Question

A firm made a significant increase in the firm’s marketing expense towards the end of the fiscal year 2019. Since the marketing splurge is so late in the fiscal year, there is no expected increase in revenue in 2019. Explain how this investment would impact the firm’s Asset Turnover, operating margin, FCF, EVA, and TSR in 2019? In your opinion, how did this decision impact the firm’s financial performance in 2019 (increase, decrease, neutral, or not sure)? Explain!

Answer 1

Given, a firm has made a significant increase in the firm's marketing expense towards the end of fiscal year and no expected revenue in this fiscal year.

1. Impact on Asset turnover Ratio of Firm in 2019
   • Marketing expense will not affect sales, but it will affect the Total Assets in form of decrease in Cash & Cash equivalents due to payment , which will decrease the total assets, hence decreasing the Asset turnover Ratio.
2. Impact on Operating Margin of Firm in 2019
   • Marketing expense will not affect sales, but will affect the operating profit by decreasing it, hence decreasing the Operating Margin Ratio.
3. Impact on FCF of Firm in 2019
   • 
   • Since marketing expenses are paid in cash and cash equivalents, they reduce the cash from operations, hence reducing the Free Cash Flows.
4. Impact on EVA of Firm in 2019
   • ​​​​​​​
   • EVA is made up from NOPAT, which is Net operating profit after tax, since Marketing expense decreases it, as it is an operating expense, therefore EVA will be decreased​​​​​​​
5. Impact on Total Shareholders Returns (TSR) of Firm in 2019
   • ​​​​​​​Well, the returns to shareholders are not getting directly affected therefore TSR may get unaffected.
   • Another POV, Marketing expense will result in loss of Cash & Cash Equivalents in the immediate past, will decrease the company's market value, hence the current price will decrease, hence TSR will decrease.
   • Another POV, marketing expense, can increase the expectations of the general public, hence will increase in demand of shares, hence increase in the price of the share, finally increase in TSR.
6. ​​​​​​​Impact on Financial Performance of the company
   • ​​​​​​​Since the financial performance of a company depends on profits earned by the company in a period of generally say 1 year, in our case the profits of the company will decline in a short span of period, as the expenditure is made during end of the period, hence the decision will decrease the financial performance of the company.