Unit 00 · Practice solutions

Practice solutions

What Finance Is For, and Where It Is Done · Orientation

Worked answers to the optional practice questions. The required question is turned in to the TAs, and its answer is not published here.

Return on the owners' money is 400,000 / 5,000,000 = 8%, but the comparison is not enough to decide whether value was created. The business return and Treasury yield carry different operating, liquidity, and sovereign risks; value is created only if 8% exceeds the return required for a business of comparable risk. Before being confident, estimate that comparable-risk required return and check whether the GH₵5 million is current economic capital or historical book value and whether this year's profit is representative.
(a) working capital; (b) investment; (c) financing; (d) working capital; (e) financing.
Profit is measured against accounting expenses only, and the cost of the owners' own capital is not one of them. If the owners could have earned more elsewhere at the same risk, the business has made them worse off even while reporting a positive number.

Credit analyst: cash available to service debt, and the security or assets available if things fail — because the lender's upside is capped at being repaid, so all their attention is on the downside. Associate: growth potential and the exit valuation — because the equity holder's return comes entirely from what is left after lenders are paid, which is where the upside lives.
A records 24/4 = GH₵6M annual depreciation; B records 24/8 = GH₵3M, so B reports GH₵3M more first-year profit with no cash advantage. Check asset age, maintenance, replacement history, realistic useful lives, and whether the two asset bases provide comparable capacity. Receivables might rise benignly because sales shifted late in the year or a large sound customer received longer terms; aggressive revenue recognition or an inadequate provision is the competing explanation. Test the ageing schedule, post-period collections, customer concentration, returns and provision policy.
Accounting is the most common entry route into finance roles, not a barrier. The statements you learn to prepare are the raw material finance people analyse, and understanding how they were built is an advantage. A few years in audit or transaction services is a well-worn path into banking, private equity, and corporate finance.