5UEFM Level 5Effective Financial

Management
Open-book exam question and
answer booklet

June 2020
Excel Global College
Centre name
your college name

Learner’s name Naseem Ahmed

First Name Last Name
ABE membership number 6 3 0 6 2 2
your ABE membership number – i.e. 123456

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All work that learners submit as part of the ABE assessment requirements must be expressed in their own
words and incorporate their own judgements. Direct quotations from the published or unpublished work of
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☐ By ticking this box, Naeem Ahmed

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am confirming that the work I am submitting is my own and I have acknowledged
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the sources of reference I have used in constructing my assignment.
Date: 25 May 2020

Day Month Year

For ABE use only

ABE 2nd mark
ABE mark (if applicable)
Important information
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Study and Examination. This guidance document provides important information on how to prepare for,
take and submit an ABE open-book exam.

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General overview
The word count for this examination is 3,500 words (-/+ 10% tolerance, i.e. your submission must not be
less than 3,150 words and must not exceed 3,850 words). There will be word count requirements
indicated next to each question. Markers are instructed to stop marking when the maximum word count
is reached.
NOTE – Appendices and the References list (if used) are all excluded from the overall word count, i.e. the
full word count allowance is for the main body of your submission.
Use allocated space for the business profile of your chosen organisation. Write your answers to each
question in the specified location. It is important that the marker can easily identify which question is
being answered otherwise the submission will not be marked.

Context – Organisation Summary

You must choose an organisation on which to base your answers, i.e. your answers must be set in the
context of this specific organisation. Choose an organisation with which you are familiar. It must be a real
organisation and the type of organisation you choose must be relevant to the questions.
All your answers must be based on this organisation unless the question instructs you differently.
You must provide a summary of background information on your chosen organisation (200 words). This
must include:
 Name of the organisation
 Size of organisation
 Main markets where it operates (geographical locations)
 Examples of products and services
 Key competitors
 Main customer segments
In addition to the above, you can include any other information which might be useful for the marker to
understand the context of your answers. Your organisation summary is not included in the overall word
count.

Syllabus Content
Before you answer the questions it is strongly recommended that you familiarise yourself with the study
content relating to the unit. This content can be found in the Qualification Specification. Understanding
this will help you to construct your answers and will ensure the content is relevant to the questions set.

NOTE – The organisation summary must be completed and must accompany the submission otherwise
the assessment will not be marked.

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 Business profile (200 words)

APPLE INC
Company Background
The corporation designs, produces and markets smart phones, personal computers, tablets, wearables
and accessories, and sells a diversity of connected services. The corporation was incorporated in1977 in
California (Apple,2019).
Products/Services
iPhone is the Corporation’s line of smartphones based on its iOS operating system. Mac Mac is the
Corporation’s line of personal computers based on its macOS operating system. iPad is the Corporation’s
line of multi-use tablets. The corporation runs a range of platforms that allow consumers to learn and
download applications and digital substance (Apple,2019).
Markets and Distribution
Apple,(2019)states that the Corporation’s consumers are mostly in the consumer, small and mid-sized
business, education, enterprise and government markets. The corporation sells its products and resells
third-party products in the majority of its main markets directly to consumers, small and mid-sized
businesses, and education, enterprise and government customers through its retail and online stores
and its direct sales force.
Competition
The markets for the Corporation’s products and services are extremely competitive and the corporation
is faced by hostile rivalry in all parts of its business. These markets are categorized by regular product
introductions and speedy technological advances that have substantially enlarged the capabilities and
use of Smartphone (Apple, 2019).

(200 Words)

OPEN BOOK EXAM QUESTIONS START ON THE NEXT PAGE

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 Question 1 20 Marks

Assess the objectives of financial management and the role of different stakeholders in the financial
strategy of your organisation.

