Value-based management, or VBM, is a management approach that became popular in the early 2000s and claims to put shareholder value creation as the core philosophy of the company. VBM is an explicit...

Value-based management, or VBM, is a management approach that became popular in the early 2000s and claims to put shareholder value creation as the core philosophy of the company. VBM is an explicit effort of senior management to link strategy, accounting, investing and operational management processes to shareholder value.

VBM often refers to the following financial concepts:

• Gross assets include both assets recognised on the balance sheet – like property, plant and equipment – and unrecognised assets, such as the value of customer goodwill.
• Net assets refer to the monetary value of gross assets after deducting the value of (net of) liabilities; that is, the value of gross assets less amounts depreciated from assets (yielding net assets) and less amounts due to lenders and creditors.

Shareholder value is related to VBM, as the value of net assets is exactly equal to the portion of the firm owned by and available to shareholders. Shareholder value is a management paradigm which urges managers to manage a company according to the objectives of its owners. These objectives are usually held to be, in the case of profit-oriented businesses, wealth maximisation.

Although VBM has been increasingly popular since around 2005, criticisms levelled at VBM are many. One prominent criticism is that VBM shapes organisational strategy by directing managers to performance metrics such as earnings per share, dividend payout, and the price/earnings ratio. As a direct outcome, management will focus on keeping business expenses as low as possible and operating revenues as high as possible.

Required

Identify how, if at all, the management of your organisation (or of an organisation with which you are familiar) uses the ideas of VBM and shareholder value. Your answer should:

a. identify the types of performance metrics and targets used that relate (or do not relate) to shareholder value and value-based management

The word limit is 500words.

b. identify how performance metrics and targets are used in operational processes such as manufacturing, sales, service delivery, human resources, inventory management, logistics and organisational structure.

The word limit is 500words.

Imagine you are the CEO of Fun & Games plc, a company engaged in the manufacture of children’s toys. The chief operational officer has asked you to confirm her evaluation that the company’s stuffed toys production line is operating profitably.

A report shown to you by the chief operational officer contains the data shown in Table 3.

Table 3 Cost data for Part2

In the same report, you find mention of operational details. You confirm with the chief operational officer that production occurs in batches of 100units, each batch takes 10 machine hours to manufacture, machine hour capacity is 1500 hours, and the company has a long-term contract to sell 3000 stuffed toys each month.

You wish to confirm or disprove the chief operational officer’s claim that the stuffed toys production line is profitable.

Required

• a.To achieve your objective, you will need to identify unit contribution margin (in £), total contribution (in £), unit contribution margin per machine hour, and total number of machine hours required. Show all workings in your calculations.

(30 marks)

• b.What would you advise for the stuffed toys division? Do you have any specific advice on the labour required in this division to fill the long-term order?

(10 marks)

easyFLITE, a company registered in the Republic of Ireland, has a vision to be the leading low-fares airline in the world. In 2018, easyFLITE was Europe’s fourth largest airline and carried 43 million passengers. The company, which is listed on the FTSE and is part of the FTSE 250 index, owns 165 aircraft situated in 20 bases. With its operations based both in Ireland and Britain, easyFLITE has a strategy of increasing its geographic diversity.

In 2018, 47 per cent of passengers originated outside the UK, and one-third of the airline’s flights did not cross British airspace. easyFLITE’s cost advantages are achieved by having attention to maximum capacity utilisation (seats flown per flight), no free-of-charge in-flight catering, and strong cost management. easyFLITE had 829,000 permanent full-time and part-time employees on its payroll in 2018.

In 2017 and 2018, the company admitted to a continued deterioration in relationships with its pilots and the pilots’ union which had taken place over several years. In the foreseeable future, easyFLITE faces strategic challenges brought about by European austerity measures, slowing economic growth, industrial unrest, high fuel cost, and increased levels of income and capital gains taxation.

Required

Using data from Exhibits 1 to 5 below, assess the organisation’s:

• liquidity (ability to convert assets into liquid assets, such as cash and short-term credit)
• solvency (ability to pay both short-run debts (creditors) and longer-term debts (bank loans and debentures) as and when they fall due)
• profitability (as shown in the income statement).

For each element – liquidity management, solvency management and profitability management – show your calculations and assessment separately. For example, when you analyse liquidity management, structure your answer as follows.

• Liquidity management assessment: show calculations of selected working capital management ratios and metrics here.
• Provide an assessment of liquidity management based on your calculation above and also based on your direct examination of the exhibits.

Exhibits

Exhibit 1, below, presents financial measures used by analysts of easyFLITE for the financial periods 2014 to 2018.

Exhibit 2, Exhibit 3 and Exhibit 4 present summaries of easyFLITE’s audited consolidated income statements, statements of financial position, and statements of cash flows, respectively, for the financial periods 2014 to 2018, inclusive.

Exhibit 5 gives analysts’ estimates of future net income for easyFLITE for the financial periods 2019 and 2020.

Exhibit1

Table 4 Benchmark performance indicators

Exhibit 2

Table 5 Consolidated income statements (amounts in millions, £) December 31

Exhibit 3

Table 6 Consolidated statements of financial position (amounts in millions, £) December 31

Exhibit 4

Table 7 Consolidated statements of cash flows (amounts in millions, £) December 31

Exhibit 5

Table 8 Analysts’ estimates