Name: EULOGIO F. ECLEO JR. Prof: PRICILLA P. BADOC, D.M.

FINANCIAL MANAGEMENT

Student Activity 1

Multiple Choice: Instruction: Encircle the letter, which you think will conform to the best
and correct answer. Please justify your choices
1. Select the letter that represents the internal environment of a business firm.
a. Management – which make the operation of the business possible through
planning, organizing, staffing, leading or directing and controlling the firm.
b. Customers
c. Suppliers
d. Financial institutions
2. What is the most important goal of a business firm?
a. Gain income
b. Maximize company profits – getting and staying profitable. Maintaining
profitability means making sure that revenue stays ahead of the costs of
doing business. Focus on controlling costs in both production and operations
while maintaining the profit margin on products sold.
c. Customer satisfaction
d. Corporate social responsibility
3. Which of the following statements is true?
a. For a firm to realize its goals, it must consider the needs of its environment.
Businesses do not operate in a vacuum but rather in a dynamic environment that
has a direct influence on how they operate and whether they will achieve their
objectives. This external business environment is composed of numerous outside
organizations and forces that we can group into seven key sub-environments,
economic, political and legal, demographic, social, competitive, global, and
technological. Each of these sectors creates a unique set of challenges and
opportunities for businesses. Business owners and managers have a great deal of
control over the internal environment of business, which covers day-to-day
decisions. They choose the supplies they purchase, which employees they hire,
the products they sell, and where they sell those products. They use their skills
and resources to create goods and services that will satisfy existing and
prospective customers. However, the external environmental conditions that affect
a business are generally beyond the control of management and change
constantly. To compete successfully, business owners and managers must
continuously study the environment and adapt their businesses accordingly.
b. Only the needs of the investors are considered in undertaking the company’s goals
c. The management’s goals are considered the most in undertaking company’s goals
d. Nothing is considered at all
4. Who decides on the financial policy and strategy of a firm?
a. Middle management
b. Top management – is the decision maker of all its financial policy and strategy
with the help of its financial managers. Since management is ultimately
 responsible to the investors, the objective of strategic financial management
should implement investment and financing decisions, which should satisfy the
shareholders and increase their return.
c. Staff
d. None of the above
5. Financial management is mainly concerned with
(A) Efficient management of every activity of business - all aspects of acquiring and
utilizing financial resources for firms activities. Financial Management is the
application of general principles of management to the financial possessions of an
enterprise.
(B) Arrangement of funds required to the firm
(C) Obtaining required funds in the appropriate mix and utilizing them, efficiently
6. Financial management helps in
(A) Short-term planning of company’s activities
(B) Estimating the total funds’ requirement and their proper utilization in fixed assets and
working capital - As a business grows and matures, it will need more cash to finance its
growth. Planning and budgeting for these financial needs is crucial. Deciding whether
to fund expansion internally or borrow from outside lenders is a decision made by
financial managers. Financial management is finding the proper source of funds at the
lowest cost, controlling the company's cost of capital and not letting the balance sheet
become too highly leveraged with debt with an adverse effect of its credit rating.
(C) Profit planning of the firm

Student Activity 2:
Answers should be backed -up by ethical concepts and standards presented above.

1. Returning unspent money

DevAnand is running an NGO to help street children. He receives government grant of Rs.2 lakh
rupees for a project to teach the “out of school” children, who work at tea-stalls, do boot-
polishing etc. A year passes, but Dev managed to utilize only 50,000 rupees from the grant.
Despite his best efforts, he could not convince many poor children or their families to join his
NGO’s program.

As per the grant rules, Dev has to return all the unspent money back to government by the end of
March 31. However, his colleague Pran suggests the following:

1. If we honestly return Rs.1.5 lakh back, then government officials will think we are
amateur, ineffective NGOs and they will substantially reduce our grant for next year or even
worse- they will not give us any project next time!
2. We should take help of CA Prem Chopra to manipulate our account books and show
majority of the grant was utilized for education.
3. Many other NGOs do the same thing- there is no problem – nobody will raise any
objection, as long as we give 20% of the grant to SDM in charge of this project.
4. Although it sounds unethical but we will not use this money for personal needs, we will
use it on street children only. Hence, our act is fully ethical and moral.

What should Dev do with the money?

Dev should return the unspent money to the government. He should protect his integrity.

