FINANCE MANAGEMENT- Is the decision-level-responsibility for funds generation, funds allocation, capital structuring

and profit supervision. It is responsible for the liquidity, solvency, profitability and financial control of the enterprise.
This responsibility involves:
1. Financial planning
2. Analysis of financial performance
3. Direction of financial operations
For these functions, the finance manager uses the following tools:
1. Operating statements to measure income, costs, expenses and profits
2. Operating margins to identify the components of gross sales as percentage of sales
3. Comparative operating statements to compare results for the current period against those of earlier periods and
our results against those of others in the same or other lines of business
4. Industrial standards for financial results
5. Balance sheet analysis ( comparative studies, ratios, aging, projections)
6. Operations budget to forecast sales, cost, expenses, and profits
7. Cash budget to forecast short-run-cash-flows from operations and short-run working capital requirements
8. Capital budget to forecast capital expenditures and to plan the sources of capital funds.
FINANCIAL PLANNING
The objective of financial planning is to ascertain the needs and capabilities of the enterprise through a projection of the
needs for and availability of funds over the short term (working capital cash-flow, operating budgets, and sources of
working capital) and over the long term (investment capital cash-flow, capital budgets, alternative capital expenditure
prospects, cost of capital, and conditions of the capital market). Budgets are discussed more extensively in a later
chapter.
ACQUISITION OF FUNDS
There are two basic types of funds:
1. Equity or ownership funds and
2. Borrowed funds (fixed claims by outsiders)
The choice between the two would be governed by:
1. Period of the obligating agreement
2. Priority of claim or preference on income
3. Priority of claim or preference on assets
4. Participation or voice in management
This would lead to the problem of arriving at the best debt-equity mix which would yield the objectives of the project at
less cost. The debt-equity mix (also stated as debt to equity ratio) would be influenced by the following considerations:
1. SUITABILITY. The type of fund should harmonise with the kind of assets to be financed.
2. VOLUME AND REGULARITY OF INCOME. If the flow of income is substantial and reliable, it becomes more
feasible to adopt financial leverage (financing through borrowing).
3. CONTROL. The type of fund to be used should reflect the importance given by the residual owners to the control
of company operations.
4. FLEXIBILITY. The source and the nature of the funds should be adjustable in response to changes in the need for
funds.
5. THE ECONOMY. The level and trend of business activity, money, supply, capital markets, and taxation.
6. THE INDUSTRY. The characteristics of seasonal variations, competition, regulation, and growth prospects.
7. THE ENTERPRISE. The organisation’s legal form, financial standing, industrial rank, and management policies and
outlook.
8. SOCIAL RESPONSIBILITIES. The company’s contribution to social progress and community development.
Since finance management is concerned with the use of money over time, the projection of funds requirements
distinguishes short-term, medium-term and long-term needs. There are different sources of funds for the different
lengths of time the funds are needed. Three general rules prevail in the acquisition of funds:
1. The maturity of the obligation should be well within the earning of life of the asset or project being financed.
2. Foreseeable regular capital requirements should be derived from long-term investors or stable sources which
can ordinarily be depended upon for loan renewals or extensions, while short-term requirements should be
covered through short-term borrowing from commercial banks or the money market.
3. The use of the funds should generate income which is greater than the cost of the funds
For short-term financing resort may be made to trade credit (“accounts payable” liability for the buyer), promissory
notes (one name or several names as co-makers, either secured or unsecured), assignment of receivables, and
commercial drafts (the recipient of the forthcoming payment instructs the obligated party to pay on sight or within a
specified time the amount specified and the obligated party accepts the draft by writing his name across the face of the
instrument).
For longer-term financing, the internal sources would be the present owners or stockholders being asked to increased
their equity investments, while the external sources would be investment houses who sell or underwrite shares or long-
term debt securities.
The finance management function requires a close watch of the money market and the capital market. The finance
manager should be familiar with the various papers and financing methods used, who the principal lenders and
securities buyers are the best contacts in the finance markets, the trends in the securities markets and the guidelines for
maintaining a good capital structure. Financing through borrowing requires the exercise of great care and the
observance of these guidelines:
1. Issue long-term bonds only if the estimated earnings give a factor of safety of at least 100% (ratio of earnings,
net of interests payments, to the amount of interests)
2. Keep the capital structure (equity capital plus long-term borrowings) simple.
 3. Aim at flexibility in the contract between our security buyers and our corporation.
4. Protect the company against loss or dilution of control (unless the incoming party is a clear asset in the
management in the company).
