Tuesday, December 10, 2019
Financial and Economic Literacy for Managers â⬠Click on Solution
Question: 1. Explain the principles of business and financial economics in an international context2. Identify and explain the impact of governmental, monetary and economic policy on decision making in a business context.3. Describe and apply macro and micro concepts and models to business decision making.4. Interpret financial information (external and internal) and apply to decision making within a business context.5. Discuss the rationale and impact of decisions for business strategies to users and stakeholders.6. Examine and discuss the relationship between theory, application in business and financial economics in an international context. Answer: Introduction The expansions of financial services have resulted in increased focus on understanding financial systems and global markets. People often wonder how financial markets work and how they impact on the global economies. Understanding how firms and consumers behave in different markets setting, how capital markets operates and the financial decisions made to improve performances are important elements for financial and economic managers (Hein, 2013, p 9). Managers need to learn how to interpreted and apply financial information by understanding the decision making within the financial and capital markets and the types of financial instrument that are used in these market and how the market interact with the economy as a whole. Combining both the financial and economic elements will help manager develop a range of skills to improve the origination strategic decision making, planning, and risk management processes. Production process. The production process determines the economic well-being of a country; this implies that all economic activities are meant to satisfy human needs. During production, two features determine the economic well-being these include the price-quality ratio of goods and increased incomes. To understand a country's economy, we must know the three production process (Hax, 2013, p 709). The three classifications of production The three classification of production includes mass production, batch production, and job production. Production managers need to choose the appropriate methods for their business. The decision of choosing particular production type will be determined by the nature of the products and the quantity to be produced (Hax, 2013, p 710). Job production Using this type production, goods are to be produced within the specified standards and customers' instruction. Each type of product will vary in size and nature ad requires separate activities during production. Equipment will have to be adjusted in a way that suits the customer's specifications. Job production involves the period when the order is received up to the time the end product has been generated. During this process, the raw materials are gathered, and parts of the production component are assembled to produce the final product. For example a boat builder can receive an order to produce a yacht with specific features; on the other hand, a hairdresser can be requested to create a unique hairstyle for a special occasion Hax, 2013, p 713). Batch production: Batch production is also termed as repetitive production; this process involves producing the quantity known in advanced. The identical products are in batches, unlike job production. During batch production, a group of products generated at once and work is divided into different operational processes. Production is conducted in stages when one stage is complete it is passed on to the next stage to complete the product. Batch production is best suited for the production of confectionery, medicine, and food industry. During this process work will be divided into two different operations including completing the first batch before passing the batch to the net operation process (Hax, 2013, p 714). Mass or flow production Mass production is a process that involves the continuous production of product on a large scale. This involves selling in anticipation of future demands. Standardized products act as the basis for mass production; this means using standardized material and equipment for production. During mass production since the production if continuous it requires a proper sequence of operation. Mass production is best used for car manufacturing and fast food production because mass production involves the process of producing in large quantities at a lower cost per unit (Hax, 2013, p 715). Opportunity costs An opportune cost is a process of analyzing the benefits that one is likely to receive after choosing from various available options. In finance, the opportunity cost is used to measure the differences in returns to be received when one the investment and forgo the other. For example, if one invests in stocks that give a return of 2 percent over the year, placing the money in stock exchange the investor has given up the opportunity to invest in other available investment options. Investment option can be like buying government bonds that can generate 6 percent profit (Hein, et al., 2012, p 46). Evolution of the UK standard industrial classification (SIC) since 1948 The standard industrial classification is a system used in the UK for classifying industries using a four digit code. The system was first introduced in the UK in 1948 to classify business establishment by type of economic activity they engage in. This classification offers a framework for to proper collection, presentation and data analysis that promotes uniformity. The SIC can be used for administrative purposes to classify industrial activities into a common structure. This code enables investors to know about a company's existence (Hein, et al., 2012, p 65). The shift in the demand curve and the movement of the demand curve Product demand keeps on evolving due to certain factors, the demand at times can increase or decrease for specific products. Being aware of what a demand curve is and shifting which is the movement along the demand curve means that one can have a clue of the changes needed to implement to meet the market demands (Fukuda-Parr et al., 2013,p 8). According to the laws of demand when