BA 217 FINANCIAL MANAGEMENT

Final Examination
nd
2 Trimester, S.Y 2019-2020, Cluster A

1. Why should effective Corporate Governance be in place?

Corporate governance is the structures and processes for the direction and control of
companies. It is also about the relationships among the management, Board of Directors,
controlling shareholders, minority shareholders and other stakeholders.

Corporate Governance should effectively be in place because it gives more effective

management. If there are clearly defined roles and responsibilities within the business, and
easily understood internal processes, the company's management and operations will improve.
Management, shareholders and other stakeholders will also have a clear understanding of how
the business operates. It reduces the potential for internal conflicts and lets management focus
on achieving the company's growth strategy and profitability. Also, it gives a good reputation. A
company with good governance systems in place is less likely to suffer the reputational
damage that can be caused when governance failures occur. Good governance can be a
selling point and something worth publicizing to stakeholders and the outside world.

2. Explain the concept of Liquidity and why it is crucial to company survival?

Liquidity refers to how available the cash or cash equivalents to meet short-term
operating needs. In other words, liquidity typically refers to a company’s ability to use its
current assets to meet its current or short-term liabilities.
Liquidity is important among companies because creditors and investors often use
liquidity ratios to measure how well the company is performing. Creditors are primarily
concerned with a company’s ability to repay its debts and they want to see if there is enough
cash and cash equivalents available to meet the current portion of debt. Even if the value of
assets owned by the company is high but if their assets cannot be readily or easily converted
into cash, meaning the company cannot pay immediately their short-term obligations. With this,
the company will be forced to sell their assets they don’t want to liquidate in order to meet their
short-term obligations. This action is not a sound decision for every company.
Investors, on the other hand, are typically more concerned with the overall health of the
business and how it can increase performance in the future. Companies that has low liquidity
usually have a difficult time increasing performance because short-term funding is not
available. Low liquidity is also a sign to investors that the company fails to efficiently generate
revenues with its assets to meet its current obligations. Creditors and investors usually prefer
higher liquidity levels, but extremely high levels of liquidity could mean the company is not
properly investing its resources.
3. Why would a financial manager want to slow down disbursement? Explain

Financial Manager would want to slow down cash disbursement for some reasons. One
reason is when the company has low cash balance. Low expected cash receipts may result in
a short-term need of cash. Another reason is budget constraints. Most project have a
forecasted budget. Financial manager must review budget of each project to determine the
spending limit for various expenditures. Slowing disbursement is usually necessary to ensure
costs come in under budget. Cost increase are usually a result of projects failing to meet
budget demands. Slowing disbursement can help financial manager to review projects to
ensure financial success.

4. Explain in general terms the concept of return on investment. Why is this concept
important in the analysis of financial performance?

Return on investment is a financial ratio used to calculate the benefit an investor will
receive in relation to their investment cost. It is most commonly measured as net income divided
by the original capital cost of the investment. The higher the ratio, the greater the benefit earned.

ROI is a helpful tool for comparing different investment opportunities. It is simple and helps
an investor decide whether to take or skip an investment opportunity. The calculation can also be
an indication of how an investment has performed to date. When an investment shows a positive
or negative ROI, it can be an important indication to the investor about the value of their
investment. Companies also use projected ROI to determine which projects or initiatives to pursue
based on their potential profitability. Using an ROI formula, an investor can separate low-
performing investments from high-performing investments. With this approach, investors and
portfolio managers can attempt to optimize their investments.

5. What is capital budgeting and why it is important?

Capital budgeting refers to the process a firm uses to make decisions concerning
investments in the long-term assets of the firm. The general idea is that the capital, or long-term
funds raised by the firms are used to invest in assets that will enable the firm to generate
revenues several years into the future.

Capital Budgeting is important for the following reasons. Firstly, it enables a company to
develop and prepare long-term strategic goals. Capital budgeting enables the appraisal of
investment options for businesses to determine future long-term direction. Secondly, it helps
companies plan their financing. Capital budgeting carefully identifies necessary expenditures,
which can be huge and affect a firm’s financial performance. Also, poor forecasting may result in
over or under investment of resources. Lastly, it is useful in selecting new profitable investment
projects. Capital budgeting helps a firm develop model that guided on how to find and evaluate
which projects to invest or not. This is important for firms that want to remain competitive in the
market and make profit.

Prepared by:

CHRISTIAN JAY R. MARCOS

MBA Student