IGCSE Enterprise: Specimen Questions with Answers 37 - 38 of 49

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Case Study: 3

Fazzari and Petersen (1993) argue that investment in working capital is sensitive to cash flow. Their findings show that firms that have larger capacity to generate internal finance have higher current asset levels. Chiou et al. (2006) also provide evidence from Taiwan to point to the influence of cash flow on investment in working capital and suggest that firms with greater cash flow have higher investment in working capital. Hill et al. (2010) show that firms with available internal cash flow capacity and capital market access invest more in working capital. By contrasting the two spectrums of researches, it can be suggested that the level of investment in working capital depends on the cash flow availability of firms (Fazzari et al. , 1988) . As argued by Banos-Caballero et al. (2014) , a positive working capital level needs financing, and therefore cash flow availability plays an important role in the relationship between WCM and firm performance.

These positive and negative influences of NWC on performance suggest that investment in working capital involve a trade-off (Baños-Caballero et al. , 2012; Deloof, 2003) . Therefore, to test the effect of cash flow on the relationship between NWC and performance, I estimate a non-linear regression similar to that of Banos-Caballero et al. (2012) and Banos-Caballero et al. (2014) . In this regard, it can be argued that whilst firms with limited cash flow should strive to achieve a reduction in working capital investment to avoid the need for expensive external finance; on the contrary, firms with available internal cash flow should increase investment in working capital in order to improve performance. Banos-Caballero et al. (2014) conclude in their research that managers should avoid negative effects on firm performance because of additional financing expenses. Internal cash flow can be used to finance investments in working capital without the need to raise costly external finance (Autukaite and Molay, 2011) . Banos-Caballero et al. (2014) examined the functional form of the relation between investment in working capital and corporate performance by taken into account financial constraint and found a convex relationship between investment in working capital and firm performance.

Question 37 (12 of 12 Based on Passage)

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Short Answer▾

What do you mean by trade-off?

Explanation

An important aspect of a working capital policy is to maintain and provide sufficient liquidity to the firm. Trade-off refers to decision how much working capital be maintained by a firm i.e.. having a large net working capital may reduce the liquidity risk faced by the firm, but it can have negative effect on the cash flows. Therefore, the net effect on the value of the firm should be used to determine the optimal amount of working capital. Working capital decision will change a firm՚s liquidity. For example- a firm can increase its profits by decreasing its cash and marketable securities as they generate low rates of return. However, the firm will be exposed to a higher risk of default or not being able to pay its bill on time if it does not have adequate cash and marketable securities.

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Case Study -2

Pottery Barn & Sherwin-Williams

Co-Branding Campaign: Color Your Room

  • One of the biggest benefits of co-branding campaigns is the opportunity to expose your product or service to a brand-new audience. That՚s exactly what home furnishing store Pottery Barn and paint company Sherwin-Williams did when they partnered together back in 2013.
  • Together, the two brands created an exclusive product line of paints, and then added a new section of Pottery Barn՚s website that helped customers easily select paint colors to complement their furniture choices.
  • Customers could coordinate paint colors with picture-perfect Pottery Barn furniture for a mutually beneficial partnership – and style assistance for both brands customers to boot. “Paint Landing,” Pottery Barn՚s landing page for the partnership, contains helpful blog posts and how-to ideas for do-it-yourself painting and decorating.

Question 38 (1 of 12 Based on Passage)

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One of the biggest benefits of co-branding campaigns is the opportunity to expose your product or service to a brand-new audience.

Explain two methods of communication to reach the intended customers.

Explanation

Marketing communication helps in moving products, services, and ideas and from manufacturers to the end users and helps in maintaining relationship with other parties like customers, shareholders, prospects etc. Firms select a mix of promotional tools to effectively communicate with their target customer groups.

The different element of this mix is:

  • Advertising
  • Personal Selling
  • Sales promotion
  • Public relations
Areas of Communication