(700 words)

Meaning of Financial Management

Financial Management means scheduling, organizing, directing and controlling the financial actions such
as purchasing and employment of funds of the endeavor. It entails applying general management values
to financial resources of the business, refer to appendix 1.
Objectives of Financial Management
The financial management is usually concerned with purchasing, distribution and control of financial
resources of business. The objectives can be-
1. To make sure habitual and sufficient supply of funds to the business.
2. To make sure sufficient returns to the shareholders which will depend upon the earning capacity,
market price of the share, prospects of the shareholders?
3. To make certain optimum funds utilization. Once the funds are obtained, they should be
employed in utmost possible way at least cost.
4. To make certain safety on investment, i.e, funds ought to be invested in secure ventures so that
sufficient rate of return can be attained.
5. To plan an effective capital structure- There have to be an effective and fair composition of capital
so that a balance is maintained between debt and equity capital.

Apples Stakeholder Roles in Financial strategy

According to Essay Town (n.d.) internal stakeholders includes at group of firms or people carrying out
transactions with Apple such as creditors, consumers, workforce, suppliers and shareholders .The reliable
Apples value chain is created by these stakeholders to achieve its objectives internationally .The
community in which Apple operates in, business support groups, the media and the government
comprise the external stakeholders, Appendix 2.

According to Oreilly (2020) at Apple, and many other companies, stakeholders also comprise those
workforces who own shares of stock or options in the corporation. That’s criterion, of course, for the top
level; having a large part of the employees as stakeholders is much less widespread.
Distinct approximately any other management, Steve Jobs was certainly not resolute on profits, share
price, or whether the stock market price of corporation shares was going up or down. His focus was as an
alternative on which product information to follow and then making those few products as near perfect
as by any means probable in all way.
In a product-driven corporation like Apple, the product stakeholders are extremely significant to its
achievement. But the approach at Apple is considerably diverse: Focus on making the products thriving,
and financial accomplishment will follow, appendix 3.
Ensuring that Apple workforce gained financially from their responsibility in assisting to build great
products was a very vital problem to Steve. All workers who were employed at Apple got stock options
on their first day of employment. Also all workers were entitled for profit sharing and gratuity so all
Apple workforces were stakeholders (Oreilly, 2020).

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The requirements for internal stakeholders differ significantly by their function in the value chain and
external their requirement for compliance and information on how Apple Inc is affecting the wider
community and countries it operates in. Credits needs to have their invoices paid and Apple to control
their forecasts for services and materials properly and thoroughly. They are key stakeholders the
organisations financial performance of the corporation, they provide vital influence on reported
financials on the basis of terms and conditions provide. Customers expect innovation and quality
products that redefine new markets while sticking to Apples philosophy (Essay Town, n.d.)

Apple has performed its buybacks sensibly: It bought shares when they were relatively cheap, rewarding
the patient shareholder. Other companies have not been so prudent, taking on debt to make ill-timed
purchases of expensive shares rather than investing in growth opportunities. In some cases, they have
done so simply to push up share prices so that management can meet goals for quarterly earnings or
metrics that trigger compensation (Desai, M , 2018).
Apple's financial model stresses cash flow over profits. It is not simply immensely profitable; in 2017, it
produced US$16 billion extra in operating cash flow than profits. It does that in part by running its daily
operations in a unique way. Naturally, a corporation has to employ external finances to finance the
procedure of stocking goods and collecting revenue from consumers (Desai, M , 2018).
Apple's retail outlets gather cash from consumers speedily, it is brutal on keeping stock low, and it takes
forever to compensate suppliers. In the procedure, its operations are tremendously successful cash
creators. This is no coincidence. It is the result of the crafty supply chain that Tim Cook made. In result,
Apple has principally been financed on the support of its suppliers, who are enthusiastic to hold their
stock and wait more than 100 days to get compensated, just for the satisfaction of doing business with
Apple (Desai, M , 2018).

(765 Words)

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5UEFM0620 © ABE 2020
 Question 2 20 Marks

Recommend how projected financial statements and other measures of business performance could be
used by your organisation to evaluate its activities and processes.

