Krisha Nell B.

Lopez July 8,
2023
2021-70022

BA 402 – Financial Management

Mid-term Examination

I. Evaluate the processes involved in being able to attain the goal of studying financial
management through the following business-related concepts.

a. Realization of the objective of a business firm through the role of financial

management

We can use the following criteria to assess the processes involved in realizing the
purpose of a business through the role of financial management, which is the goal of
studying financial management:

 Relevance: The processes should be related to the objective of the business firm and the
role of financial management in achieving it. They should also be consistent with the
vision and mission of the business firm and its stakeholders.

 Effectiveness: In terms of value creation, competitive advantage, financial performance,

etc., the processes should be able to deliver the intended objectives and results.
Additionally, they must be capable of adjusting to shifting market conditions and
customer preferences.

 Efficiency: The processes must be able to utilize the available resources as efficiently as
possible while lowering costs and risks. They should also be able to increase the value of
the business for its owners and shareholders and produce significant returns on
investment.

 Innovation: The processes should be able foster innovation and creativity in the business
and its goods or services. They should also be able to differentiate themselves from
competitors by adjusting to changing technologies and market opportunities.

Using these standards, we may assess a few examples of the processes involved in
realizing a business firm's objective through the function of financial management,
which is the goal of studying financial management:

 Capital budgeting: This is a process of evaluating and selecting long-term investment

projects or opportunities that are expected to generate future cash flows for the
business firm. It involves estimating the expected revenues and costs of various
projects or opportunities, applying capital budgeting techniques such as net present
value (NPV) or internal rate of return (IRR) to select the most profitable projects or
opportunities, financing the selected projects or opportunities with an optimal mix
of debt and equity that minimizes the cost of capital, and monitoring and controlling
the implementation and performance of the projects or opportunities.

 This process is relevant to the objective of a business firm

because it helps to allocate scarce resources among competing
uses to achieve growth, profitability, or other strategic goals.
 It is effective because it helps to maximize the value of the
business firm by choosing projects or opportunities that have
positive NPV or IRR.
 It is efficient because it helps to minimize the cost of capital by
choosing an optimal capital structure.
 It is innovative because it helps to explore new markets,
products, or technologies that can create competitive advantage
or differentiation for the business firm.

 Working capital management: This is a process of managing the short-term assets

and liabilities of a business firm to ensure liquidity and solvency. It involves
estimating the cash inflows and outflows of various activities such as sales,
purchases, production, etc., applying working capital techniques such as cash
budgeting, inventory management, accounts receivable management, accounts
payable management, etc. to optimize the level and composition of working capital,
financing the working capital needs with appropriate sources such as trade credit,
bank loans, etc., and managing the cash flow cycle and working capital ratios of the
business firm.

 This process is relevant to the objective of a business firm

because it helps to maintain smooth operations and avoid
financial distress or bankruptcy.
 It is effective because it helps to improve the profitability and
liquidity of the business firm by reducing idle cash balances,
inventory costs, bad debts, etc.
 It is efficient because it helps to reduce the cost of financing by
using trade credit or short-term loans.
 It is innovative because it helps to adopt new methods or
technologies that can improve working capital efficiency or
effectiveness.

b. Business strategies for financial viability of business operations

The role and significance of business strategies for financial viability of a business to the
processes involved to attain the purpose of financial management are:
 Business strategies help in defining a company's vision, mission, goals, and
objectives as well as ensuring that they are in line with its available resources
and capabilities.
 Business strategies help a business to identify its competitive advantage, target
market, value proposition, and growth opportunities, and to develop and
implement effective marketing and sales plans.
 Business strategies help a business to optimize its capital structure, investment
portfolio, dividend policy, and cash flow management, and to balance its risk and
return trade-offs.
 Business strategies help a business to monitor and evaluate its financial
performance, profitability, efficiency, and sustainability, and to make necessary
adjustments or improvements.

By doing so, business strategies enable a business to achieve financial viability, which is
the ability to generate sufficient cash flow to meet its operational costs and debt
obligations, as well as to grow at the desired rate while satisfying customer expectations.
Financial viability is essential for the purpose of financial management, which is to
maximize the value of the business for its owners and stakeholders.