other things are equal the price of goods or services rises, the quantity demand falls and when the prices fall the demand increases. Therefore if there are any changes in prices, there will be a movement along the demand curve. An increase in price is marked as P1 results to P2 causing the change in quantity demand. Price changes do not shift the entire demand curve but only moves the curve from one point to the other as indicated in the diagrams below (Fukuda-Parr et al., 2013, p 11). Shift in the Demand Curve When the shift in the demand curve occurs, the entire demand curve will move to either left or right. For instance increase in income can be translated to mean that people can spend more even when the prices do not change. The shift of the demand curve to the right can be as a result of the increased price of a substitute good or when there is increase income among individuals. For instance, if there is an increase in prices of petrol the movement along demand curve will be noticed because the product will buy in small quantities. But in the long run, the curve may shift to the left due to people looking for alternatives (Fukuda-Parr et al., 2013, p 23). The income and substitution and the effect of an increase in price. The income effects analyze how changes in prices can affect consumer income and how much-increased income can result to low demands. The substitution effect is about increased in prices of good that encourages the consumer to look for alternative goods. The substitution effects are about the high process and consumer response. For example, if the prices of meat increases then higher prices might encourage the consumer to look for other options like vegetables, meaning that consumers are likely to avoid buying meat due to the income effects (Hein, 2013, p 5). 2. Two types of markets In business, markets can be defined using the product or the end consumers to both of these features. The common distinction of the market is between consumer and industrial markets. Consumer markets Products and services in this market are bought by individual for consumption these goods include fast moving goods like foodstuffs and durable goods like household items. Industrial market The industrial market involves selling goods among business enterprises .the goods are not directly produced for consumers. For example office furniture or selling raw material like steel. This can also include selling services like security and legal services (Afonso and Sousa, 2012, p 4439). Public goods Public good is an item that is consumed by the society and can be consumed without necessarily reducing its availability. Public goods cannot be withheld from consumers. A dam is an example of public good. Economists refer to public goods as nonrivalrous and no excludable, meaning that people can benefit from using these goods without reducing its availability (Hax, 2013, p 711). Ways in which government intervenes in the market Due to the nature of markets, unequal distribution of resources is likely to affect the countries' Gross domestic product. Therefore, government intervention in markets is important to minimize inequalities in markets and also increase individual income. Government using its legislative arm formulates policies related to taxes, subsidies, and expenditure. Taxes can help regulate resource use some of these taxes include taxes to from import or export while pushing up domestic prices for imported product. This is meant to spur economic growth. (Afonso and Sousa, 2012, p 4440). The government through the Federal Reserve uses specific policies to influence the economy. For example monetary, policies are a strategy to stimulate economic growth. Due of fear of inflation the central bank can incentivize businesses owners to borrow and spend faster. The government can also use open market operations; this process includes the central bank ensuring that money adequately circulates by buying and selling of treasury bills and bond or selling foreign currencies. (Afonso and Sousa, 2012, p 4441). The key macroeconomic policy objectives that governments typically pursue Some of the key macroeconomic policy objective the government is likely to pursue to attempt to increase economic welfare includes price stability. Price stability is a strategy the government is likely to pursue to prevent economic fluctuation and also help in attaining a steady economic growth. Economic growth can be realized through labor force, capital formation or technological processes. The government can seek to achieve a higher economic growth over a long period to improve the living standard of its citizens. (Afonso and Sousa, 2012, p 4442). The balance of payments equilibrium and exchange rate stability. The government would want to balance the flow of goods, assets, and service to remain stable. In situations when a country loses reserves, it might experience balance of payment deficit that is why the government is likely to prefer to build a substantial volume of foreign exchange reserves. Building a stable foreign exchange reserve ensures smooth flow of goods and services. (Afonso and Sousa, 2012, p 4443). The government is likely to pursue the macroeconomic policy to attain some social objective; this means that the government will ensure that income distribution is more equitable. This strategy is likely to promote economic growth where resources are utilized effectively (Afonso and Sousa, 2012, p 4444). The circular flow of income The circular flow of income and spending indicate the connection between the different economic sectors. It shows how goods a services flow and the production factors between companies and households. After production of goods, the circular flow shows how income is generated according to production factors like land, or capital. Withdrawals are viewed as increases in relation to savings or taxes that reduce the circular flow of income. This process leads to multiple contractions of production. Injection into the circular flow is the added investment by government to boost the circular flow of income for expansion purposes (Hax, 2013, p 716). 