Answer Q3,4,5 in section b only. 
400 words for each question

Question 3 a) Explain what is meant by “Operating gearing (or Operational gearing)”, and discuss the importance of this concept for managers. (10 marks) b) Accounting has traditionally over-simplified the relationship between volume, selling price and profit. Discuss the usefulness of the cost-volume profit (CVP) model and break-even analysis for decision making .

(20 marks) (Total 30 marks)


Question 4 Managers must realise the importance of capital expenditure evaluation and its relationship with strategy formulation and implementation. In particular, managers use the main techniques for capital expenditure evaluation: Accounting Rate of Return (ARR), Payback (PB), and the two discounted cash flow methods: Net Present Value (NPV) and the Internal Rate of Return (IRR).
Required:
Critically discuss the extent to which the Net Present Value (NPV) and the internal Rate of Return (IRR) methods are better than other investment appraisal methods? In your answer, address the limitations of other methods stated above.
(Total 30 marks)


Question 5 Businesses often need external funds to maintain their operations and invest in future growth. There are two major sources of finance that can be raised: debt and equity. Each type has its share of benefits and drawbacks.

Required: (a) Briefly explain the benefits of debt finance (borrowings) and discuss the risks and problems facing companies which have very high levels of gearing. (14 marks)

(b) Two of the main sources of equity finance are retained earnings and ordinary shares. Discuss the advantages and disadvantages of each of these sources.

(16 marks)