(700 words)

Evaluation of business performance and financial management processes

Projected Financial Statement
Projected financial statements add in present trends and prospects to arrive at a financial picture that
management believes it can achieve as of an upcoming date. At a minimum, projected financial
statements will demonstrate a summary-level income statement and balance sheet, refer appendix 4.
This information is imitative from a revenue trend line, as well as expense percentages that are based on
the present proportions of expenses to revenues (Accounting Tools, 2020). A better set of projected
financial statements will incorporate the following features:
A statement of cash flows
Expense projections that comprise step costs for main points at which revenues raise or reduce
Consideration of the speed at which the company can logically expand, based on its prior history
Consideration of the corporate challenges operation on the ability to expand, refer to appendix 5.
The capability of the company to attract the funding required in order achieving the financial outcomes
stated in the plan (Accounting Tools, 2020).
The cash-flow statement brings together the opening and closing balances of cash and cash equivalents
for the reported accounting time. It reports a net cash inflow or outflow for every action and for the
overall dealing.
Apple Inc.’s cash produced by operating activities improved from 2017 to 2018 but then slightly
decreased from 2018 to 2019 not reaching 2017 level.
Amount of cash inflow (outflow) from operating activities, exclusive of discontinued operations.
Operating activity cash flows comprise transactions, adjustments, and adjustment in value not defined as
investing or financing activities (Stock Analysis, 2020).
Stock analysis (2020) states that the cash flow statement gives information concerning a corporation’s
cash receipts and cash payments through an accounting phase, representing how these cash flows
connects the ending cash balance to the opening balance shown on the corporation’s balance sheet.
Apple Inc’s cash generated by operating activities grew from 2017 to 2018 but reduced from 2018 to
2019 which was below the level of 2017.Whereas the corporation’s cash generated by investing activities
increased in 2017/2018 and 2018/2019 respectively
Ratio Analysis:
Ratio analysis is employed as a vital instrument in study of financial statements. Ratios are employed as a
standard for estimating the financial position and performance of a business. Ratio is the representation
of one figure in relations of another. It is the expression of the correlation between mutually
independent data. Ratio analysis used financial report and information and reviews the main relationship
in order to assess financial performance.
It assists the analysts to make quantitative decision about the financial position and performance of the
organisation (Aisha, P .n.d.).

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According to stock analysis (2020) the Apple Inc’s operating profit margin ratio which is calculated as
operating income divided by revenue, depreciated from 2017 to 2018 and from 2018 to 2019.The Gross
profit margin for Apple Inc.’s profit margin ratio shows a reduction in the percentage of revenue
available to cater for operating and other expenditures. Its operating profit margin ratio equally
decreased from 2017 to 2018 and from 2018 to 2019

Capital Structure:
The Finance manager has to make a decision on most favourable capital structure to make the most of
the wealth of shareholders. Aisha ,P (n.d.) states that In capital structure decisions investigation of
operating and financial leverages, cost of diverse components of capital, EPS – EBIT analysis,
ascertainment of EPS of diverse financing options, finding out financial break-even point, indifference
point investigation and other mathematical models are employed, refer to appendix 6.
Apple Inc’s EBITDA grew from 2017/2018 but there was a slight drop from 2018/2019 .It’s EV/EBITDA
ration reduced from2017/2018 and finally exceeded 2017 by growing in 2018/2019 (Stock Analysis ,
2020).
Other significant financial management methods as stated by Aisha, P(n.d.)includes common size
statements, trend ratios, funds flow analysis, working capital management and capital budgeting
techniques apart from the discussed above that can be used to evaluate an organisations activities and
performance, refer to appendix 7 .

(655 Words)

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 Question 3 20 Marks

In the context of your organisation, evaluate its main sources of potential financial risk using suitable
techniques. For each risk area you are required to recommend and justify appropriate action to reduce
the exposure.

(700 words)