3. The four major areas of finance The four major areas of finance include investment, cooperate finance, international finance, and financial institutions. The investment includes financial assets like stock and bonds. Financial institutions include banks like commercial and investment banks. Other institution includes insurance companies and brokerage firms. Hein, et al., 2012, p 53). International finance includes understanding how other countries economic activities enhance economic growth. This process involves understanding some of the international financial rules and regulations and how it might affect business processes. Corporate finance consists of understanding the financial activities that enable the corporation to run smoothly .these includes the department and their role in maximizing shareholder value. Hein, et al., 2012, p 58). The determinants of market interest rates Market interest rates are determined by the prices and duration, for example, the real risk-free rate is gained when there is no risk or uncertainty. Timing is the preference to spend whereby the interest rate will depend on if one decides to spend now or later. Some of the premiums include default risk premium; this occur when the borrower cannot make payment within the specified period. Premium, in this case, can be high or low depending on the worthiness of the credit (Chatziantoniou et al., 2013, p 754). Basic financial statements, including formats and purpose. The four types of the financial the statements include a statement of financial position also referred to as balance sheet. Balance sheet presents the financial status of a company. The income statement also known as the profit and loss statement presents the organization performance. Cash flow statement highlights the movement of cash and the balance remaining in a specific period. Some of the important activities in a cash flow statement include the operating activities, invsting activities and the financial activities. Statement of changes in equity helps companies to track its equity process over a given period (Hein, 2013, p 6). Marks and Spencer 2014 Annual Report financial statements According to Mark and Spencer annual financial statement, the liquid ratio of the company includes the current assets subtracted from the current liabilities Liquid ratio = current assets current liabilities 7,903.0 - 2,349.3= 5553.7 The liquid ratio of Mark and Spencer indicate that the company can pay its current liabilities when its due therefore the company can meet and pay its short-term debts (Marks and Spencer 2014, p 91). 4. Capital budgeting Capital budgeting is an important process because it creates accountability and measurable outcomes. If a business cannot measure the effectiveness of investment decision, the company is likely to fail in a competitive market environment. When investing, the decision process includes understanding the purpose, time; risks involved tool to be used to analyze its benefits and the process of monitoring and making necessary adjustments (Chatziantoniou et al., 2013, p 760). Understanding the purpose means why we want to invest, time is the period to achieve the purpose. The risk is analyzing certain barriers that might limit us from achieving our purpose investment. Tools are the financial products and the benefits, cost and the rules of use. Monitor and adjustment mean being proactive in monitoring and making changes where necessary (Chatziantoniou et al., 2013, p 761). Net present value (NPV) and investment NPV is an important tool used to make investment decisions because it will provide a clear picture on how the investment can add value to the company. Net present value can be used to acquire assets or for future capital projects. For example, a company can decide to open a new product line using NPV because it will help them project future cash inflows that cover the future costs related to starting and running the project (Hein et al., 2012, p 66). The yield curve and the interpretation of the different shapes yield curves are lines showing interest rate at a specific time on bonds having the same credit value and maturity date. The shape of the yield curves present, future interest rate changes in relation to economic activities. Iverted yield curve means that the long-term bonds may fall in relation to the economic recession. Therefore long maturity bond yields may have lower returns (Fukuda-Parr et al., 2013, p 29). If the required rate of return on these projects is 10 percent, which would be chosen and why? I would choose Project B because the cash flow indicates better yields in future compared to project A. If B project investment is at 50,000 and in five years generate a cash flow of 99,500, The cash flow annually will be at 99,500 50,000 = 49,500 Conclusion The above financial features are important in understanding how cash flow and expected returns on investment. Analyzing the economic elements and financial elements of a market has help managers make better investment decisions for future economic growth. Using different financial tools like financial statements and NPV managers can interpret the findings to make informed decisions on the financial and capital markets. References Afonso, A. and Sousa, R.M., 2012. The macroeconomic effects of fiscal policy. Applied Economics, 44(34), pp.4439-4454. Chatziantoniou, I., Duffy, D. and Filis, G., 2013. Stock market response to monetary and fiscal policy shocks: Multi-country evidence. Economic Modelling, 30, pp.754-769. Fukuda-Parr, S., Heintz, J. and Seguino, S., 2013. Critical perspectives on financial and economic crises: heterodox macroeconomics meets feminist economics. Feminist Economics, 19(3), pp.4-31. Hein, E., Truger, A. and van Treeck, T., 2012. The European financial and economic crisis: Alternative solutions from a (Post-) Keynesian perspective. In The Euro Crisis (pp. 35-78). Palgrave Macmillan UK. Hein, E., 2013. 1 Finance-dominated capitalism, re-distribution and the financial and economic crises. Post-Keynesian Views of the Crisis and Its Remedies, p.15. Hax, A.C., 2013. Hierarchical production planning (pp. 708-716). Springer US. Marks and Spencer 2014. Annual Report financial statements.Retrived from : https://corporate.marksandspencer.com/investors/b73df1d3e4f54f429210f115ab11e2f6
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