1.

PRAGMATIC WEIGHTS:
Pragmatism emphasizes learning through doing and making. Although financial
management is a process, it is filled with deadlines and products such as
budget documents, financial statements, and revenue estimates. Financial
managers do and make these documents. The theory is important because it
can guide doing and making. It can also be used to make sense of the results or
consequences of these actions. The theory does not represent truth rather it is
a guide to action and a prism to interpret consequences. Many academic
theories of budgeting and finance attempt to generalize about the processes
and outcomes in the field, but do not focus on understanding the day-to-day
tasks and motivations of practitioners. While academics spend lots of time
arguing about theories and methodology, practicing financial managers are
often stuck with the messy jobs of producing budgets or changing tax codes.
Classical pragmatism provides a strategy that can help financial managers
recognize and resolve problematic situations as they go about the practical
day-to-day business of implementing programs, preparing financial reports,
balancing budgets, and considering revenue options. It does this in a context
that encourages democracy, and recognizes the web of networks that enrich
and complicate their world, thus the emphasis on the community of inquiry is
more appropriate than a single theory. As a practicing financial manager who
looks at the action-oriented, adaptable, and ever-fluctuating environment
described by classical pragmatism he knows this is his world.

Pragmatism is not new to this field; it is over 130 years old. In the 1926 book,
Municipal Finance, A. E. Buck wrote, “The approach is from the pragmatic
point of view, the emphasis being placed on practical and efficient financial
administration. The method of treatment is empirical; theory is reduced to a
minimum. The criteria used are based on experience and practice” (p. v). In
1930, Mabel Walker wrote: “If a budget clerk were to carefully search
through the archives of public finance, economic theory, and municipal
government, he would find pitifully little to assist him in the all-important
question of dividing up the city’s revenues. His adoption of rule-of-thumb
devices to tide him past the crucial points is the most that could be reasonably
expected… To understand municipal budget making it is necessary to visualize
this tremendous pressure that is being exerted from all sides – the pressure of
organized interests, ambitious department heads, civic groups, official
prejudices, the political potency of a low tax rate, and even of public opinion
were not represented by any of the above. The final budget will be the result
of these forces and not the outcome of a dispassionate evaluation of the
various functions.

A pragmatic philosophy of public budgeting and financial management is

designed to serve practitioners, not theorists. But if it does so, then it should
have empirical validity. Further work needs to articulate the organizing
principles of this approach and how we can test for empirical validity. And
some coherence is still needed to organize thinking in the field that could easily
be overwhelmed by numerous theories. Nevertheless, we think this approach
has great promise for the field.

2. LEVERAGES:
Financial leverage results from using borrowed capital as a funding source
when investing to expand the firm's asset base and generate returns on risk
capital. Leverage is an investment strategy of using borrowed money—
specifically, the use of various financial instruments or borrowed capital—to
increase the potential return of an investment. Leverage can also refer to the
amount of debt a firm uses to finance assets.
DECISIONS SUPPORTED BY LEVERAGES:
The conventional view of building and deploying the technology on time, to
plan and within budget are generally considered the key measurements and
criteria for success in the implementation of projects.
 Gartner’s research tells us that, on average, 70%-80% of BI projects fail,
and of these 40% - 60% are late or never finish – a technical failure. The
rest failed because they are not adapted in a way that justifies the cost –
a business failure. To measure the success of an implementation,
companies should ensure that a key measure is when the tangible,
measurable benefits outweigh the total cost of the technology.
Therefore measurement should be more than just on time, to specification,
and budget, but rather:
 Is the cost of providing insights to the business less than before?
 Is information more accurate now that user intervention is removed?
 Is information available quicker than it was before, thereby supporting
improved decision-making?
 Are reports more relevant as they focus on the heart of the problem that
the user is having?
 Are insights available in an easier format, thereby growing user
adoption?
 Are people making different decisions as they are focusing on the right
issues?

 Understanding the User:

The process of identifying and understanding the requirements of the
user, their decision rights, and their computer literacy levels can only
really be understood by analysts spending time in the business with the
user. Performing depot and plant walkabouts, sitting in sales team
meetings, or understanding how a branch manager coordinates his day
are examples of necessary exercises that should happen for user
requirements to be truly understood.
 Understanding the Requirement:
A decision audit could be embarked on, where the decision rights and
capabilities of the user are compared to the type of information they are
provided with to execute their job. A gap analysis provides the analyst
team with greater insights into the current position of the user and
enables them to understand what they need to do to make the user
truly effective.