Introduction
Financial risks generate the likelihood of losses occurring from the failure to attain a financial purpose.
The risk shows uncertainty concerning foreign exchange rates, interest rates, commodity prices, equity
prices, credit quality, liquidity, and a corporation’s access to financing, appendix 8 ,Woods, et al (2009).
Types of Financial Risks.
Market risks: These are the financial risks that occur because of possible losses owing to transformations
in prospect market prices or rates. The price shifts will frequently relate to interest or foreign exchange
rate changes, but also comprise the price of essential commodities that are very important to the
business.
a) Interests rates risks
The Apple Corporation’s exposure to alterations in interest rates relates mainly to the Corporation’s
investment portfolio and outstanding debt. Whereas the corporation is exposed to international interest
rate changes, the organisation’s interest income and expense are mainly susceptible to fluctuations in
U.S. interest rates. Transformations in U.S. interest rates influence the interest earned on the
Corporation’s cash, cash equivalents and marketable securities and the fair worth of those securities, as
well as costs related with hedging and interest paid on the Corporation’s debt (Apple Inc, 2019).
b) Credit risks
This Financial risk is linked with the likelihood of default by counter-party. Credit risks usually occur since
customers fail to pay for goods supplied on credit.The impact of credit risk differs between sectors, and is
high in the part of financial services, where short- and long-term lending is essential to the business. A
company can also be exposed to the credit risks of other firms with which it is closely related. An
apparent example is the reliance of a company on its access to credit from its bank (Apple Inc, 2019).
c)Exchange Rate Risks
According to Apple Inc (2019) the organisation is a net recipient of currencies other than the U.S. dollar.
Consequently, transforms in exchange rates, and in particular a strengthening of the U.S. dollar, will
unconstructively affect the Corporation’s net sales and gross margins as articulated in U.S. dollars. There
is a risk that the corporation will have to alter local currency pricing due to rivalry pressures when there
has been major instability in foreign currency exchange rates.

Liquidity risk refers to uncertainty regarding the capability of an organisation to unwind a position at
little or no cost, and also relates to the availability of adequate funds to meet financial commitments
when they fall due. Cash flow risks relate to the unpredictability of the organisation’s daily operating cash
flow (Woods, et al, 2009).
Risk Response
The business is required to act in response to the risks it has identified. An instance would include
coming up with a policy defining the corporation’s reaction to a particular risk, and give details how that
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policy fits in with its wider purposes. Appendix 9, It would also (a) set out the management procedures
to be employed to manage that risk, (b) allocate duty for handling it, and (c) set out the main
performance instruments that would permit senior management to observe it (Woods, et al, 2009).
.
Risk transfer entails paying a third party to take over the downside risk, while maintaining the likelihood
of taking benefit of the upside risk. An alternative, for instance, generates the chance to exchange
currency at a pre agreed rate (the strike price). If the successive exchange rate turns out to be
encouraging, the holder will exercise the alternative, but if the successive exchange rate is unfavourable,
the holder will let it slip. Therefore, the option guards the holder from downside risk while keeping the
probable benefits of upside risk (Woods, et al, 2009).

The corporation employs a blend of internal and external management to implement its investment plan
and attain its investment goals. The Apple Inc on average invests in greatly rated securities, with the main
objective of reducing the probable risk of principal loss Appendix 10. The Corporation’s investment
guiding principle usually requires securities to be investment status and restricts the amount of credit
exposure to any one issuer. To give a meaningful evaluation of the interest rate risk related with the
Corporation’s investment portfolio, the organisation carried out a sensitivity analysis to determine how
an alteration in interest rates would impact on the value of the investment portfolio. The corporation
may enter into foreign currency forward and option agreements with financial institutions to guard
against foreign exchange risks linked with certain available assets and liabilities, certain firmly committed
transactions, predicted potential cash flows and net investments in overseas (Apple Inc, 2019).

(751 Words)

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 Question 4 20 Marks

In the context of your organisation, evaluate options for the financing of business activities. You are
required to include in your evaluation the characteristics of the different sources of finance.

(700 words)

