Problem 1

Framework of financial management

Instructions:
1. A framework of financial management is presented below.
2. You are required to elaborate and discuss the meaning of this framework.
3. Use examples as necessary to make your explanation more easily understandable.

Initiate plan

YES

External
NO GOALS Environme
Plan
nt
= Maximize value

Reexamine
Tangible goals
Assumptions
Stratagems

Long-term Liquidity Financial

investment structure structure
decisions decisions decisions

Level of operating assets

Leverage structure

Impact of Rate of
risk Trade-offs return

Options

Financial package plan and analysis

Problem 2

An oil spill on July 3, 2006 threatens a mangrove forest on the Philippine Island of
Guimaras, an area only just recovering from the country’s largest spill. This latest spill
stems from an explosion onboard a floating power barge in the 13-kilometer (8-mile)
waterway between the city of Iloilo and Guimaras Island. Operator AC Energy Inc. said
the incident spilled 48,000 liters (12,700 gallons) of fuel oil into the Iloilo River and its
tributaries before being contained eight hours later. But the Philippine Coast Guard said
around 251,000 liters (66,300 gallons) of oil had spread around the waterway. The day
after, July 4, the Coast Guard estimated it had collected 130,000 liters (34,300 gallons) of
oil. Some of the oil was swept out of the containment area by strong waves and carried
across to communities in Guimaras. Considering that Operator AC Energy Inc. could
have used double-hulled oil tankers might have prevented the spill, but the cost of
refitting their fleet of single-hulled tankers was considered too high. Also, the cost of
cleaning up an oil spill would be less than the cost of refitting the ships, thus increasing
shareholder value. Several years after the oil spill, however, Operator AC Energy Inc.
was fined billions of pesos for the spill. How do the costs of the cleanup and the fines
pertain to a discussion of maximizing shareholder value and ethical responsibility?

Problem 3

San Miguel Corporation-Board of Directors made a resolution that awarding the

general operation manager if company profits exceed P100,000,000 this year. During the
final week of the year, the manager changes an accounting policy that will increase
reported profits from P95,000,000 to P102,500,000, triggering his bonus. The change in
profits of P7,500,000 will reverse itself in the next year, and the accounting change has
no impact on San Miguel Corporation cash flow. Discuss the above situation as it relates
to both an agency problem and efficient markets.

Problem 4

Loren Segura and Dave Johnson both work for Sports Products, Inc., a major
producer of boating equipment and accessories. Loren works as a clerical assistant in the
Accounting Department, and Dave works as a packager in the Shipping Department.
During their lunch break one day, they began talking about the company. Dave
complained that he had always worked hard trying not to waste packing materials and
efficiently and cost-effectively performing his job. In spite of his efforts and those of his
co-workers in the department, the firm's stock price had declined nearly P2 per share over
the past 9 months. Loren indicated that she had shared Dave's frustration, particularly
because the firm's profits had been rising. Neither could understand why the firm's stock
price was falling as profits rose.
 Loren indicated that she had seen documents describing the firm's profit-sharing
plan under which all managers were partially compensated on the basis of the firm's
profits. She suggested that maybe it was profit that was important to management,
because it directly affected their pay. Dave said, "That doesn't make sense, because the
stockholders own the firm. Shouldn't management do what's best for stockholders?
Something's wrong!" Loren responded, "Well, maybe that explains why the company
hasn't concerned itself with the stock price. Look, the only profits stockholder receives
are in the form of cash dividends, and this firm has never paid dividends during its 20-
year history. We as stockholders therefore don't directly benefit from profits. The only
way we benefit is for the stock price to rise." Dale chimed in, "That probably explains
why the firm is being sued by the government environmental officials for dumping
pollutants in the adjacent stream. Why spend money for pollution controls? It increases
costs, lowers profits, and therefore lowers management's earnings!"

Loren and Dave realized that the lunch break had ended and they must quickly
return to work. Before leaving, they decided to meet the next day to continue their
discussion.

Required
a. What should the management of Sports Products, Inc., pursue as its overriding
goal? Why?
b. Does the firm appear to have an agency conflict? Explain.
c. Evaluate the firm's approach to pollution control. Does it seem to be ethical?
Why might incurring the expense to control pollution be in the best interests of
the firm's owners in spite of its negative impact on profits?
d. On the basis of the information provided, what specific recommendations
would you offer the firm?

Problem 5

Using this link https://www.imf.org/en/Topics/imf-and-covid19/Policy-

Responses-to-COVID-19, write a reaction paper following the format of Handy-Dandy
Guide to Writing a Reaction Paper on how the Philippine government responses on
financial problems for the economy to survive the pandemic in the country?