What I know

Instruction: I. Fill in the blanks and identify the following terms.

1. define as the management of money and includes

activities such as investing, borrowing, lending, budgeting, saving, and forecasting.
2. are responsible for the financial health of an
organization. They produce financial reports, direct investment activities, and
develop strategies and plans for the long-term financial goals of their organization.
3. are those institutions that operate in the financial market,
providing different services for a wide range of stakeholder. Usually with financial
institutions you are referring only to banks, but actually you can categorize them in:
Investment banks and Insurance companies.
4. defines all financial decisions and activities of an
individual or household, including budgeting, insurance, mortgage planning,
savings, and retirement planning.
5. is the act of estimating revenue (in the form of your
allowance) and expenses over a period of time.

II. TRUE or FALSE

Instruction: Before each statement, write TRUE if the statement is correct or
FALSE if the statement is incorrect.

1. To achieve the goal of profit maximization for each alternative being considered,
the financial manager would select the one that is expected to result in the highest
monetary return.
2. Dividend payments change directly with changes in earnings per share.
3. The wealth of corporate owners is measured by the share price of the stock.
4. Financial markets are intermediaries that channel the savings of individuals,
businesses, and government into loans or investments.
5. The money market involves trading of securities with maturities of one year or
less while the capital market involves the buying and selling of securities with
maturities of more than one year.
III. MULTIPLE CHOICE

Instruction: Choose the letter corresponding to the correct answer for each of the
questions provided below.

1. The is created by a financial relationship between suppliers and users

of short-term funds.
A. financial market
B. money market
C. stock market
D. capital market

2. Firms that require funds from external sources can obtain them from .
A. financial markets.
B. private placement.
C. financial institutions.
D. All of the above.

3. The major securities traded in the capital markets are .

A. stocks and bonds.
B. bonds and commercial paper.
C. commercial paper and Treasury bills.
D. Treasury bills and certificates of deposit.

4. The primary goal of the financial manager is .

A. minimizing risk.
B. maximizing profit.
C. maximizing wealth.
D. minimizing return.

5. A financial manager must choose between four alternative Assets: 1, 2, 3, and

4. Each asset costs $35,000 and is expected to provide earnings over a three-year
period as described below. Based on the profit maximization goal, the financial
manager would choose .
A. Asset 1.
B. Asset 2.
C. Asset 3.
D. Asset 4
 MODULE 3THE BUSINESS FINANCE PERSPECTIVE

FINANCE IN EVERYDAY LIFE

As a high school student, you ask for your ―baon‖ by asking money from
someone, like from your mother, father, sister, brother or guardian. Budgeting
your own baon indicates that you are practicing on how to manage your finances.

How much allowance they are given to you and how often do you receive it
(daily, weekly, etc.)

What activities have you done in a day from getting to school, to attending flag
ceremony, classroom discussions, lunch breaks, end of classes, occasional
meriendas or going out with friends and playing computer games, going back
home and going back out to a nearby store to buy autoload because you
realized that you can‘t end the day without texting their crush?

Do you have savings out of the allowance you get from your parents?

Now, identify your expenses you incurred (i.e. jeepney/tricycle fare, lunch,
merienda, computer games) and recognize the amount or value you save
and possibly invest it at a young age.

The most of the activities you do involving decisions on where to use

your allowance is a finance decision.

What’s In
(Activity No. 1) Let us try this activity.

Be able to define or give the meaning of the term finance in your

own words. You may enumerate as many definition as you can.

_
 What‘s New

LESSON 1: DEFINITION OF FINANCE

Finance is defined as the management of money and includes activities such as

investing, borrowing, lending, budgeting, saving, and forecasting. There are three
main types of finance: (1) personal, (2) corporate, and (3) public/government.

From that expenses you wrote down and listing all these down on a piece of paper
with the respective peso amounts. Try to get as many answers as possible. Your
answer will serve as your average daily allowance.

Go back to your list of expenses and give for the total peso amount of the listed
items. If the peso amount exceeds the daily allowance, your items should be
dropped off from the list. Cross out the items dropped but do not erase completely.
Continue this until total items remaining in the list can be covered by the daily
allowance.

