University of Dhaka

Department of International Business

Midterm Examination 1
Course Code: IB-206

Prepared by:
Md. Sakib Hossain
ID No. SM-030-113
Section: B
Department of International Business
University of Dhaka

Supervisor:
Dr. Suborna Barua
Associate Professor
Department of International Business
University of Dhaka

Date of submission: February 5, 2021

Question and Answer

Question 1: Why money management, cash generator and the ultimate goal of the firm are
interrelated?

Answer: Money management is managing money in an investment, budgeting, saving,

banking, and taxes. Cash generation is operating cash flow, less capital expenditure but not
included gains, losses, or expenses associated with all unusual items.

A firm has profit maximization as its short- term goal and wealth maximization as its long-
term goal or you can say the ultimate goal. Wealth maximization means increasing the value
of a business to increase the value of the shares held by its stockholders. When wealth
maximizes, the price of shares also increases. If the money of an organization is not managed
properly in investment and others, then the firm will face loss and will not be able to earn
enough cash for future investment but may still be making profit. But in the long run, the
various work will not be done for not having enough cash. If cash flow decreases, the
organization will suffer in the long run and the value will not be increased. But if the firm
manager does investment, banking, budgeting by taking a proper investment decision, the
firm can earn cash for future investment which will help in the long run though profit can be
less. The value of any investment depends on how much benefit generated, given its past,
current, and future business potential which is measured by cash flow. In the end, it matters
whether or how much cash the firm has been able to generate or accumulate rather than
profit. If cash flow or cash generation increases, the wealth or share value of stockholders
will increase in the long run. This is the way money management; cash generation and wealth
maximization are interrelated.

I think, from the above discussion, Chandrima can find the relation between money
management, cash generation, and the ultimate goal which is wealth maximization. She needs
to be more careful in investments to get enough money rather than profit because the ultimate
goal is important which is shareholders value or wealth maximization.

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Question 2: Is there really any relation of continuous borrowing by Akram and his brothers
with the value of the business at all? If it is, how?

Answer: Continuous borrowing of cash is reducing the asset of the business. The business is
not making enough cash that it should be. It has more expenses than income. Over that, the
three owners of the business have a debt for 5 years of 37% of shareholders equity on the
business. Business and owner are not the same entity thus the money should be back in the
business as soon as possible. Another problem caused by lack of cash is you can't invest it in
more efficient machines to reduce the production cost per unit. Expenses will reduce cash.

Now lack of cash means you can't pay your investors or stakeholders. This will ruin the
company's value. And because of the ruined value, investors will not prefer to invest here.
The company is facing zigzag profit which refers it doesn’t have a quality to gain others trust
by increasing investment risk. They will prefer to invest in other companies. The value of this
company depends on how well it can pay its stakeholders. And thus, the value will be
declined.

Question 3: What is the process of calculating the amount Akram would charge on his cousin
for the stake he is going to sell?

Answer: The firm needs to find out the firm value before selling stock. The stake represents
the percentage of its stock that one owns. By firm valuation, we can calculate worth of stocks
to sell them at the correct price. The investors are attracted more to the firm which has a good
value in its stocks. They won't invest without knowing stock value.

Akram and his brothers are willing to sell some ownership to their cousin. But they need to
know the value of that ownership or you can say stock. This value will determine the charge
Akram will offer his cousin. To know the value, they can utilize three golden steps or
processes. Given below:

1. Calculate or find the benefits to be generated by the firm.

2. Calculate the present value of all expected 'benefits' generated by the firm.
3. Sum up all the present calculated values, that is the total present value of all the future
benefits to be generated by the firm. It is also the value of the firm.

So, this is how Akram and his brothers can charge their cousin and also know their company
value.

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Question 4: What’s wrong if they continue the same trend by looking at how much profit the
business has generated?

Answer: As a business owner, you must make a profit to stay in business. But focusing only
on profit will not make the business the best it can be. In other words, earning shouldn't be
the main goal of the business.

This business should not focus only on profit rather than other things that increase its cash. If
the business is not focused on growth, it may not be around very long. The business should
satisfy consumers. Employees should be paid in time. Train them properly so that they can
produce more efficiently. Investment should be made in buying efficient machines to reduce
per-unit production cost. All of these activities need a load of money. Profit should be made
but also while increasing cash. This company can be slaughtered from the market within a
few year (as its cash is only 3%) if it continues to look at profit only. It should change its way
and focus on increasing cash flow for the time being.

Question 5: Why is cash more important than profit?

Answer: To determine which is more important, we need to see in what situation the business
is going through.

Suppose, a business makes a profit every month, but it has hard assets or account receivable,
and there is no cash to pay employees. Once a debt is paid, or the business sees an overflow
of revenue, it'll start to see positive cash flow again. In this situation, cash flow is more
important than profit because it keeps the business running while still maintaining a profit.

Alternatively, the business may see increasing revenue and cash flow, but the amount of debt
is massive, thus the business doesn't make a profit. The absence of profit will decline cash
flow. So, in this situation profit is more important. A business owner can put up his or her
personal assets as capital into the business. Alternatively, they can get a small business loan
from a bank to keep the business running until it starts seeing cash flow again.

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