Name : MARK PAULO D.

MENDOZA
Subject : MBA – FINANCIAL MANAGEMENT AND ACCOUNTING POLICY
Date : May 13, 2021

1. How does the Finance Manager works?

Financial managers are the one responsible for the financial status & health of an
organization. They also administer the financial affairs of all types of business whether in private
and public, large and small, profit seeking and not for profit. They perform such varied tasks as
developing (1) a financial plan, budgets & reports, (2) extending credit to customers, (3) evaluating
proposed large expenditures, (4) raising money to fund the firm’s operations (5) direct investment
activities, (6) develop strategies and plans for the long-term financial goals of their organization.
Financial managers work in many places, including banks and insurance companies. Financial
managers increasingly assist executives in making decisions that affect the organization, a task for
which they need analytical ability and excellent communication skills.

The role of the financial manager, particularly in business, is changing in response to

technological advances that have significantly reduced the amount of time it takes to produce
financial reports. Financial managers’ main responsibility used to be monitoring a company’s
finances, but they now do more data analysis and advise senior managers on ideas to maximize
profits. They often work on teams, acting as business advisors to top executives. In recent years,
a number of factors have increased the importance and complexity of the financial manager’s
duties. These factors include the recent global financial crisis and subsequent responses. by
regulators, increased competition, and technological change.

The most important job of a financial manager is to create value from the firm’s capital
budgeting, financing, and net working capital activities. Financial managers create value when the
firm (1) tries to buy assets that generate more cash than they cost & (2) Sell bonds and stocks and
other financial instruments that raise more cash than they cost.

2. How do you determine the appropriate dividend policy in a company?

The term dividend policy means policy concerning quantum profits to be distributed as
dividend. The board of directors of the company decide as to how much profits should be given
to shareholders in the form of dividend. In practice, many companies do not have dividend policy
and they take each dividend decision independent of every other such decision. Decisions that is
every year when the company decides to pay a dividend (1) depending upon the profits (2)
depending on its future financial requirements and (3) depending upon its investment and
financial decision the company takes the dividend decision and company decides about how much
dividend it is going to pay to the shareholders. Moreover, the decision regarding the dividend
policy and how much amount to be paid as dividend & how much amount to be retained by the
company that is decided by basically the board of directors. The Financial manager is dependent
upon the board of directors and he is required to do according to the given direction from the
board of directors.

Paying dividends involves outflow of cash. The cash available for dividend with the
company will depend upon its investment and financial decisions. If a company is going to
 purchase some asset in the coming future, it is going to incur some capital expenditure, as it will
need cash in the future. Therefore, the company will be paying lesser dividends. In this sense, the
dividend decision of the company will depend upon its investments and financing decisions.

Dividend policy are affected and decided by the following factors: (1) Regularity and
stability of earnings – it is when the company is earning on a regular basis and there is stability in
the earnings of the company then the company can afford to pay more and higher dividends to
the shareholders. If the company is uncertain about its earnings and the company’s profit is
irregular and unstable, then the company is not possible to pay regular and higher dividends. (2)
Financial needs of the company – means how much cash the company needs for the future.
Whether the company is going to incur some capital expenditure in the future and it will receive
cash and funds for that purpose then in that case it will keep more profits with it and it will pay
less dividends to the shareholders. (3) Desire of the shareholders – when a shareholder may want
a return from the company either in the form of dividend or they may want a return from the
company in the form of capital gains. Dividend means the regular term which they will getting
from the company and capital gains means the earning which the or profit they will be earning
when they will be selling the investments of the company. So if the shareholder wants a regular
return, he will be more interested in the regular dividends (4) Desire of control – If the company
wants to keep and retain more control over the company then it won’t be interested issuing more
shares to the company. If the company issues more shares in the market and it raises more funds
by the issue of equity shares, then it will lose control over the company (5) Liquidity Position –
payment of dividends results in the outflow of cash and therefore if company is earning profits
and companies having sufficient liquidity then it can afford to pay more dividends. But if the
company’s liquidity position is not good, then they will give lesser dividends to the shareholders
(6) State of Economy – how the economy is going and how the economy is doing (7) State of
Capital Market – If company is having an easy access to the capital market or share market then
they can pay more dividends to the shareholders (8) Legal & Contractual Restrictions – imposed
by the companies regarding the payment of dividends (9) Taxation policy – amount of tax the
government charged a specific company on their profits.