To evaluate the role and significance of business strategies for financial viability of a
business to the different processes involved to attain the purpose of financial
management, the following criteria must be considered:

 Relevance: How well do the business strategies address the specific needs,
challenges, and opportunities of the business and its industry?
 Effectiveness: How well do the business strategies achieve the desired outcomes
and objectives of the business and its stakeholders?
 Efficiency: How well do the business strategies utilize the available resources
and capabilities of the business and minimize its costs and risks?
 Adaptability: How well do the business strategies respond to the changing
internal and external environment and customer demands of the business?
 Innovation: How well do the business strategies create value and differentiation
for the business and its products or services?

By applying these criteria, one can assess the strengths and weaknesses of the business
strategies for financial viability of a business and identify areas for improvement or
enhancement. This can help to ensure that the business strategies are aligned with the
processes involved to attain the purpose of financial management, which is to maximize
the value of the business for its owners and stakeholders.
II. Generate a framework to address the conclusion of Mr. Woon from the point of view of
Financial Management by looking into some of the major business decisions made before
arriving at such conclusion.

The following discuss a framework to address the conclusion of Mr. Woon:

A. Compare the financial ratios of Catandungan Lasa Enterprises (CLE) with the industry
averages provided by the bank. The following includes the relevant ratios:

i. Gross Margin (%) – Catandungan Lasa Enterprises keeps higher percentage of its
revenue which is 32% than Industry average of 31.33%. This means that
Catandungan Lasa Enterprises has more money left over to cover its expenses.

 Catandungan Lasa Enterprises = 32.00

 Industry Average = 31.33

ii. Net Margin (%) - Catandungan Lasa Enterprises keeps higher percentage of its
revenue as net profit which is 14% than the industry average of 9%. This means
that Catandungan Lasa Enterprises has more money left over to reinvest in the
business, pay dividends to shareholders, or save for future growth.

 Catandungan Lasa Enterprises = 14.0

 Industry Average = 9.00

iii. Return on Equity (%) – Catandungan Lasa Enterprises generated higher profit
the money invested by its shareholders or equity which is 15.81 than the
industry average of 13.43. This means that Catandungan Lasa Enterprises is
more efficient and more profitable, thus, having a competitive advantage over
its peers.

 Catandungan Lasa Enterprises = 15.81

 Industry Average = 13.43

iv. Return on Assets (%) – Catandungan Lasa Enterprises has better asset utilization
than the industry.

 Catandungan Lasa Enterprises = 8.76

 Industry Average = 8.60

v. Current Ratio (%) – Catandungan Lasa Enterprises has more liquidity than the
industry.

 Catandungan Lasa Enterprises = 2.65

 Industry Average = 2.60
B. Evaluate the impact of the business decisions made by CLE on its financial performance.
Some of the decisions are:

i. Closing the store outlets in Metro Manila and Virac, Catanduanes

 Improved profitability
 Decreased company sales
 High reduction on operating costs

ii. Concentrating on export and sales to local department stores

 Improved profitability
 Decreased company sales
 High reduction on operating costs

C. Identify the strengths and weaknesses of CLE's financial position and performance based
on the ratio analysis and the business decisions. Some of the factors to consider are:

 In terms of profitability, liquidity, solvency, and efficiency, the calculated financial

ratios show that CLE has a better performance than the other enterprises
catered by the bank.

 The CLE decided to close their store outlets in Metro Manila and Virac,
Catanduanes and focused on export and sales to local department stores. These
decisions led to decreased company sales and high reduction on operating costs,
which in turn, led to improved profitability. Although this business decision led
to improved profitability, there is also a possibility that not closing the store
outlets in Metro Manila and Virac could lead to better financial performance of
CLE – this is through proper management of their financial resource, analyzing
the market condition in the industry, make appropriate business strategies and
adopting to market advances.

D. Provide recommendations for improving CLE's financial performance and position in the
future. Some of the suggestions are:

i. Diversifying the product line or market segments

ii. Reducing operating costs or increasing sales volume
iii. Managing working capital or debt level more effectively
iv. Investing in new technology or equipment