Financial objectives of the organisation, Financial Management

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A brief scenario for each of two different organisations is presented. You are advised to read both scenarios before answering the questions that follow. Use the scenario details to assist your answer wherever possible.

Public Sector Organisation:

This organisation's legal status is a Trust. It has been created with the object of providing specialised ENT (Ear-Nose-Throat) care in the public sector. It has just started its operations and the total budgeted revenue for the current fiscal year is expected to be Rs150 million.

The Board of Directors is appraising an investment proposal, which is the construction of a new building to be funded through the Private Finance Initiative (PFI). The amount of debt to be raised to fund the capital expenditure is estimated to be Rs 200 million. The loan will be amortised over 15 years at a variable rate of interest; the current interest rate being 8% per annum.

The Trust's sole financial objective is "To achieve financial balance during the year". Its other objectives are of a qualitative nature such as "providing high quality care".

Private Sector Organisation:

This company is listed with the Mauritius Stock Exchange and is in the hospitality industry. Its stated financial objectives are:

? "To achieve a 20% return on investment (ROI) per annum".
? "To achieve an annual growth rate of 5% in earnings per share (EPS)".

The company has an equity market capitalisation of Rs 500 million and it has several debt instruments trading at a total value of Rs 110 million.

Required:

(a) Discuss the reasons for the difference in the financial objectives of the two types of organisation given above.

(b) Outline the main differences in the business risks involved in the achievement of their financial objectives.

(c) Describe the rationale for PFI in the financing of public sector infra- structure. What are the pre-conditions for the successful and sustainable public-private-partnership (PPP). Is PPP worth the trouble?


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