1. “Because others are also doing it” – is never the valid justification to commit an unethical
or criminal act.
2. Two wrongs don’t make a right:
a. Manipulating account books to keep the grant money.
b. Bribing SDM to keep the grant money.
3. The shelf life of lie and deception is very low- especially when manipulating the account
books – ask Ramalinga Raju, ex-chief of Satyam.
4. DevAnand was unable to use 75% of the grant money, it implies

a. Dev didn’t try hard enough or Government had exaggerated the amount of money
required to educate the out of school children or both

In any case, If Dev keeps the unspent grant; government will continue pumping more money-,
other NGOs and the SDM will keep amassing wealth.

2. Misleading for good purpose

DevAnand is the inspector in charge of Rampur Police station. The police station building is in
dire need of repairs, but hasn’t received any grants for years. One day, a cyclone hits a nearby
area, damaging most of the houses and shops. Although Dev’s police station gets partially
damaged, but most of the building remain intact . Government sends a disaster assessment team
to ascertain the level of damage and pay relief money. The DSP Mr. Pran, orders DevAnand to
do following:

1. Hire some laborers and destroy the remaining parts of your police station building.
2. When disaster assessment team comes, you tell them building collapsed by the cyclone,
and ask them to give priority in funding after all police station is one the most important
public offices in a town.

Should DevAnand obey his boss’s order?

DevAnand should not obey his boss’s order. The shelf life of lie and deception is very low.
Especially when many people are involved. In this case, laborers and any bystanders. Both Dev
and Pran are risking themselves to an unnecessary negative publicity and possible departmental
inquiry and punishment for professional misconduct. Indeed police building needed repairs and
should been given a grant months ago, but three wrongs do not make a right:

1. Wanton destruction of a public building.

2. Misleading the disaster assessment team.
3. Police officer DevAnand spending his time and energy in such activity rather than doing
rescue-relief-patrolling duty after the disaster.

4. Private matter of Public employee?

1. DevAnand is working as an under Secretary in the pension department. One day, his
friend GuruDutt, an SBI PO, narrates

DevAnand visits Mr.Ashok Kumar’s house but he is suffering from Alzheimer’s disease, unable
to give coherent answers. Frustrated DevAnand directly confronts Prem Chopra. But Prem
says “Mr.Ashok Kumar was a friend of my father. He has no relatives or children and my wife
Bindu has been taking care of him like daughter since a long time. Therefore, Mr.Ashok Kumar
gives us money out of good will, so we can send our son to an expensive IIT coaching class
@Kota, Rajasthan. Besides this is a personal family matter and none of your damn business.”

Do you think DevAnand made a blunder or was he merely performing an ethical duty?

Yes he made a blunder. Here, both GuruDutt and DevAnand has failed to act in responsible
manner. Because:

1. A banker must keep his clients’ data confidential, unless required by the law to disclose
it.
2. GuruDutt didn’t even wait to cross verify who else is giving money to Mrs.Bindu
Chopra’s account. Because if there was a ‘large scale bribe scam’ then lot other senior
citizens would be making payment to Bindu’s account, and not just Mr.Ashok Kumar alone.
3. Even in that situation, Gurudutt had to consult his boss within his own bank first. He
cannot go around giving informal tips to outsiders. This is an unethical act for a banker.
4. DevAnand too acted in hasty manner. First, he starts ‘investigation’ based on an informal
tip from a banker who is not supposed to tip him in the first place. He should have consulted
the vigilance department before moving further.
5. Second, Dev Anand confronts Prem Chopra, without any hardcore evidence. When
you’re holding a public office, you can’t go around accusing people in such haste. It breaks
the office discipline, destroys the staff morale and allows the guilty person to cover his
tracks.

Student Activity 3:

1. If you have a cool 2 Million Dollars which of the 10 Examples above will you invest in?
Please allocate your 2M.
 2. Briefly discuss the methods/formulas used in making important investment decision.

Answers:

1. Given examples are illustrations on how you will decide if you have some investment.
With regards to this first question that if I have 2 Million Dollars, I will surely invest my
2 Million dollars to the company or firm with the following consideration:
a. High NPV
b. IRR is greater than the rp
c. Payback Period is lesser than the acceptable payback value
d. Profitability Index

After this consideration, I will surely invest my 2 million dollars to the company who
meets the above consideration.