The activity you did is called budgeting. - Budgeting is the act of estimating
revenue (in the form of your allowance) and expenses over a period of time (in this
case, on a daily basis). Budgeting will be further discussed in the next lesson.

Go back to the activity and focus your attention on the surplus resulting from your
budgeting.
1) Is your answer resulted in savings or excess cash? What will you do with the
excess money? Maybe your answer will be:

• Return to parents
• Save. How and where? Coin savers, Hidden under their beds, Deposit in banks,
Invest in stocks (rare answer)

Excess money presents an opportunity for investments.

Investments come in many forms that will generate income or appreciate in the
future.

- Between hiding your cash under your bed and depositing it in the bank, it would
be better to keep your money in bank deposits because these earn interest.
Go back to the activity that you have written in the paper. What other problems
you may face in making financial decisions. Let us assume that all the expenses
listed on your paper (including those that were previously crossed out) are
incurred during the day.

Let us compute how much more cash they would need to support all those
expenses.

Have you encountered the same situation? If not, have you ever in a situation
where you are short of cash, what would you do?

Where will you get extra cash?

What other sources of cash do you know? Your possible answers will be:
 Ask from parents • Pawnshops
• Borrow from a friend • 5/6
• Fund raising activities • Banks
All your possible answers are called sources of funds. When faced with
financial difficulties (in this case, the lack of funds to meet the current expenses)
we look for people or institutions that will give us the money we need.
 What Is It

As you encounter it, the easiest way to define finance is by providing examples of
the activities it includes. There are many different career paths and jobs that
perform a wide range of finance activities. Below is a list of the most common
examples:

• Investing personal money in stocks, bonds, or guaranteed investment

certificates (GICs)

• Borrowing money from institutional investors by issuing bonds on behalf of

a public company

• Lending money to people by providing them a mortgage to buy a house

• Using Excel spreadsheets to build a budget and financial model

• Saving personal money in a high-interest savings account

• Developing a forecast for government spending and revenue collection

• Prepare financial statements, business activity reports, and forecasts

• Monitor financial details to ensure that legal requirements are met

• Supervise employees who do financial reporting and budgeting

• Review company financial reports and seek ways to reduce costs

• Analyze market trends to find opportunities for expansion or for acquiring

other companies

• Help management make financial decisions

In addition, finance is a term for matters regarding the management, creation, and
study of money and investments. There are many other specific categories, such
as behavioral finance, which seeks to identify the cognitive (e.g., emotional, social,
and psychological) reasons behind financial decisions.

What’s More
LESSON 2: ACTIVITIES OF THE FINANCIAL MANAGER

What is a Financial Manager?

Financial managers are responsible for the financial health of an organization.

They produce financial reports, direct investment activities, and develop strategies
and plans for the long-term financial goals of their organization. Financial
managers work in many places, including banks and insurance companies.

Financial managers increasingly assist executives in making decisions that affect

the organization, a task for which they need analytical ability and excellent
communication skills.

Financial managers also do tasks that are specific to their organization or industry.
For example, government financial managers must be experts on government
appropriations and budgeting processes, and healthcare financial managers must
know about issues in healthcare finance.
 Moreover, financial managers must be aware of special tax laws and
regulations that affect their industry.

LESSON 3: FINANCIAL INSTITUTIONS AND MARKETS

Once you graduate from school, you will no longer receive your daily allowance.
Either you would be employed by a company, manage your family business, or
start up your own business.

Who among you wants to own their own business? What type of business
organization you want to operate?

Let us recall the forms of business organizations:

Sole 
Proprietorship - A business owned by one person and operated for his
or her own profit.
 Partnership - A business owned by two or more people and operated for
profit.
 Corporation – An entity created by law owned by shareholders.

If you want to become a shareholder of a corporation, by buying stocks you can do

so. At this point, maybe you are aware of big listed companies like PLDT, Globe,
JFC, BPI, Banco De Oro, San Miguel Corporation, among others.