 Reviewing Technology Options:

Once the users’ requirements, decision rights, and literacy levels are
established, the team then has sufficient information to formulate a
requirement that needs to be executed. From that point onwards the
decision of technology should become important as the project team
now understand the users’ context and engagement approach with their
information.

 Making the Technology Decision:

Arguably, most of the technologies could get the user to the same point
of view, by leveraging the strengths of what they do differently. In
deciding which one to choose, clients need to understand what it is
about one technology that they value over another. Each technology has
its strengths and weaknesses and once you understand what you value,
you can align the correct technology to your requirements.
3. METHODS OF APPRAISAL UNDER CERTAINTY CONDITIONS:

i. Payback Period (PBP):

One of the simplest investment appraisal techniques is the payback
period. The payback technique states how long it takes for the project to
generate sufficient cash flow to cover the project’s initial cost.

For Example,
XYZ Inc. is considering buying a machine costing $100,000. There are two
options Machine A and Machine B. Machine A will generate revenue of $
50,000, $ 50,000 & $ 20,000 in year 1, year 2 & year 3 respectively while
Machine B will generate revenue of $ 30,000, $ 40,000 & $ 60,000 in
year 1, year 2 & year 3 respectively. As per the above example, the
payback period is 2 years & 2.5 years for machine A & machine B,
respectively. According to the payback period method, machine A will be
given preference.

ii. Accounting Rate of Return Method (ARR):

The accounting rate of return is an accounting technique to measure the
profit expected from an investment. It expresses the net accounting
profit arising from the investment as a percentage of that capital
 investment. It is also known as return on investment or return on
capital.
The formula of ARR is as follows:

ARR=(Average annual profit after tax / Initial investment) X 100

For Example,
XYZ Inc. is looking to invest in some machinery to replace its current
malfunctioning one. The new machine, which costs $ 420,000, would
increase annual revenue by $ 200,000 and annual expenses by $ 50,000.
The machine is estimated to have a useful
life of 12 years.
Depreciation expense per year = $ 420,000/ 12 = $ 35,000
Increase in average annual profit = $ 200,000 – ( $ 50,000 + $ 35,000) = $
115,000
Initial investment = $ 420,000
ARR = ( $ 115,000 / $ 420,000 ) * 100 = 27.38%

iii. Internal Rate of Return Method (IRR):

An internal rate of return is the discounting rate, which brings
discounted future cash flows at par with the initial investment. In other
words, it is the discounting rate at which the company will neither make
a loss nor make a profit. We can also call this rate the yield on
investment and the marginal efficiency of capital.
It is obtained by the trial & error method. We can also state that IRR is
the rate at which the NPV of the project will be zero. i.e., Present value
of cash inflow – Present value of cash outflow = zero.
The management approves an investment or a project if its IRR (internal
rate of return) is higher than the cost of capital or the required rate of
return.

iv. Net Present Value (NPV):

It is the sum of discounted future cash inflows & outflows related to the
project.
The formula of NPV ={ + + …….. } – Initial Investment
 Where,
CFi = Cash flow of the first period
CFii = Cash flow of the second period
CFiii = Cash flow of the third period
CFn = Cash-flow of nth period
n = No. of Periods
i = Discounting rate

For Example,
XYZ Inc. is starting the project at the cost of $ 100,000. The project will
generate a cash flow of $ 40,000, $ 50,000 & $ 50,000 in year 1, year 2 &
year 3 respectively. The company’s WACC is 10%. Find out NPV.

Formula of NPV = [ $40,000/( 1+0.1)1] + [ $ 50,000 / (1+0.1)2 ] +[ $

50,000/ (1+0.1)3 ] – 100,000

Net present value = $ 36,363.63 + $ 41,322.31 +$ 37,565.74 – $ 100,000

= $ 115,251.68 – $ 100,000

The net present value of the project is $ 15,251.68

Here, the net present value of the project is positive & therefore, the
project should be accepted.