2. A. The net present value (NPV) of a project is defined as the present value of all future
cash flows produced by an investment, less the initial cost of the investment:

where n is the number of cash flows generated by the investment and rp is the required return on
the investment project.

The NPV Decision rule

In determining whether to accept or reject a particular projected, the NPV decision rule is

 Accept a project if its NPV > 0;

 Reject a project if its NPV < 0;
 Indifferent where NPV = 0.

B. Internal Rate of Return (IRR)

The internal rate of return, IRR, of a project is the rate of return which equates the net present
value of the projects cash flows to zero; or equivalently the rate of return which equates the
present value of inflows to the present value of cash outflows. The internal rate of return (IRR)
solves the following equation:
In determining whether to accept or reject a particular project, the IRR decision rule is

 Accept a project if IRR > rp

 Reject a project if IRR< rp
 Indifferent if IRR = rp
 For Mutually exclusive projects accept the project with highest IRR if IRR > rp

where rp is the required return on the project. We illustrate the use of the IRR rule, and some of
the pitfalls of this approach via a series of examples.

C. Payback Period (PP)

The payback period, PP, is the length of time it takes to recover the initial investment of the
project. To apply the payback period criterion, it is necessary for management to establish a
maximum acceptable payback value PP*. In practice, PP* is usually between 2 and 4 years. In
determining whether to accept or reject a particular project, the payback period decision rule is:

 Accept if PP < PP*

 Reject if PP > PP*
 Indifferent where PP = PP*
 For mutually exclusive alternatives accept the project with the lowest PP if PP<PP*

D. Profitability Index

Another capital budgeting technique, the profitability index, is used when firms have only a
limited supply of capital with which to invest in positive NPV projects. This type of problem is
referred to as acapital rationing problem. Given that the objective is to maximize shareholder
wealth, the objective in the capital rationing problem is to identify that subset of projects that
collectively have the highestaggregate net present value. To assist in that evaluation, this method
requires that we compute each projects profitability index PI.

We then rank the projects PI from highest to lowest, and then select from the top of the list until
the capital budget is exhausted. The idea behind the profitability index method is that this will
provide the subset of projects that maximize the aggregate net present value.
Student Activity 4
1. Supply the missing part of the Financial Statements of the KLEEN
SWEEP, Inc.
Cash flow statement
Cash flows from operating activities
Cash receipts from revenues $ 1,500
Cash payments for expenses (300)
Net cash flow from operating activities $ 1,200

Cash flows from investing activities

Cash payment for Land $ (500)
Net cash flow from investing activities $ (500)

Cash flows from financing activities

Cash receipts from stock issue $ 2,000
Cash receipts from bank loan $ 1,000
Cash payments for dividends (50)
Net cash flow from financing activities $ 2,950
Net increase in cash $ _3,650

Income Statement
Revenue 1,500
- Expenses
Rent 100
Utility Exp. 200 (300)
Net income 1,200

BALANCE SHEET
Assets
Cash $ 3,650
Land 500
Total Assets $ 4,150

Liabilities
Note payable $ 1,000

Stockholders’ Equity
Common Stock $ 2,000
Retained Earnings $ 1,150
Total Stockholders’ Equity $ 3,150
 Total Liabilities and Stockholders’ Equity $ 4,150

2. Assess the financial health of the business in terms of profitability, liquidity &
solvency by using the ratios. Justify your answers

Profitability Ratios:

Gross Profit Margin = Revenue – Expenses

Revenue

=1,500 – 300
1,500

Gross Profit Margin = 0.8 or 80% of the total revenue

Return on Asset

Asset Profitability = Net Income

Total Asset

= 1,200
4,150

Asset Profitability = 0.28 or 28%

Return on Equity

Equity Profitability = Net Income

Total Equity

= 1,200
3,150

Equity Profitability = 0.38 or 38%

Liquidity Ratio:

Short Term Solvency Ratio

Total Current Asset

Total Current Liabilities

= 4,150
1,000

= 4.15 so based on the liquidity ratio the company has a very good and safe
liquidity. This is for short-term solvency.
 >1,0 bad
 1,0 – 1,5 weak
 1,5 – 2,0 good
 >2,0 very good

Long-term Solvency Ratio

Total Equity
Total Asset

= 3,150
4,150

= 0.75 or 75% based on its long-term solvency ration the company has a very
good standin.

 0% – 30% bad
 30% – 50% low
 50% – 70% good
 70% – 100% very good