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5UEFM Level 5 Effective Financial Management Of Coca-Cola Questions Answers

    5UEFM Level 5 Effective Financial Management 

    Open Book Exam questions Answer Booklet

    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. 

    Organization Summary (200 words)

    Question 120 Marks
    Discuss the Ethical Issues that need to be considered in Financial Management to ensure that financial practices reflect your organizations stated ethical requirements and standards.  
    Question 220 Marks
    Evaluate how the use of Financial Statements and the calculation of key financial ratios can help with the understanding of the business performance of your organization. 
    Question 320 Marks
    In the context of your organization and activities, evaluate potential areas of Financial Risk and the appropriate financial management techniques to deal with each risk. 
    Question 420 Marks
    Evaluate different options available to your organization for financing both its short-term and long-term activities. 
    Question 520 Marks
    Evaluate how business opportunity can be evaluated by your organization using different investment appraisal techniques. Within your answer you must include your explanation of two different recognized investment appraisal techniques.


    Answer

    Organization Summary (200 words)

    Coca-Cola is one of the famous and most loved beverage company; successfully running their business around the globe. The main aim of the company is to support and serve the local community and create a more sustainable business. This is the most popular beverage manufacturer and marketer of non-alcoholic syrups. The main flagship product of the company is indeed Coca-Cola. Still, they offer more than 400 brands in more than 200 countries in the world (Business Report, 2019). From the initial stage, the company is highly committed towards innovation and integrate the same in its production process. It is to be noted in this context that Coca-cola is following a multi-layered system for the sake of driving brand stewardship. Coca-cola is operating their business in most emerging markets around the world such as Europe, Middle-East, Africa, Latin America, and North America and Asia Pacific nations. Main products of the company include Coca-Cola,  Diet Coke, Coca-Cola Zero Sugar, Minute Maid, Fanta, Sprite, Powerade, Gold Peak, Dasani, Simply and GlacéauSmartwater. Such global reach and variety of products are playing a pivotal role for Coca-Cola to attain competitive advantage. However, there are some of the major competitors of Coca-Cola such as Pepsi-Co, Nestle and Dr Pepper Snapple (Trefis Team, 2019). The primary customer segments are restaurants and food chain and coffee houses, who are the regular purchaser of soft drinks.

