MAC2602 ASSIGNMENT 3
SEMESTER 2 OF 2024
EXPECTED QUESTIONS
AND WELL DETAILED
ANSWERS.
1. Question: Define the concept of corporate strategy and explain its
significance in financial management.
Answer: Corporate strategy is a long-term, comprehensive plan developed by an organization
to achieve specific goals and objectives. It provides direction for resource allocation, business
activities, and investment decisions. In financial management, corporate strategy is crucial
because it guides financial planning, risk management, capital structure decisions, and
investment opportunities. Aligning financial management with corporate strategy ensures
sustainable growth, optimal returns, and risk mitigation.
2. Question: What are the main types of risks businesses face, and how
can they be managed?
Answer: The main types of risks include:
● Market risk: Fluctuations in market prices (e.g., stock prices, interest rates).
● Credit risk: The risk that a borrower will default on their obligations.
● Operational risk: Failures in internal processes, systems, or human errors.
● Liquidity risk: Inability to meet short-term obligations due to insufficient cash flow.
Management Strategies:
● Market risk: Hedging through derivatives (options, futures).
● Credit risk: Performing credit assessments and using credit insurance.
, ● Operational risk: Strengthening internal controls, process audits, and implementing risk
management frameworks.
● Liquidity risk: Maintaining adequate reserves, cash flow forecasting, and short-term
financing options.
3. Question: Discuss the importance of financial ratios in strategic financial
management.
Answer: Financial ratios are critical tools for assessing an organization’s financial health and
performance. They help in:
● Liquidity management: Ratios like the current and quick ratio assess the company’s
ability to meet short-term obligations.
● Profitability analysis: Ratios like return on equity (ROE) and return on assets (ROA)
provide insights into the company’s ability to generate profits.
● Leverage analysis: The debt-to-equity ratio helps evaluate the company’s capital
structure and its reliance on debt.
● Efficiency assessment: Ratios like inventory turnover and asset turnover indicate how
efficiently a company uses its resources.
Strategic financial management uses these ratios to make informed decisions about resource
allocation, investment, and risk management.
4. Question: Explain the difference between systematic risk and
unsystematic risk and provide examples of each.
Answer:
● Systematic risk (market risk): This is the risk inherent to the entire market or market
segment. It cannot be eliminated through diversification. Example: Economic recessions,
changes in interest rates, inflation.
● Unsystematic risk (specific risk): This type of risk is specific to a particular company or
industry. It can be mitigated through diversification. Example: A company’s management
decisions, product recalls, industry regulation changes.
5. Question: How do capital budgeting techniques like Net Present Value
(NPV) and Internal Rate of Return (IRR) influence strategic investment
decisions?
Answer:
● Net Present Value (NPV): This technique calculates the present value of future cash
flows from an investment, discounted at the required rate of return. A positive NPV
SEMESTER 2 OF 2024
EXPECTED QUESTIONS
AND WELL DETAILED
ANSWERS.
1. Question: Define the concept of corporate strategy and explain its
significance in financial management.
Answer: Corporate strategy is a long-term, comprehensive plan developed by an organization
to achieve specific goals and objectives. It provides direction for resource allocation, business
activities, and investment decisions. In financial management, corporate strategy is crucial
because it guides financial planning, risk management, capital structure decisions, and
investment opportunities. Aligning financial management with corporate strategy ensures
sustainable growth, optimal returns, and risk mitigation.
2. Question: What are the main types of risks businesses face, and how
can they be managed?
Answer: The main types of risks include:
● Market risk: Fluctuations in market prices (e.g., stock prices, interest rates).
● Credit risk: The risk that a borrower will default on their obligations.
● Operational risk: Failures in internal processes, systems, or human errors.
● Liquidity risk: Inability to meet short-term obligations due to insufficient cash flow.
Management Strategies:
● Market risk: Hedging through derivatives (options, futures).
● Credit risk: Performing credit assessments and using credit insurance.
, ● Operational risk: Strengthening internal controls, process audits, and implementing risk
management frameworks.
● Liquidity risk: Maintaining adequate reserves, cash flow forecasting, and short-term
financing options.
3. Question: Discuss the importance of financial ratios in strategic financial
management.
Answer: Financial ratios are critical tools for assessing an organization’s financial health and
performance. They help in:
● Liquidity management: Ratios like the current and quick ratio assess the company’s
ability to meet short-term obligations.
● Profitability analysis: Ratios like return on equity (ROE) and return on assets (ROA)
provide insights into the company’s ability to generate profits.
● Leverage analysis: The debt-to-equity ratio helps evaluate the company’s capital
structure and its reliance on debt.
● Efficiency assessment: Ratios like inventory turnover and asset turnover indicate how
efficiently a company uses its resources.
Strategic financial management uses these ratios to make informed decisions about resource
allocation, investment, and risk management.
4. Question: Explain the difference between systematic risk and
unsystematic risk and provide examples of each.
Answer:
● Systematic risk (market risk): This is the risk inherent to the entire market or market
segment. It cannot be eliminated through diversification. Example: Economic recessions,
changes in interest rates, inflation.
● Unsystematic risk (specific risk): This type of risk is specific to a particular company or
industry. It can be mitigated through diversification. Example: A company’s management
decisions, product recalls, industry regulation changes.
5. Question: How do capital budgeting techniques like Net Present Value
(NPV) and Internal Rate of Return (IRR) influence strategic investment
decisions?
Answer:
● Net Present Value (NPV): This technique calculates the present value of future cash
flows from an investment, discounted at the required rate of return. A positive NPV
