Question

Scenario

You are working as a graduate within the engineering department of a manufacturing and

consulting focused public listed company. You and your team are working on the post-COVID

recovery and how best to allocate capital. Your team has $1,000,000 in capital at their disposal.

The entire department is going to have a conference call next week and you have been asked

to prepare a memo for the team regarding the financial options being considered. As the

accounting department will be joining your memo is to prepare the staff for the call.

The accountants are expected to use terms which may not be fully understood by the greater

department. So your memo will be distributed before the call or you may be asked to speak on

the call to assist everyone's understanding.

1. As there is still uncertainty about employees returning to work the capital may

need to be moved from its current interest bearing account elsewhere. Explain the

opportunity cost associated with leaving the money in a bank account as opposed

to other investment options that may mitigate that opportunity cost.

2. The stock price of your company has suffered due to the economic downturn. A

focus at the company may be to encourage both current and prospective

shareholders. Explain one way that the company could deploy company-wide

excess capital to directly incentivise these investors.

3. Some employees have raised their concern that the new product line will not be

profitable and that it will cost more to produce the new product than will be made.

Explain the break even point with particular focus on why a break even point is

not immediate but rather is reached over time.

3 Paragraphs each please

Answer 1

Solution

1.Opportunity cost asociated with leaving the money in a bank account - The issue here is that there is still some uncertainity about the employees returning to work.As just like the labor and machinery that is required in production,the capital is also required.Since there is uncertainity in production happening ,instead of keeping the capital ideal in the bank account (the bank(current / savings) accounts provide negative / zero / very nominal interest on the amount kept in them.Instead if we can keep the same capital in either short-term investment avenues like short fixed term deposits,market instruments,liquid funds,etc., they will yield some interest and they can be withdrawn whenever required as well (liquid)- This is the opportunity cost lost if the money is kept in the bank account.

2.One way the company could deploy company wide excess capital to directly incentize the shareholders is to anounce dividends to them.This will encourage the investors to continue holding on to the stock.So,the demand for the stock will increase in the market so the price of the stock will increase.

3.Break-even point is the quantity of goods to be produced (or) the amount of sales that need to be done so that the cost of production is recovered i.e., no gain no loss.

Break even point depends on the amount of Fixed Costs,Variable Cost and the sales price.While the Fixed Cost is directly proportional to the break-even point,the Variable Cost and the Sales price are inversely proportional to the same.

Break even point = (Fixed Cost ) / (S.P - Variable Cost)

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