Finance Assignment

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Question #1

Three items on the balance sheet that will be impacted by this new undertaking are

equipment, finance log, and long term debt. The three items are selected because the decision to

expand will need the organization to make changes to the current amount or values of the three

items. The equipment section of the balance sheet will be increased by the new undertaking

because the airline will need to get new aircraft for the new route which will be recorded under

the plant, machinery, and equipment. In addition, the airline will also open new offices and

purchase other equipment for use in maintaining the new aircraft in the Havana. The finance log

will also increase if the organization acquires these new aircraft using the lease option rather than

purchasing. The airline will need to get a finance letter of guarantee to lease the new aircraft.

Lastly, the long term debt of the airline will increase as it will need to take a loan to facilitate this

expansion to lease new aircraft and employ additional staff.

Starting service to a new market will increase the number of passengers served by the

company hence increasing the amounts of sales that the company will make. The new market

will bring additional sales hence increasing the sales amount on the income statement. Starting

service in a new market leads to expanding of the airline's operations. The expansion will lead to

an increase in operating expenses such as labor, fuel costs, fees paid to airports for aircraft space,

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maintenance costs, cost of food served to passengers and other incidental expenses. The

marketing, management and operations decisions of the company will also impact the net income

in that if the sales will be more than the operating expenses the net income will increase and it

will decrease if the sales will be less than the operating expenses.

Question #2

Finance decisions include investment, financing and dividend distribution decisions

(Alslethat and Altahtamouni 72). The investment and financing decision relates to management

decisions in that the decision to invest a new market in Cuba is an investment decision aimed at

maximizing shareholder value which is a critical role of management. After making the finance

decision to make new investment by offering service in Cuba, this will be foundation of

management decisions such as when to start, the number of additional staff the company will

require, the fleet size to have dedicated for offering service in Cuba, and strategies to use in

penetrating the market and achieving competitive advantage.

Financial decisions relate to marketing decisions in that the finances that the organization

will get from various funding sources will determine the marketing budget of the company and

the marketing decisions will have to be based on the marketing budget of the airline. The amount

allocated to marketing will influence the decision on the kind of marketing activities to

undertake. In additions, several marketing decisions have financial implications. Such decisions

include pricing, product promotion and pricing, product mix and distribution policy. For

instance, the decision about the pricing of the air tickets the firm will make will influence the

revenue earned which is part of the financing function.

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The operational decisions that the company must make include the number of airplanes to

operate on the new route, the processes to use in selling tickets, and scheduling of flights.

Starting service to Cuba will require making these decisions and the effective implementation of

the decisions is facilitated by finance decisions. For instance, the decision on the number of

flights to have on a particular route relates to the finance investment decision on the number of

new aircraft to purchase.

Question #3

The ratios that will be impacted by starting service to a new destination are profit margin,

return on assets (ROA) and return on equity (ROE). Profit margin will be affected as the total

revenue of the company is expected to increase after starting operations and at the same increase

the net income earned by the airline. The ROA will be affected as the sole purpose of the assets

is to generate new profits and the current and new assets will be put into use to earn profits. ROE

measures how well the firm uses the shareholders money to generate profits. The ratio will be

affected as increase in profits after the investment in Cuba means that shareholders money has

been efficiently used.

Two competitors are Southwest Airlines are JetBlue and Alaska. These two airlines are

the competitors of Southwest Airlines as they have a strategy similar to the one used by

Southwest Airlines of charging low fares, use efficient flights that use minimal fuel costs, and

specializes in point-to-point flights that are cheap to operate.

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Contrasting the above ratios

LUV

JetBlue

Alaska

Profit

margin(2017 & 2018)

16%, 11%

16%, 2%

12%, 5%

ROA (2017,

2018)

0.13, 0.09

0.12, 0.02

0.09, 0.04

ROE (2017,

2018)

0.35, 0.25

0.24, 0.04

0.27, 0.11

(Nasdaq)

The decisions made by management will either reduce or improve the ratio depending on

the impact of the items used to calculate the ratio. For instance, the decisions made by these three

functions may increase the assets of the organization and putting them into good use will

increase the net income and hence increase all the three ratios.

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Works Cited

Alslethat, Zaher Abdelfattah and Farouq Rafiq Altahtamouni. "The Causal Relationship between

Financial Decisions and Their Impact on Financial Performance." International Journal

of Academic Research in Accounting, Finance and Management Sciences (2014): 72-80.

Nasdaq. Nasdaq. 2019. <https://www.nasdaq.com/symbol/alk/financials?query=ratios>.

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