3. Describe the use of CAPM model and the CML in portfolio management

The capital market line (CML) represents portfolios that optimally combine risk and return
The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk
and expected return for assets, particularly stocks. CAPM is widely used throughout finance for
pricing risky securities and generating expected returns for assets given the risk of those assets
and cost of capital. It is a theoretical concept that represents all the portfolios that optimally
combine the risk-free rate of return and the market portfolio of risky assets. Under CAPM, all
investors will choose a position on the capital market line, in equilibrium, by borrowing or lending
at the risk-free rate, since this maximizes return for a given level of risk.

Portfolios that fall on the capital market line (CML), in theory, optimize the risk/return
relationship, thereby maximizing performance. The capital allocation line (CAL) makes up the
allotment of risk-free assets and risky portfolio for an investor. CML is a special case of the CAL
where the risk portfolio is the market portfolio. Thus, the slope of the CML is the Sharpe ratio of
the market portfolio. As a generalization, buy assets if the Sharpe ratio is above the CML and sell
if the Sharpe ratio is below the CML. CML differs from the more popular efficient frontier in that
it includes risk-free investments. The intercept point of CML and efficient frontier would result in
 the most efficient portfolio, called the tangency portfolio. The CAPM, is the line that connects the
risk-free rate of return with the tangency point on the efficient frontier of optimal portfolios that
offer the highest expected return for a defined level of risk, or the lowest risk for a given level of
expected return. The portfolios with the best trade-off between expected returns and variance
(risk) lie on this line. The tangency point is the optimal portfolio of risky assets, known as the
market portfolio. Under the assumptions of mean-variance analysis – that investors seek to
maximize their expected return for a given amount of variance risk, and that there is a risk-free
rate of return – all investors will select portfolios which lie on the CML.

Finding the market portfolio and the best combination of that market portfolio and the
risk-free asset are separate problems. Individual investors will either hold just the risk-free asset
or some combination of the risk-free asset and the market portfolio, depending on their risk-
aversion. As an investor moves up the CML, the overall portfolio risk and return increases. Risk
averse investors will select portfolios close to the risk-free asset, preferring low variance to higher
returns. Less risk averse investors will prefer portfolios higher up on the CML, with a higher
expected return, but more variance. By borrowing funds at the risk-free rate, they can also invest
more than 100% of their investable funds in the risky market portfolio, increasing both the
expected return and the risk beyond that offered by the market portfolio.

The CML is sometimes confused with the security market line (SML). The SML is derived
from the CML. While the CML shows the rates of return for a specific portfolio, the SML represents
the market’s risk and return at a given time, and shows the expected returns of individual assets.
And while the measure of risk in the CML is the standard deviation of returns (total risk), the risk
measure in the SML is systematic risk, or beta. Securities that are fairly priced will plot on the CML
and the SML. Securities that plot above the CML or the SML are generating returns that are too
high for the given risk and are underpriced. Securities that plot below CML or the SML are
generating returns that are too low for the given risk and are overpriced.

4. Describe how you select among several project opportunities in hand

Project Selection is a process to assess each project idea and select the project with the
highest priority. Projects are still just suggestions at this stage, so the selection is often made
based on only brief descriptions of the project. As some projects will only be ideas, you may need
to write a brief description of each project before conducting the selection process. Selection of
projects is based on (1) Benefits where the measure of the positive outcomes of the project. These
are often described as "the reasons why you are undertaking the project". The types of benefits
of eradication projects include Biodiversity, Economic, Social and cultural. Fulfilling commitments
made as part of national, regional or international plans and agreements. (2) Feasibility where the
measure of the likelihood of the project being a success, i.e. achieving its objectives. Projects vary
greatly in complexity and risk. By considering feasibility when selecting projects, it means the
easiest projects with the greatest benefits are given priority.