    Question 120 Marks
    Financial management is mainly concerned with generation, allocation and appropriate management of financial resources, which is the key to cost-effectively running the business. Financial management comprises of both corporate finance and personal finance, and the financial market solely facilitates the economic activity of an organization. Ethics is one of the critical aspects of running a business transparently (CFA Institute. 2020). Hence, the primary ethical considerations need to be maintained in every aspect of the business. Inclusion of ethics in financial management comprises of moral norms, which need to be managed in terms of exploring the opportunity of more significant financial gain. 
    There are multiple areas such as financial market, trading practice, financial contracting, fair work and agents, which are most prone towards ethical issues in financial management. So, it is the prime responsibility of financial managers of corporate entities to explore the ethical issues in financial management and take action accordingly to address the same (Atrill & Lindley, 2019). Corporate governance and following the code of ethics in a business is essential since they define the relationship of the stakeholders, management and a committee of directors with a set of rules, company policies and practices in managing the risks and strategic compliance towards the company. 
    The ethical issues, which are needed to be considered in financial management, are as follows:
    • Insider Trading 
     This is one of the most crucial ethical issues in corporate financial management. This is associated with illegal financial conduct. Illegal insider trading can be referred to as the activity of both selling and purchasing security, which is nothing but the breach of fiduciary duty and other relationships, which are entirely based on trust and confidence. This is the act of selling information about security in possession of the material. The violation of insider trading can comprise of tripping the information and security trading, which can make all the relevant and confidential information, exposed to the fraudulent act (Winship, 2018). Coco-cola Company diligently follows the ethical code of conduct which is imperative for the financial managers as well as other employees of the company to follow (Ethical Code of Conduct, 2019). Acting with honesty and integrity, providing accurate information to the management and complying with the rules and regulations are vital practices of the organization.
    • The Agency Problem Creating Ethical Issues In The Organizations
    Agency problems may be referred to the fiduciary issues that crop up between the trustees and the stockholders or beneficiaries, between board members and shareholders of the company. The Coca-Cola Company represents gender equality where the workforce comprises of a substantial number of women. However, the discrepancy in the number or the under-representation of women in the board members may lead to agency problems as a large portion of customers, and the workforce may not be well represented in this case (Chiu et al. 2019). The finance, audit and executive committee of the company do not represent a diverse workforce in the interest of the stakeholders.
    • Challenges in Measurement 
    This is another major issue in financial management. Any kind of changes in measurement can both, directly and indirectly, affect the financial performance of an organization. Any kind of challenges in measurement if not recorded properly, can lead to significant financial issues of an organization. Coca-Cola has been addressing the problems related to measurement in financial management through transparent employee policies and business policies (Jones & Comfort, 2018). Realizable value, fair value, the value in use, amount of the business and historical cost and deprival cost are some of the crucial principles of measuring financial reporting and accounting.
    • Development of IFRS
    International Financial Reporting Standard (IFRS) is one of the major ethical issues of financial management. It is the matter of utmost importance for the organization to adopt the International financial reporting standard, which us the key of managing finance with maximum efficiency. However, in some of the significant cases, it had been observed that the organizations confront with misappropriation of a financial asset. This issue can mainly found in individual employee level, which can highly hamper the reputation and morale of the staffs of an organization (Sinclair & Keller, 2017). As discussed by Mele et al. (2017), wrong invoice and mishandling of accounts are some of the significant causes of misappropriation of assets. This issue can make it difficult for Coca-Cola to follow the financial standard and thereby run the business in a profitable manner.
    Question 220 Marks
    The financial condition of an organization plays a significant role in determining the overall performance of an organization along with its potential to sustain in the highly competitive business environment. So, it is a matter of utmost importance to assess the financial statement and calculate the core financial ratios. This is the way, through which it would be easy to evaluate the financial health of an organization. To assess the overall financial condition of an organization, it is imperative to assess balance sheet, income statement and cash flow statement individually (Arkan, 2016). As per the perception of Kotane (2015), in-depth analysis of these factors is highly beneficial to get a significant insight about profitability and internal proficiency of an organization. It is to be noted in this context that understanding the core relationship between variables is much more helpful for the sake of assessing the financial condition and performance of an organization. 
    The role of the financial statement is very much important factor in the way of providing a comprehensive snapshot of the overall health of an organization. For instance, from the financial statement of Coca-Cola, the overall performance of the company can be assessed. Based on the financial information, it can be said that the net revenue of the company has been declined by 9% and the rate of operating income has been declined by 8% (The Coca-Cola Company. 2020). The sudden outbreak of COVID-19 has affected the operation of companies irrespective of the industries, from which they are belonging. This is so with the case of Coca-Cola. The sales rate of Coca-Cola has been positively shattered due to this COVID-19 pandemic. From the income statement of Coca-Cola, it is evident that prolonged down since June has resulted in the invulnerability of their potential base of customers and declined the rate of sales. In the era of extreme uncertainty due to COVID-19 pandemic, Coca-Cola is highly exposed to severe financial risk. The pandemic has led the company to face severe threat related to commodity, interest rate and commodity (Pollak & Shanker, 2020). Besides, the company is also facing significant current risk. So, from the financial statement of Coca-Cola, it can be said that the overall performance of the company is declining gradually due to the sudden outbreak of COVID-19. However, to sustain in the highly uncertain business environment, the company is putting extreme stress. As informed by Sozzi (2020), the company implemented a comprehensive risk management strategy to focus on the unpredictability of the financial market and take action accordingly in terms of lowering the adverse impact of COVID-19 from their business performance.
    According to Myšková&Hájek (2017), the current ratio can be also be defined as the working capital ratio. By measuring this operating capital ratio, the rate of credit balance and long term debt can be measured. Measurement of the quick ratio is also a significant factor, which can help in evaluating the organization's ability to assess cash in terms of supporting immediate demand. Based on the financial ratio of Coca-Cola, it can be said that the rate of current ratio in the year 2019 was 0.7567, which is relatively low in comparison to other years (Macro Trends.net. 2020). So, from the analysis of the financial ratio of Coca-Cola, it can be said that the financial performance of Coca-Cola is lowering, which has highly affected their internal proficiency. 
    The business performance of the company can also be ascertained through gap analysis on the projected financial statement and financial ratios. The gap analysis in the present scenario helps in distinguishing the specific, measurable, attainable, realistic, and on-time goals to be achieved by the company. The historical data is collected by the finance department to understand the reasons why the objectives and deadlines could not be met (Asif, 2016). The gap in the desired levels is measured in the financial report to understand the final step of compiling an action report which needs to be implemented by the company to gain a desirable outcome in the financial year. As described by ANI New Report (2020), the economic gap analysis in Coca-Cola is determined with the drop in sales to 28% due to many job cuts and stalled operations in the bottling plant during the pandemic crisis.