5. Keep the cost of debt service to the minimum (debt service is payment of current interest and current
amortisation or reduction of principal)
6. Reserve the best of our assets acceptable as collateral for emergency financing.
7. Limit the use of borrowed funds to the specific use for which they were borrowed.
8. Funds which are temporarily idle should be made productive through placements in the money market even for
a few days.
9. Follow closely the amortisation schedule for the loan and have payments ready before due date.
The money market is the exchange mechanism by which money and short-term instruments of solvent credits are
traded as commodity. It is the market in which money and “near money” instruments are bought and sold. Aside from
government securities which are a class by themselves, the instruments traded are issues of leading or prime financial
institutions or well established business concerns selected by a market process of credit and investment rating.
The money market is different from the capital market, which refers to the market for long term debt and equity
instruments (the components of the capital structure of a corporation). An important and well-known element of the
capital market is the stock market. The money market and the capital market compose the financial market.
FINANCIAL INTERMEDIATION
Financial institutions (FI’s) comprise the heart of the intermediation function and process. They are the dealers who
congregate in the money market in order to relate efficiently the sources of short-term funds to their eventual users. In
principle, the uses to which such short-term funds are applied should likewise be short-term, otherwise a serious
liquidity problem might arise. This intermediation task is accomplished through the purchase of commercial
papers(representing financial obligations of prime corporation whose credit worth is assessed to be above par) and their
subsequent sale to the investing public (individuals or entities with temporary excess funds or savings). Thus, what
would have been funds lying idle are mobilised by the financial intermediaries in order to activate the productive
capability of various corporations.
COMPARISON BETWEEN THE MONEY MARKET AND THE CAPITAL MARKET
The money market differs on four counts from the capital market. These differences underscore the reality of
specialised functions between them and that, in fact they are complementary.
1. Their maturity structures are not the same for they cater to really different business requirements. The money
market (with maturities from 15 days to 360 days) is basically short-term, since it provides funds for working
capital requirements. It allows for the levelling out of heavy fluctuations in cash flows resulting from day-to-day
operations. Long-term investment requirements arising from the need to replace, expand or install plant
capacity are served by the capital market.
2. From the point of view of the investor, the two markets differ in the flexibility allowed by their respective
liquidity provisions. In the money market there is ready liquidity of investment. This is consistent with the reality
that funds in the money market being temporarily idle funds, and money market placements are made with the
expectation that liquidation can be scheduled. Capital structure investments, on the other hand are
understandably, funds which can be committed for longer use. Thus there is less flexibility in the capital market
until an active secondary market has been developed to complement the primary market for bonds and shares
of stock. Our well-organized stock exchanges are active secondary markets.
3. They do not face the same risk factors. Capital market investments are exposed to a broader range of risk, not
only because of the longer holding period but also because their earnings are determined by the business
performance and financial condition of the issuer. The money market, on the other hand, stipulates a fixed
return in accordance with a promissory commitment. In cases when the original issuer fails to comply, the dealer
stands ready to take the responsibility if the instrument was sold “with recourse”.
4. As a corollary to the risk factor, the yield structures of the two markets are dissimilar. Normally, the money
market yield is the highest fixed income obtainable from comparable investment outlets(in term of safety,
maturity , and flexibility) Yield on money market investments is in the form of interest at a rate agreed upon, but
without any prospect of capital appreciation. The capital market on the other hand, carries a wide spectrum of
rates of return dependent on earning power of the enterprise and dividend policy as decided by the board of
directors. It could be very profitable in terms of yield plus capital appreciation, or it could bring a loss depending
on the prevailing business conditions. Money market interest rate is determined by prevailing money supply and
demand conditions, the maturity period, the amount involved and the features or characteristics of the
instrument. Money market dealers on a given day tend to quote rates which only narrowly differ, whereas
capital market returns can vary widely in accordance with the earning power of the corporations.
ROLE OF THE FINANCIAL MARKET
Viewed from various angle the financial market fulfils several major functions which have far reaching economic
implications.
1. Money market intermediation contributes to the greater mobilisation of investable funds and their channeling
into meaningful investment undertakings. This is so because the money market seeks and offers various
investment outlets which conform to the saver’s and the user’s respective liquidity, safety and yield
requirements. Opportunities for a more varied scope of management and financial resources are tapped by the
money market by bringing together the supply of and demand for short-term funds. These are the short-term
capital formation and capital allocation functions of financial intermediaries for meeting capital requirements.
