Divine Word College of Bangued

Bangued, Abra
School of Business Management and Accountancy
Bachelor of Science in Accountancy

Homework No. 1

Instructions: Encode your answers in Microsoft Word, save the file with document name,
AE19_HW01_<surname> and send the file to e-mail address: kerohvincentborja@gmail.com
on or before August 29, 2020 at 2:00 PM.

1. Are you in favor of disinvestment/privatization of PSEs? Explain your answer in five to ten
sentences.

2. Mini-case Study. Explain your answer in five to ten sentences.

The Headquarters Building

(Author: Elton G. McGoun, Assistant Professor Finance, Bucknell University)

Topic: Capital Budgeting

Characters: John, financial analyst at a small bank
The president of a small bank

“These numbers are not what I expected, John. Are you sure they’re correct?”

John wasn’t. You could never be sure with capital budgeting. You just made your best
estimates, even though you knew any one of the dozens of forecasted numbers could
turn out to be different by a hundred percent or more. “I think everything here is
realistic, sir. The new headquarters building doesn’t seem to be a good idea right now.”

“Is your growth estimate high enough? After all, we've been growing over 10 percent
per year for the last five years.”

John had assumed a 12 percent growth rate for the next ten years. It was optimistic, to
say the least, but not out of the question. “I suppose I could make the growth rate a little
higher, sir. Things really are looking good for the bank.”

“They certainly are, John. They certainly are,” said the president. “Our stock price has
doubled in the last six months, and our stockholders are happier than they’ve ever
been.” The president turned back to the architectural drawings and carpet samples that
covered his desk.

John went back to his office. Plugging in a higher growth rate wouldn’t be difficult;
however, he knew it would take a 20 percent growth rate for ten years to make the
building look feasible. This was clearly unattainable--at that rate, the bank would end
up with all the deposits in the entire county. But who really cared? The bank was sitting
on a mountain of surplus cash, and the construction would give a real boost to the
AE 19 Financial Management 14

This module is a property and is exclusively used by the DWCB College Department. Any duplication and reproduction, storing in any retrieval
system, distribution, posting or uploading online as well as transmitting in any form or means ( photocopying & electronic sharing ) of any part,
without prior written permission from the owner is strictly prohibited.
 Divine Word College of Bangued
Bangued, Abra
School of Business Management and Accountancy
Bachelor of Science in Accountancy

downtown area. There wasn’t much chance the board of directors would spot the
questionable assumption. They usually spent most of their meetings arguing about the
hours of the drive-up window. The board didn’t really need to do much, though. The
president was a sharp manager and had single-handedly brought the bank its
unprecedented success. Still, John really didn’t like playing with the numbers.

John is now choosing between three alternatives:

1. Refuse to do the analysis with the unrealistic assumptions.
2. Do the analysis with the unrealistic assumptions, but clearly point out the
impossibility of their occurring in a way that it is not possible to miss. John might
even submit an alternative analysis that he feels is correct.
3. Do the analysis with the unrealistic assumptions and make no special point about
the problems with them.

If you were John, which action would you take and why?

AE 19 Financial Management 15

This module is a property and is exclusively used by the DWCB College Department. Any duplication and reproduction, storing in any retrieval
system, distribution, posting or uploading online as well as transmitting in any form or means ( photocopying & electronic sharing ) of any part,
without prior written permission from the owner is strictly prohibited.