4. SENSITIVITY ANALYSIS:
Sensitivity analysis is a management tool that helps in determining how
different values of an independent variable can affect a particular dependent
variable. It is a way of analyzing the change in the project's NPV or IRR for a
given change in one of the variables. The decision maker, while performing the
sensitivity analysis, computes the project's NPV or IRR for each forecast under
three assumptions - pessimistic, expected, and optimistic.
The formula for sensitivity analysis is basically a financial model in excel where
the analyst is required to identify the key variables for the output formula and
then assess the output based on different combinations of the independent
variables.
Mathematically, the dependent output formula is represented as,
Z = X2 + Y2

ADVANTAGES OF SENSITIVITY ANALYSIS:

 In-depth Analysis:
When sensitivity analysis is done, each independent & dependent
variable is studied in-depth. Their movements are studied, and how the
independent variable affects the dependent variable is also studied.
 Strengthen weak spots:
As sensitivity analysis studies each variable independently, it can identify
critical variables that may act as a weakness. For example – In this
analysis, we find out that bond prices are extremely volatile to changes
in inflation. We can take measures to reduce the impact, say by hedging.
Thus we can say that – the weak spot is identified & strengthened.
 Decision Making:
Sensitivity analysis results in a data-backed forecast. When all the
variables are considered and all the outcomes are analyzed, it becomes
easy for the management to decide on investments within the business
& decisions about investing in the markets.
 Quality Check:
Through sensitivity analysis, the management can know which variables
have a high impact on the success or failure of a project.
 Proper Allocation of Resources:
Sensitivity analysis can identify strong & weak areas & measure their
impact on the final objective. This helps the management in directing
resources to variables that most require these resources.

LIMITATIONS OF SENSITIVITY ANALYSIS:

 Based on Assumptions:
Sensitivity analysis is based on historical data & management
assumptions. If these assumptions themselves are wrong, the whole
analysis will be wrong, and the future forecast will not be accurate. For
example, suppose management assumes that raw material prices will
increase in the future and will affect the final price of the product. In
 that case, the company will purchase additional raw materials at present
prices. But if instead of rising, raw material prices fall, then the company
will be at a disadvantage in the market.
 Not Relative:
Sensitivity analysis considers each variable individually and tries to
determine the outcome. In the real world, all variables are related to
each other. For example, both inflation and market interest rates affect
bond prices. Sensitivity analysis will consider how much a change in
inflation will affect the bond price and how a change in market interest
rate will affect the bond price, but it won’t consider how a change in
inflation will affect the market interest rate or vice versa. This is an
incomplete analysis. Thus, we can say this analysis gives depth to the
forecast but doesn’t consider its breadth.

5. DIVIDEND POLICY:
 A dividend is the share of profits that are distributed to shareholders in
the company and the return that shareholders receive for their
investment in the company. The company’s management must use the
profits to satisfy its various stakeholders, but equity shareholders are
given first preference as they face the highest amount of risk in the
company.

 The dividends and dividend policy of a company are important factors

that many investors consider when deciding what stocks to invest in.
Dividends can help investors earn a high return on their investment, and
a company’s dividend payment policy is a reflection of its financial
performance.
A few examples of dividends include:
o Cash dividend:
A dividend that is paid out in cash will reduce the cash reserves of a
company.
o Bonus shares:
Bonus shares refer to shares in the company that is distributed to
shareholders at no cost. It is usually done in addition to a cash dividend,
not in place of it.

Examples of Dividend Policies:

 Regular dividend policy:
Under the regular dividend policy, the company pays out dividends to its
shareholders every year. If the company makes abnormal profits (very high
profits), the excess profits will not be distributed to the shareholders but are
withheld by the company as retained earnings. If the company makes a loss,
the shareholders will still be paid a dividend under the policy.

 Stable dividend policy:

Under the stable dividend policy, the percentage of profits paid out as
dividends are fixed. For example, if a company sets the payout rate at 6%, it is
the percentage of profits that will be paid out regardless of the number of
profits earned for the financial year.
Whether a company makes $1 million or $100,000, a fixed dividend will be
paid out. Investing in a company that follows such a policy is risky for investors
as the number of dividends fluctuates with the level of profits.

 Irregular dividend policy:

Under the irregular dividend policy, the company is under no obligation to pay
its shareholders and the board of directors can decide what to do with the
profits. If they make an abnormal profit in a certain year, they can decide to
distribute it to the shareholders or not pay out any dividends at all and instead
keep the profits for business expansion and future projects.
The irregular dividend policy is used by companies that do not enjoy a steady
cash flow or lack liquidity. Investors who invest in a company that follows the
policy face very high risks as there is a possibility of not receiving any dividends
during the financial year.

 No dividend policy:
Under the no-dividend policy, the company doesn’t distribute dividends to
shareholders. It is because any profits earned are retained and reinvested into
the business for future growth. Companies that don’t give out dividends are
constantly growing and expanding, and shareholders invest in them because
the value of the company stock appreciates. For the investor, share price
appreciation is more valuable than a dividend payout.