Management Critical Thinking Samples

- The worth of a company is computed by various methods. The first method is computing the net assets of a company. Net assets are the total assets of a company from which all the liabilities have been deducted. This means that the worth of the business is computed to be whatever is owned by the company. It is a good measure of computation of value as it takes into account all the resource and earning potential of a company. Secondly, the worth of a company is determined by the net assets plus a consideration for goodwill and brand name of a company. This is a realistic approach as the business builds good rapport in the market that must be compensated. Stock investors usually value the company using dividend growth method which also takes into account the future growth opportunity for a company. Other methods include auctioning a company, using CAPM model and pricing the company in line with the similar assets, or assets whose value is known, and those assets that have similar earning potential.
- There are several reasons why the companies trade at premium or discount. If an assets or a company is considered to be a very good investment, and future events leading to further growth in the company’s income and resources, the company sells at a premium. Investors usually pay higher for assets who are marked to grow at a pace greater than the market’s growth rate. Another reason for the company to be trading at premium is because of high demand of its shares. This will lead to the company’s prices being higher than its par value and it will trade at an amount above its face value.
- A company trades at a discount if there are bad rumors about the company in the market. If it is believed that the company has no earning potential or the chances of the company earning a decent return are low, then it will trade at discount. Investors use the figure of Yield to Maturity to determine the price of an asset. If the asset’s yield is lower than the market’ yield-to-maturity, the company will trade at discount and there won’t be a much demand for the company and its stock in the market.
- There are several steps involved in the forecasting the future financial statements or creating proforma financial statements. First of all the business model is studied and past growth rates are considered. Then looking at the future events, and past trend, the growth rate for the company is determined. Previous year’s sales are then grown by the growth rate determined in the first step. Similarly, past ratios are studied and horizontal and vertical analysis is carried out to trend the costs and other expenses and revenues. These are then added to the proforma financial statements.
- Research and Development, Finance and marketing are all important functions and components of a business. A business needs to study all these functions for proper strategy implementation. If the strategy formulate has not fit with these element, then the strategy execution will be very difficult, and the firm won’t be able to implement the strategy. For example, if a new store opens, and tries to compete with Walmart, it will fail. It will not have as much funds as Walmart has. It will not have the same brand name power, and it won’t be able to market itself as well as Walmart. Hence, you can make good strategies, but they need to have a proper fit with the organization’s resources. Another example could be of a new smart phone manufacturer who tries to compete with Samsung and Apple. It won’t be able to do that because of the brand name and size and of Apple and Samsung. Therefore, no firm can implement a strategy without taking into account its importance functions like Marketing, Finance and, Research and Development.
- Net Profit from operation is a company’s money that is used for expansion and growth of the business. If it is tied as capital, then the company won’t be able to use these funds for growth and as a result there will be no growth. The advantage of using is that there is no interest cost for using these funds, and sometime it is better to use these funds rather than letting them lie idle.
Selling an asset will reduce the earning potential of a company if it is not replaced. The advantage of using this as a source of capital is that there will be no interest charge, and the company will get rid of non-productive or unnecessary assets.
Debt leads to high interest rate payments, and increase the liabilities of the company in the balance sheets. The advantage of using this method is that interest is fixed, and if the company has good projects, it is the best method to raise capital.