Corporations may either be privately owned or publicly owned. Privately owned

corporations are often owned by family members whose stocks may not be offered
to outsiders unless consent by the family members is secured.

While there are many stockholders, there is generally a group of investors or a

family which controls each listed company. For example, in the case of BPI, the
biggest stockholder is Ayala Corporation and in the case of Banco De Oro, it is SM
Investment Corporation. Prices of stocks of listed corporations are driven by
several factors such as the earnings of the companies, the prospects of the
industry where these companies operate, the general market sentiment, and the
economic prospects of the country, among others.
Knowing the Shareholder

Let us assume that you are the biggest shareholder in a corporation. The
objectives you want to achieve as owners of the corporation is: to be profitable and
have a lot of cash.

If you think a profitable company is a successful company, can success be

attributed to profitability only? Recall that the determination of profit is based on
the accrual method. Is it possible that a company can have profits but still does not
have enough cash to pay its obligations (i.e. suppliers, lenders)? What will happen
if the company cannot pay its obligations?

What do you think of a company who has very large amount of cash? They
may say that this is good because the company will always have enough cash to
pay its obligations. But even though having a lot of cash has its advantages, it also
signals unhealthy company practices. It may tell them that management has not
been putting the company‘s resources into good use. Also, keeping too much cash
in the books is like hiding your extra allowance under their bed. They will be
missing out on investment opportunities.

Remember, that the overall objective of a shareholder should be wealth

maximization. What defines a shareholder‘s wealth?

Measurement of the shareholder’s wealth:

•Instruction: read carefully and analyse this. How do we measure shareholders

wealth?

Let us have an example.

 Assume that you bought 10 shares of Globe Telecom at PHP2,510 each on

September 9, 2010. This brings his investments to PHP25,100. What
happens to the value of his investment if the price goes up to PHP2,600 per
share or it goes down to PHP2,300 per share?

Therefore, the shareholders‘ wealth is measured based on the current

market price of the corporation‘s stocks. The market price changes across
different periods. Hence, the value of your investment changes in different points
on time based on the market value at that time.

Now, at this point, let us start discussing the factors which can affect prices.
Factors that Influence Market Price

Let us group the factors into two: Factors that the Management can control and
external factors that cannot be controlled by management.

Controllable by Management Uncontrollable External Factors

• profitability • macroeconomic conditions

• having a good liquidity and reasonable
leverage position
• dividends
• competent management which affects
the company‘s operating efficiency
• coming up with corporate plans that
improve the business prospects of the
company
• political stability
• prospects of the industry where the
company operates
• general market sentiment
• flow of foreign funds invested in the
Philippine stock market

Each factor influences market price.

 Profitability

Profit is a measure of the financial performance of a company for a period

of time. Although it is a major driver for increasing the value of stock, an
investor should not rely on profits alone. As discussed earlier, it is
possible that the company has profits but its cash flow is negative.
An examples is that: suppose the following Income Statements and Cash
Flow Statements of companies A, B and C were presented to you. Which
do you think is a more attractive company?

COMPANY A
Income Statement Cash Flows
Sales P 100,000 Collection from Customers P0
Less: Costs 50,000 Payment of Expenses 50,000
Profits P 50,000 Net Cash Flow (P 50,000)

COMPANY B
Income Statement Cash Flows
Sales P 100,000 Collection from Customers P 100,000
Less: Costs 150,000 Payment of Expenses 50,000
Profits (P 50,000) Net Cash Flow P 50,000

COMPANY C
Income Statement Cash Flows
Sales P 100,000 Collection from Customers P 100,000
Less: Costs 70,000 Payment of Expenses 70,000
Profits P 30,000 Net Cash Flow P 30,000
1. Company A is profitable but generated negative cash flows which resulted
from the uncollected accounts receivable of PHP100,000.
Without adequate cash inflows to meet its obligations, the company will face
liquidity problems, regardless of its level of profits.

• Company B on the other hand has a positive cash flow but is unprofitable. This is
a result of the company‘s delay in payment of its costs.