Sources of funds
According to S, Carter et al (1997)A corporation might raise new funds from the following sources:
· The capital markets:
i) New share issues, for instance, by corporations obtaining a stock market listing for the first time
ii) Rights issues
· Loan stock
· Retained earnings
· Bank borrowing
· Government sources
· Business expansion scheme funds
· Venture capital
· Franchising.
Government assistance
The state gives finance to corporations in cash grants and other types of direct aid, as part of its guiding
principle of assisting to develop the countrywide economy, particularly in high technology industries and
in parts of high unemployment. For instance, the Indigenous Business Development Corporation of
Zimbabwe (IBDC) was set up by the state to help small local businesses in that nation ( S, Carter et al ,
1997).
How the State Helped Apple
Jones , M (2013) notes that Apple Inc. (NASDAQ:AAPL) received some significant state-backed financing
all through its early years. The corporation’s funds came from the federal small business investment
program. According to Mazzucato, the very important technologies which are found in those products
were developed mainly because of state funds and not straight at Apple Inc. (NASDAQ:AAPL). Her point
however, isn’t that Apple Inc. (NASDAQ:AAPL) or co-founder Steve Jobs didn’t create. It’s that the state
provided a push to make certain that it happened.
Bank lending
Borrowings from financial institutions are a significant origin of finance to corporations. S, Carter et al ,
(1997) states that bank lending is still mostly short term, though medium-term lending is quite
widespread these days.
Short term lending may be in the form of:
a) An overdraft, which a corporation should keep within a limit set by the financial institution. Interest is
charged (at a variable rate) on the amount by which the corporation is overdrawn from daily;
b) a short-term loan, for up to three years.
Forbes(2020) states that Apple’s (NASDAQ: AAPL) capital structure has changed considerably over the
last few years, with its debt to equity ratio rising from 0.3x to 1.2x between 2014 and 2019 and its total
debt rising from $35 billion in 2014 to $108 billion in 2019. The corporation has been taking on debt,
partly to fund its share repurchases and dividends, which have together expanded from $47 billion in
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2015 to $81 billion in 2019. Nevertheless, Apple has gone slow on raising new debt for the last few years,
as its debt load has declined from about $116 billion in 2017 to $108 billion, and we believe that debt
could stay behind at current levels going forward. Below, we take a closer look at Apple’s debt and
overall capital structure.

Leasing
A lease is a contract between two parties, the "lessor" and the "lessee". The lessor owns a capital asset,
but permits the lessee to employ it. The lessee makes payments under the terms of the lease to the
lessor, for a specified period of time(S, Carter et al ,1997).
Leasing is, consequently, a form of rental. Leased assets have frequently been plant and machinery, cars
and commercial vehicles, but might also be computers and office equipment. There are two basic forms
of lease: "operating leases" and "finance leases".
An operating lease is treated like a rental contract. Neither the leased asset nor the connected liability is
reported on the lessee balance sheet, but the rights may be very comparable to the rights of an owner.
The lessee only accounts the lease payments as a rental expense in income statement (Stock analysis,
2020).
LT-Debt-to-Total-Asset is a measurement showing the percentage of a company's assets that are funded
with loans and financial requirements lasting more than one year. The ratio gives a wide-ranging
measure of the financial position of a corporation, including its capability to meet financial needs for
outstanding loans. It is considered as a corporation's Long-Term Debt & Capital Lease responsibility
divides by its Total Assets. Apple's Long-Term Debt & Capital Lease Obligation for the quarter  end
of Mar. 2020 was $89,086 Mil. Apple's Total Assets for the quarter that ended in Mar. 2020 was $320,400
Mil. Apple's LT-Debt-to-Total-Asset for the quarter that ended in Mar. 2020 was 0.28.
Apple's LT-Debt-to-Total-Asset improved from Mar. 2019 (0.26) to Mar. 2020 (0.28). It may propose that
Apple is increasingly becoming more dependent on debt to grow their company (Gurufocus, 2020).
(722 Words)

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 Question 5 20 Marks

Discuss how your organisation might evaluate potential investment opportunities to ensure that
decisions reflect the needs of the business and its financial management strategy.

