FINANCIAL MANAGEMENT

Individual assignment

Submitted to:
Prof. L V Raman

Submitted by:
Sunita Mahajan
PGPMX 2018-2020 B2

IIM Indore, Mumbai Campus

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FINANCIAL MANAGEMENT

Take any financial decisions topic (Capital budgeting, Capital Structuring & Dividends decisions) and find
out how it is done in real scenario in your organization by interviewing senior manager or execute of
your organization.

Organization Introduction

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As per the course outline, following questions were used to check what is happening in the real world.

Capital Expenditure Questions & Answers:

1) How are capital budget set? What limits/constraints apply? Do they vary from year to year?
Capital Budgets are set based on estimated forecast / budgets spend for various capital
expenditures (i.e. Computer equipment to be replaced or new, furniture & fixtures, servers etc).
Some of these expenses can be discretionary depending upon operating company’s profitability
and overall health. The Budgets definitely vary YOY basis the overall outlook of the company (3-
5 year plans), estimated profits, replacement of technology, etc
2) What procedures are used to develop and validate investment proposals?
Management/Leadership team is briefed by the CFO/FD on various proposals that are potential
viable / feasible in the current year or years to come. Depending upon how much needs to be
invested, their pay-out period / IRR etc, the proper due diligence needs to be done. This
diligence depending upon the investment $ could be done in-house or externally through
consulting companies
3) What economic criteria are applied in investment decisions?
Pay-out period, NPV and IRR
4) How is discount rate determined? How is project risk priced?
Discount rate is the rate of return that is used in the discounted cash flow (DCF) analysis to
determine the present value of the future cash flows. Discount rate refers to the rate that is
charged to banks/FI by Fed/Reserve/central banks on their loans. Discount rate refers to the
interest rate used in DCF
5) How are nondiscretionary /no income producing projects approved?
Some spends are ear-marked on a yearly budget as Investments. All pro-bono work has to be
approved by the Leadership/Management team
6) Does financing pays any role in investment decision?
Without a doubt, it’s a very significant decision. Plus, the source of financing type – equity or
debt is another vital factor that will weigh to prove a project is feasible in terms of moving
ahead
7) Are investments post audited?
All investments post their incurrence should be audited / verified to their original plan/budget
to see what worked vs not. Circumstantial and actual evidence and its revelation helps to make
better future decisions
8) Are acquisition treated differently? What motivates them?
Acquisitions are always different from small/medium purchases. Acquisitions is certainly a drain
on company cash flows but also capable of giving it a huge edge in terms of market share which
otherwise would not be possible organically. With the times we live in, technology itself is
becoming redundant so fast, that acquisitions seems the right way to go and lead if someone
aspires to be a market leader.
9) How are assets sales evaluated?
Depending upon the type of asset, it’s value would have to be evaluated either at cost or market
value. For example – marketable securities like stocks/options at market value, intangible assets
(patents/trademarks) at cost (as reflected in the Balance-sheet)

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Financing Questions:

1) What criteria are used in sourcing finance?

Time period, ownership/control and finance source itself
2) Does the firm have direct gearing level? Why?
Each company according to its financial risk capability would have a gearing ratio. Total
Liabilities/Total assets would give a gearing ratio (debt ratio)
3) When is external finance sought?
In pursuit of Growth (to broaden the offering, grow the workforce or expand overseas), preserve
internal resources and see what is available outside and get an outside perspective
4) How is the choice made between debt and equity?
Clearly the decision is very specific to each and every business. And most of the companies
could be using the mixed model. However, there are some factors to be considered before
reaching out to debt/equity financing namely – long term goals, available interest rates, need
for control, borrowing requirements, current business structure, future repayment terms and
access to equity markets

Summary of how Capital Budgeting Decisions are made in Puma Energy:

Three categories of projects are always must-go projects. Maintenance, stay in business and safety
projects do not go through a project evaluation cycle as they are considered in annual budgets of
organization. All other projects go through the traditional method of IRR / NPV / Buyback calculations.
Based on the viability of the project, these projects are forwarded to board meetings and based on
organization’s strategies and vision, final decision is taken.

Example:
Investment decision for opening of new storage terminal in Colombia
The Group completed the construction of a 8k m3 storage terminal at Baranoa – its first terminal in
Colombia. This is further strengthening Puma Energy’s position in Colombia, where the Group already
operates a network of 98 retail sites and is present in one airport. Since this project did not belong to
must-go projects category, evaluation in following excel template was carried out and accordingly the
project was undertaken. Since the information remains highly confidential, it cannot be shared but
sample data is shown in the template for illustrative purpose.

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Here is the excel template of the same –

Capex Economic
Model.xlsx

FAQ Worksheet

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Description Worksheet

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Output Worksheet With NPV, IRR and Payback

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