When selecting project opportunities, it should be ensured that the project aligns with
the organizational strategy. a prospective project is simply a good idea it’s unlikely to survive. For
this reason, you need to make certain that the prospective project aligns with your overall
organizational strategy. It’s important that all key stakeholders are present, and familiar with the
overall strategy. With the strategy as a guide, identify where each project might meet multiple
organizational goals. Conducting an organizational or environmental assessment is also a factor
 while selecting project opportunities. This assessment will imply how broad and intensive an
effort the project will be for the organizational. This will help understand the context in which you
will undertake the project and helps both the scope and coordination of the project, while
anticipating future needs. Assess the resources – evaluating the resources on hand to accomplish
the project ahead. Resources may mean people, time, or budget. This should be a key
consideration in selecting the project. Projects for which you do not have sufficient resources may
stall and become an ongoing drain on your organization, while less ambitious projects may help
you reach a position from which you can more easily accomplish more expensive or time-
consuming goals. Lastly is identifying the parameters to complete the project. The project
completion/timeframe is a crucial point to decide up-front. As you consider timeframes, you
should also decide on the metrics by which you will measure success. Timeline/Timeframe is
directly proportional to the cost/budget of an organization. With these five considerations guiding
your project opportunity selection process, this will help choose the projects that will best serve
your organizational goals.

5. How do you construct and apply the break-even analysis model?

Break-even analysis is widely used to determine the number of units the business needs
to sell in order to avoid losses. It will tell you exactly what you need to do in order to break even
and make back your initial investment. Determining at what point your company, or a new
product or service, will be profitable. Put another way, it’s a financial calculation used to
determine the number of products or services you need to sell to at least cover your costs. When
you’ve broken even, you are neither losing money nor making money, but all your costs have been
covered.

This calculation requires the business to determine selling price, variable costs and fixed
costs. The variable cost (expenses that fluctuate up and down with sales) and the selling price of
an individual product and the total cost are required to evaluate the break-even analysis.
Your break-even point is equal to your fixed costs (expenses that stay the same no matter how
much you sell), divided by your average price, minus variable costs. Basically, you need to figure
out what your net profit per unit sold is and divide your fixed costs by that number. This will tell
you how many units you need to sell before you start earning a profit.

There are many benefits to doing a break-even analysis. (1) Price smarter - finding your
break-even point will help you price your products better. A lot of psychology goes into effective
pricing, but knowing how it will affect your profitability is just as important. You need to make
sure you can pay all your bills (2) Cover fixed costs - when most people think about pricing, they
think about how much their product costs to create. Those are considered variable costs. You still
need to cover your fixed costs like insurance or web development fees. Doing a break-even
analysis helps you do that (3) Catch missing expenses - It’s easy to forget about expenses when
you’re thinking through a small business idea. When you do a break-even analysis you have to lay
out all your financial commitments to figure out your break-even point. This will limit the number
of surprises down the road (4) Set revenue targets - after completing a break-even analysis, you
know exactly how much you need to sell to be profitable. This will help you set more concrete
sales goals for you and your team. When you have a clear number in mind, it will be much easier
to follow through (5) Make smarter decisions - entrepreneurs often make business decisions
based on emotion. If they feel good about a new venture, they go for it. How you feel is important,
but it’s not enough. Successful entrepreneurs make their decisions based on facts. It will be a lot
easier to decide when you’ve put in the work and have useful data in front of you. (5) Limit
financial strain - doing a break-even analysis helps mitigate risk by showing you when to avoid a
business idea. It will help you avoid failures and limit the financial toll that bad decisions can have
on your business. Instead, you can be realistic about the potential outcomes. (6) Fund your
business - a break-even analysis is a key component of any business plan . It’s usually a
requirement if you want to take on investors or other debt to fund your business. You have to
prove your plan is viable. More than that, if the analysis looks good, you will be more comfortable
taking on the burden of financing.