(700 words)
What is investment appraisal?
Investment appraisal is a technique that a company will examine the attractiveness of probable
investments or projects based on the results of several different capital budgeting and financing
techniques (Ig,2003). Apple Inc might appraise likely investment opportunities to make certain that
decisions replicate the requirements of the business and its financial management strategy
Investment appraisal techniques
There are many ways through which Apple Inc can perform investment appraisals; however here are
three of the largely general methods:
Payback period
Payback period is the duration of time between making an investment and the time at which that
investment breaks even.
To calculate the payback period, the company will take the investment cost and divide it by the yearly
cash flow. Investments with shorter payback periods are more attractive since it will take less time for an
investor to receive back their capital.
Advantages of Payback Period
The technique requires very few inputs and is moderately easier to compute than other capital
budgeting techniques. The corporation requires computing the payback period is the project’s initial cost
and yearly cash flows.
Because the payback period is straightforward to compute and require less input, managers are speedily
able to compute the payback period of the projects. This aids the managers to make speedy decisions
(eFinance management,2020).
Disadvantages of Payback Period
This is amongst the key challenges of the payback period that it disregards the tie value of money which
is a very significant business theory. As per the theory of the time value of money, the money received
sooner is worth more than the one coming later since of its likelihood to earn an extra return if it is
reinvested. The payback technique is so straightforward that it does not consider normal business
settings. Frequently, capital investments are not just one-time investments. Somewhat such projects
require further investments in the subsequent years as well. In addition projects frequently have
irregular cash inflows (eFinance management,2020).

Net present value

Net present value (NPV) is the disparity between the current value of cash inflows and the current value
of cash outflows over a determined period of time. Apple Inc can use NPV to compute the approximate
profitability of a project and it is a type of capital budgeting which takes in to consideration for the time
value of money (Ig,2003).
The time value of money is the principle that money is worth extra in the present than an equivalent
amount will be in the future since it has longer to earn interest. Cash inflows and outflows are adjusted
according to the principle of the time value of money, taking accessible interest rates into account.
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NPV will help Apple Inc to find out whether it is more financially practical to invest in a project, or to
allow a different rate of return somewhere else based on projected prospect returns. To compute the
NPV, Apple Inc would subtract the current value of invested cash from the current value of the expected
cash flows.
If the NPV is positive, then it shows that a project’s forecasted earnings or profits are larger than the
expected costs. If the NPV is negative, then the reverse is true, and the project or investment might not
be undertaken by the corporation (Ig, 2003).
Accounting rate of return
The accounting rate of return (ARR) Apple Inc can employ the ratio in capital budgeting to compute an
investment’s expected return compared to the initial cost. Distinct from NPV, ARR does not account for
the time value of money, and if the ARR is equal to or larger than the required rate of return, then the
project is considered to have acceptable levels of profitability (Ig, 2003).
ARR is presented as a percentage return, signifying that an ARR of 20% means that the project is
estimated to return 20p for every 100p invested over a one-year period. To compute the ARR, the
corporation would divide the average return during a given period by the average investment in that
same period.
Why is investment appraisal important for traders?
Investment appraisal is vital for Apple Inc since it is a type of essential examination and, as such, it is able
to represent a trader whether a stock or a corporation has long-term likelihood based on the
profitability of its prospect projects and happenings(Ig,2003).

(716 Words)

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 15. Stock analysis (2020) Apple Inc [Online] Available at:https://www.stock-analysis-
on.net/NASDAQ/Company/Apple-Inc/Ratios/Profitability(Accessed;17.05.2020)
16. Woods, M and Dowd ,K (2009) MANAGEMENT ACCOUNTING GUIDELINE[Online]Available at:
https://www.cimaglobal.com/Documents/ImportedDocuments/cid_mag_financial_risk_jan09.pdf
(Accessed:17.05.2020)

17.

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Appendix (optional)
Appendix 1: The Financial Management Functions

Appendix 2:An example of a stakeholders Participation Matrix

Example of a stakeholder participation matrix for a proposed private sector population project in Pakistan.
Source: ODA (1995)

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Appendix 3: Stakeholder Interest and Power

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Appendix 4: Apple’s Inc Annual statement data

Source: Apple Inc (2020)

Appendix 5:Apple Inc. Consolidated cash flow statement of selected items

Source : Apple Inc (2020)

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Appendix 6: Apple Inc,. EBDITDA calculation

Source : Apple Inc (2020)

Appendix 7:Apple Inc. Cash flow statement

Source: Apple Inc (2020)

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Appendix 8

Source: Woods, et al, (2009).

Appendix 9: Risk Management Cycle

Source: Woods, et al, (2009).

Appendix 10:

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Appendix 11:

Source: Woods, et al, (2009).

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