2. Accordingly, the Company will soon have to pay the remaining PHP100,000
liability and its cash will no longer be sufficient. Again, without adequate
cash inflows to meet its obligations, the company will face liquidity
problems.
 3. Company C is profitable and has a positive cash flow. Based on the
information provided, Company C seems to be the best.

 Good liquidity and reasonable leverage position.

Liquidity and leverage refers to the company‘s management of the type and
amount of assets and liabilities that it will hold in the course of its operations.

 Dividends.
Holders of shares receive dividends from a corporation as returns on their
investments in form of cash or other properties. Companies which have better
dividend policies are generally more attractive than companies who do not pay out
dividends. Take note that there may be times that companies do not pay out
dividends because of future expansions. Same with the other factors affecting
share price, dividend policies should go hand in hand with other factors in
determining market price.

 Competent management.
Competent managers may have any of the following attributes: 1) visionary 2)
decisive 3) people-oriented, 4) inspiring, 5) innovative, 6) respected and 7)
experienced or seasoned manager.

 Corporate plans that improve the business prospects.

An example is: Company A which is in the business of selling Halo-halo in the
Quiapo area (or any other area) for 5 years. Company A is consistently earning
profits and has a positive cash flow. When asked how Company A sees itself after
5 more years, Company A answered that it would continue to sell Halo-halo in
Quiapo (or any other area).

On the other hand, Company B sells Buko Juice in Antipolo area (or any
other area different from Company A‘s area) for 5 years. Company B is
consistently earning profits and has a positive cash flow. When asked how
Company B sees itself after 5 more years, Company B answered that it has
generated enough cash to expand its business to Cubao area (or any other area)
to take advantage of the growing demand of Buko Juice in Cubao.
Between Company A and Company B, which would be a better investment?
The answer is Company B. Since it has more concrete future prospects allowing
investors to hope for better revenues and net income.

 External Factors
These factors influence the general reaction of investors in making an
investment decision. Its effect is not only to a specific company but on all
companies or a group of companies under similar circumstances. Such factors
are a result of the environment a company operates in rather than the decisions of
the company‘s management.

Role of Financial Management

What do you think, given the factors that influence market price, how will
the company ensure that such objectives will be achieved? This is achieved
through financial management. Financial management deals with decisions that
are supposed to maximize the value of shareholders‘ wealth. (Cayanan). These
decisions will ultimately affect the markets perception of the company and
influence the share price.
 What I Have Learned

Managers of a corporation are responsible for making the decisions for the
company that would lead towards shareholders‘ wealth maximization. Competent
managers may have any of the following attributes: 1) visionary 2) decisive 3)
people-oriented, 4) inspiring, 5) innovative, 6) respected and 7) experienced or
seasoned manager.

The shareholders‘ wealth is measured based on the current market price of

the corporation‘s stocks. Profit is a measure of the financial performance of a
company for a period of time.

Finance is concerned with decisions about:

- How much of their earnings they spend
- How much they save or how much they need
- How they invest their savings
- How they raise additional funds they need
The goal of financial management is to maximize the value of shares of stocks.

What I Need to Reflect

Knowing the importance of managing the money, you will be able to save more
for the future. A 150-word each essay is much appreciated.

1. Did you find our topic enjoyable and interesting? Write something about. Use the
space below or do it in your notebooks.

2. Why is the study of Finance important to you?

 Assessment
Instruction: I. Fill in the blanks and identify the following terms.

1. is the money coming in and going out of your

business and how much of the money sitting in your bank account is yours to
spend. A healthy cash flow is having enough money to pay what you owe when it‘s
due.

2. is an estimate of your income and spending over a

period. It helps you think ahead and plan your spending to get to where you want
to go.

3. is an accounting report that shows your income

and expenses and whether you made a profit or loss — over the financial year. It
may also be known as the income statement.

4. is an accounting report that shows what you own

and what you owe at the time of the report. It‘s known as the ‗snapshot‘ of your
business‘s financial position.

5. is the category of business skills that involves

managing your company's money. The types of finance include investing,
borrowing, lending, budgeting, saving and forecasting.