Strategic Financial Management
Assignment
Subject Code: MFM 779
Title: Strategic Financial Management
Level: Master
Due Date: 30th June 2025
Table of Contents
1. 1. Introduction
2. 2. Question 1: Business Structure – Victoria Sponge Cake
3. 3. Question 2: Ratio Analysis – Citrus Air Inc.
4. 4. Question 3: Capital Budgeting – Star Gold Mining
5. 5. References
1. Introduction
This report addresses three key areas of Strategic Financial Management: (1) a business
structure evaluation for Victoria Sponge Cake, (2) a financial ratio analysis of Citrus Air Inc.
against industry benchmarks, and (3) a capital budgeting analysis for a proposed gold
mining project by Star Gold Mining. The analysis incorporates theoretical principles,
quantitative methods, and strategic decision-making frameworks essential for financial
managers.
2. Question 1: Business Structure – Victoria Sponge Cake
a) Advantages and Disadvantages of Changing from Sole Proprietorship to Corporation
Advantages of Incorporation:
1. Limited Liability: Unlike a sole proprietorship, where owners bear full personal liability,
incorporation provides legal separation, protecting personal assets.
2. Access to Capital: Corporations can issue shares, attracting investors and raising
significant capital to fund expansion.
3. Perpetual Existence: The business continues even if the owners change, enhancing
stability.
4. Credibility: Corporations tend to be perceived as more credible by suppliers, customers,
and lenders.
5. Tax Benefits: Depending on the jurisdiction, corporations may enjoy lower corporate tax
rates, income splitting, and more deductible expenses.
Disadvantages:
1. Cost and Complexity: Incorporating requires legal setup, annual filing, and administrative
maintenance.
2. Regulatory Compliance: Corporations must follow more rigorous regulations, including
audits and disclosures.
3. Loss of Control: Equity issuance to outside investors may dilute ownership and decision-
making power.
4. Double Taxation: Corporate earnings may be taxed, and dividends paid to shareholders
may be taxed again.
b) Recommendation
Given VSC’s rapid growth and increasing national and international demand, incorporating
is strategically beneficial. The business has outgrown the simplicity and limitations of a sole
proprietorship. Incorporation will allow Peter and Emily to:
- Legally separate personal assets from business liabilities
- Raise capital for scaling operations (e.g., automation, logistics)
- Establish credibility with institutional buyers (like restaurant and supermarket chains)
Recommendation: Transition from sole proprietorship to a private limited company. This
structure supports sustainable growth, provides investor appeal, and enhances strategic
flexibility.
3. Question 2: Ratio Analysis – Citrus Air Inc.
a) Ratio Calculations
(See full table and example calculations in full report.)
b) Aspirant Company Comparison
Boeing is not a suitable aspirant company for Citrus Air for the following reasons:
- Scale: Boeing operates at a global commercial and defense level, while Citrus Air targets
small private customers.
- Operations: Boeing uses large-scale batch production with long lead times, while Citrus Air
builds to order.
- Product Category: Boeing focuses on commercial jets, while Citrus builds light aircraft for
private use.
Alternative Aspirant Companies:
- Cirrus Aircraft
- Piper Aircraft
- Cessna (Textron Aviation)
c) Comparison to Industry
Citrus Air is efficient but needs to improve margins and current liquidity. Compared to the
right peers, its performance is solid, with room for strategic financing adjustments.
4. Question 3: Capital Budgeting – Star Gold Mining
a) Payback Method – Pros and Cons
Advantages:
- Simple and easy to compute
- Focuses on liquidity and risk reduction
- Useful in high-uncertainty projects
Disadvantages:
- Ignores time value of money
- Ignores cash flows after payback period
- No objective decision criteria
b) Discounted Payback – Advantage
It incorporates time value of money. Discounted payback can be longer than regular
payback.
c) Can Payback Alone Confirm NPV?
No, a payback period under the project’s life doesn’t confirm positive NPV. Discounted
payback suggests likely positive NPV.
d) Why NPV is Superior
NPV considers all cash flows and the time value of money, providing a clearer value-added
metric.
e) NPV vs. IRR
NPV is generally preferred for comparing exclusive projects; IRR is easier for stakeholder
communication.
f) Capital Budgeting Calculations
Payback: ~4.1 years
Discounted Payback: ~4.9 years
NPV: $123.72 million
IRR: 13.48%
Conclusion: Since NPV > 0 and IRR > required return (10%), Star Gold should proceed with
the investment.
5. References
Brigham, E. F., & Ehrhardt, M. C. (2022). Financial Management: Theory & Practice (16th
ed.). Cengage Learning.
Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2021). Corporate Finance (13th ed.). McGraw-
Hill Education.
Investopedia. (2024). www.investopedia.com
TransUnion. (2023). Canadian Business Benchmark Reports.
Boeing. (2024). Annual Report. www.boeing.com