    Question 320 Marks
    Evaluation of potential areas of financial risk faced by Coca Cola Corporation and the appropriate financial management techniques:
    At present, the multinational company Coca Cola Corp is facing the following financial risks:
    • Foreign Exchange Risk
    Coca-Cola sells its products in over 200 countries across the world. Due to their widespread operational activities, they are heavily exposed to foreign currency risk. Their finance mainly depends on the dollar and euro rates and their risk increases due to the unfavourable exchange rates between the Euro, the US dollar and other currencies from other various countries that they operate in (Debt Investors, 2019). Coca-Cola has to purchase the raw materials required for operation from the countries that they operate in, and they often have to make the purchases in countries other than the official currency of that country, and that leads to higher costs of sales for Coca Cola in that official currency. This falls under their transactional exposure. Additionally, they have to function with many other currencies other than Euros and these changes against their primary currency affects their consolidated income statement and balance sheet when the final financial results are converted back into Euros which leads to translational exposures (Debt Investors, 2019).
    • Interest Rate Risk
    Coca-Cola is more prone to facing serious market risks due to the fluctuating interest rates in all the zones that operate with the Euro currency. They have the desired level of the mixture of the fixed and floating rate liabilities that they check on a periodical basis. Based on their evaluations and desired debt mixture, they modify their interest payments (Integrated Annual Report, 2019). Their interest rate derivatives are also crucial for their interest rate costs hence facing the rate risks endanger their business.
    • Commodity Pricing Risk
    The price of the commodities depends mostly on raw materials. Coca-Cola manages their price risks on their raw materials via the provisions under their treasury policy and various other policies that are administered by the Treasury and Procurement Departments (Debt Investors, 2019). According to their Treasury policy, they conduct their hedging activities on a rolling horizon of 2 years, and this policy also covers the minimum as well as the maximum coverage level per time bucket through a "layered" approach. There are different maximum and minimum hedging levels for each underlying commodity of Coca Cola. These hedging activities are conducted through the available financial derivatives or all the physical provisions provided in their material supply contracts.
    • Credit Risk
    Coca-Cola controls their credit risk through their restrictive policies based on their counterparty treasury transactions. However, they don't choose their counterparties randomly; rather, they participate in transactions with only potential counterparties that fall under their strict guidelines and qualify the investment-grade (The Coca-Cola Company Quarterly report pursuant to Section 13 or 15(d), 2019). They set their limits, specific to each country that they operate in, that specifies the maximum acceptable exposure with each of the counter-party and these limits are regularly reviewed and monitored.
    • Liquidity Risk
    According to Coca Cola’s general policies, they have to retain a certain minimum amount of liquidity reserves in the form of cash on their balance sheets. While accessing their committed facilities, if the need arises, Coca Cola always ensures that they have viable access to sufficient resources that they need to meet their funding requirements (Debt Investors, 2019). In case there is ever a situation where they face liquidity constraints, Coca Cola always prepares itself by continually maintaining a minimum of 250 million Euros of financial headroom which is their committed funding facilities along with their cash reserves without their short-term borrowings or forecasted cash flow requirements listed.
    • Cash Flow Risk 
    There are times when Coca Cola is short of funds when they want to expand their projects in other parts of the world beyond America, and at the same time, their customers aren't that financially stable either, and that is when the corporate is unable to pay for their invoices within the stipulated time that expose them further to their cash flow risk. In such a case, the company uses their cash flow hedging strategies to minimize all the fluctuations in their cash flows that might be caused due to their various other risks such as the foreign exchange rate, interest rate etc. (The Coca-Cola Company Quarterly report pursuant to Section 13 or 15(d), 2019).
    Question 420 Marks
    Business is all about producing and distributing goods and services for satisfying needs and requirements of customers and the community in which a company is continuing its internal functionality. To carry out on-going activities properly, businesses need monetary resources. Therefore, finance is considered as one of the most important factors of running the business with utmost efficiency (Ekpo et al. 2017). As stated by Anderson et al. (2018), business finance is referred to as the fund, which the businesses require for the sake of carrying out various activities. Lack of appropriate financing creates a significant obstruction for the companies to carry out the function smoothly. Different types of business financing are as follows: 
    • Equity Financing
    This is one of the major types of short-term business financing. This strategy is mainly used by start-up companies to have ample funds to carry out initial business activities. As opined by MessoRaude, Wawire&Wawire (2015) equity financing is defined as the process of exchanging a particular portion of ownership of the business for carrying out investment-related activities. The ownership, acquired from equity investment paves the way for investors to share the profit of a company. One of the most significant aspects of equity financing is that this involves permanent investment in a company. However, Drover et al. (2017) argued on the ground that a strong organizational structure is very much needed in terms of carrying out the activity of equity financing. From the financial statement of Coca-Cola, it is evident that the company is facing severe sales related issue due to prolonged lockdown. Still, the evidence is showing that the company follows a robust structure with the intension of running their operation smoothly. Moreover, recently the company has streamlined its international system for the sake of aligning its operational units and thereby sustain their position as the market leader (Coca-Cola Company. com. 2020). The inclusion of such a strong organizational structure will be highly beneficial for Coca-Cola to run the process of equity financing with utmost efficiency. As the company is confronting is facing the significant financial issue as the outcome of COVID 19 pandemic, they must follow the strategy of equity financing to address short term financial commitment.
