy to manage and make decisions quickly. There does not exist an entity that can influence the CEO since their power is supreme and independent.

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A board is made of outsiders who are well skilled in their domain. References. Faradisty, A., Hariyani, E. and Wiguna, M., 2019. The effect of corporate social responsibility, profitability, independent commissioners, sales growth, and capital intensity on tax avoidance. Journal of Contemporary Accounting , pp.153-160.

Ruiz, Carlos Enrique, and Bob Hamlin. "Perceived managerial and leadership effectiveness in Mexico and the USA: A comparative study of effective and ineffective managerial behaviour." European Journal of Training and Development (2019). Laurie, Sally, and Kathleen Mortimer. "How to achieve true integration: the impact of integrated marketing communication on the client/agency relationship." Journal of Marketing Management 35, no. 3-4 (2019): 231-252. Aguilera, Ruth V., J. Alberto Aragón-Correa, Valentina Marano, and Peter A. Tashman. "The corporate governance of environmental sustainability: A review and proposal for more integrated research." Journal of Management 47, no. 6 (2021): 1468-1497.

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