    • Debt Financing 
    This is another major way of financing, especially for long-term objectives. This is the way of borrowing funds from the creditors with the commitment that the organization will repay the borrowed money along with interest soon. For the creditors, the main interest of lending money to the borrower is getting the interest rate. As in the debt financing, money is to be repaid by long term schedule, this type of financing can be adopted by the companies like Coca-Cola for the sake of addressing long term financial commitment (La Rosa et al. 2018). As discussed by O. Obuya (2017), bonds are the major sources of debt financing. It is to be noted in this context that bonds are slightly different from another type of debt financing. In this type of financing, the companies have to repay the principal only and not the interest rate. Besides, in this type of financing, money is not to be repaid until the maturity date. From the financial point of view, it can be said that issuing bond serves companies with the ability to explore the opportunity to avail effective financing without paying it back, before applying the money to fund. However, Zhang (2015) contended on the ground that there is some risk, which the investor can face in the case of debt financing. If the company goes bankrupt before the maturity day, the investor may lose the entire money. Still, as Coca-Cola is facing a major financial issue, they must go for debt financing. From the commitment of Coca-Cola, it is evident that the company is extremely loyal to its investors. So, the chances of losing money are extremely low. This strategy of debt financing will serve Coca-Cola with the ability to revive its financial condition and thereby run the business in a profitable manner.
    The advantages of different types of business finance help in replacement of the assets, loans from a bank can be easily accessible with the good reputation of the company and being least expensive can be provided against the asset. The stock financing can raise substantial amount where the capital is not required to be paid back (Hazam et al. 2017). The disadvantages of different types of finance are that in case of dissolution of the firm, the assets may also be sold off.  
    Question 520 Marks
    Investment appraisal is defined as the process, followed by an organization to assess the attractiveness of an investment. From the finance perspective, the findings from capital budgeting and different financing play a major role in measuring the accountability of investment. As mentioned by Donkor, (2016), the measurement is referred to as the form of fundamental analysis, which can serve organizations with the ability to figure out long term trend as well as perceived profitability. The main aim of investment appraisal is to maximize the profitability of an organization and thereby optimize return on investment. This is mainly meant for evaluating the durability of investment to satisfy long term financial commitment of an organization. This is the way of assessing whether the investment activity is viable by assessing it from a different perspective. (Mahmoud & Neale, 2016) When as a company is aiming to spend money, it is the matter of utmost importance to work out to see spending is on the right thing. This is the way of ensuring the fact that there is value in money, which they are spending.
    The growth and prosperity of an organization are entirely dependent on the continuous flow of idea related to capital investment. Besides, the ability of an organization to generate profitability also plays a major role in determining its prosperity. As stated by Chatzilakos (2018), exploring appropriate investment technique is the matter of utmost importance in the way of making the right investment decision. So, organizations like Coca-Cola must follow appropriate investment technique as it is the key to making the right investment decision. The techniques, which the business giants like Coca-Cola can follow to make the right investment decision are presented below:
    • Payback Period
    The payback period is referred to as duration of time, in between investing and the time, in which the investment is broken. This is one of the simplest investment appraisal techniques, which plays a major role in determining the time, taken by a project to generate required cash flow, which can address the initial cost of the project (Gorshkov et al. 2016). This is the default technique, used by most of the organizations to focus mainly on cash flow rather than profit. According to Tikhomirov & Plotnikov (2018), one of the most significant aspects of the investment appraisal techniques is that it provides some meaningful insight about probable risks of investing. Therefore, by implementing the technique of the payback period, it would be highly beneficial for Coca-Cola to calculate and understand and thereby determine the duration to recoup an investment. This is the most popular investment appraisal technique, which can help in exploring the ways, through which the risk of investment can be mitigated. Payback period mainly focuses on liquidity and lower the chances of further analysis.  
    • Net Present Value
    This is another major investment technique. Net present value is referred to as the difference of the current value of cash flow and the value of cash outflow over a particular period. This technique is used by the organizations with the intension of calculating the probable profitability, pertaining to a project. This can be referred to as capital budgeting, which plays a pivotal role in assessing the time value of money (Wang, 2019). The time value of money can be referred to as a principle, based on which both inflow and outflow of cash can be managed. This is the way, through which Coca-Cola can determine the area of investment and take decision accordingly.


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