2. Over-all financial development prospects are aided by education, discipline and negotiating skills acquired
through and contributed by the money market. The manpower needs organisational procedures, and systems
necessary to develop other sectors of the financial market can be enhanced by existing money market expertise.
And the basic savings investment attitude of the populace is correspondingly developed together with an
 investment climate. Thus, the money market’s level of operational sophistication augurs well for other modes of
financial development.
3. In the process of developing the long-term capital market, the money market (through the secondary trading it
provides) seasons the longer dated instruments. The rigidity associated with long maturities is effectively
softened by the possibilities for shortened holding though sale of the instruments to ready buyers, this transfer
being facilitated by a secondary market.
4. The need by the monetary authorities for a sensitive financial policy indicator is answered by the interest rate
movements in the money market. These rate fluctuations quickly and accurately reflect the relative balance
between the funding requirements of the business community and the general availability of money. Monetary
policy makers can, therefore make opportune fine tuning adjustments through appropriate policy measures,
either in response to or as stimulant of such interest rate movements. Stability, a key ingredient to the
commitment of resources for productivity and employment aggregates, can thus, be better attained.
ANALYSIS OF FINANCIAL PERFORMANCE
The financial performance of the enterprise is analysed for internal purposes so that management and stockholders may
know the financial outcome of operations and the ongoing financial condition of the enterprise. It is also needed for
external purposes such as submission to a supervisory agency or compliance with regulation on tax benefits. The finance
manager also analyses the financial performance and position of other enterprises we do business with, grant credit
facilities to, make money market placements with, make stock market investments in, have trust or reinsurance
agreements with, or are considering for acquisition or merger.
FINANCIAL STATEMENT ANALYSIS
Financial analysis is the careful consideration of all the many factors which affect the present and the future financial
position of the enterprise being studied, to lead to a decision on any pertinent purpose, such as credit application,
security investment, or purchase. These factors include general business conditions---“the business climate”---as
affected by economic, financial, political and social influences the outlook for the industry and for that particular
enterprise in the industry; the performance of the competing enterprises; the competence and the integrity of
management and the market conditions and price patterns.
After the broad approach comes the analysis of the financial position of the particular enterprise applying for credit
facility, as revealed by financial statements. Basically, the analysts seek to determine:
a. The solvency or ability of the applicant to pay its obligations and liabilities as they come due.
b. The basic solidity or stability, i.e continued profitability of the enterprise and
c. Management’s readiness to pay all obligations on time, i.e, credit consciousness.
FINANCIAL STATEMENTS
Financial statements, particularly if certified by an independent chartered accountant, are generally considered essential
documents;
1. To accompany and support an application for credit facilities and
2. For regular submission if credit facilities are to be maintained on a continuing basis.
While previously, only the balance sheet (or statement of financial position in modern terminology) and the income
statement (formerly known as the profit and loss statement) were referred to by the term “financial statements” it is
becoming more usual to request that the submission include a statement of sources and application of funds and a cash
flow projection (or cash budget). The increasing demand for these two reports indicate the greater importance being
placed on competent cash management, since this area is the proximate cause of repayment difficulties.
A business enterprise may be basically sound as far as assets, liabilities, equity and retained earnings are concerned; or
as far as production, marketing and administration may be judged. However, competence and integrity in cash
management would also have to be evaluated to be able to give a better judgment of the enterprise as a credit risk. It is
for this purpose that the statement of sources and application of funds and the cash flow projection are useful because
finance management is concerned with liquidity and the availability of cash on due date to pay the credit obligations on
time. We should be interested in the sources of funds and the uses to which these where placed (“where got, where
gone”), preferably over a succession of fiscal periods. This historical record of cash management should be studied side-
by-side with future funding plans and expectation, as revealed by the cash-flow projection, in order to obtain a complete
picture. The request for these two additional statements yields the added advantage of requiring the borrower.
1. To make careful financial plans, and
2. To exercise close supervision over cash management so that satisfactory cash management reports can be
rendered.
Finance analysis should not be satisfied with such replies as, “We never prepared such statements before”, when
requesting for these additional cash management reports. If the amount of the loan so warrants, the preparation of cash
management reports or statements should be a requirement.
Analysis of financial statements is often a predicament of the credit manager whose receivables portfolio is composed of
small trade debtors (such as small drug stores and general stores) who do not prepare sophisticated financial statement,
or of individuals (who hardly keep any records) buying on hire purchase plans. Nevertheless, our objectives should
include working for the time when through education and the force of usual business practice plus government
regulations, such financial statements would eventually be more widely available.
LIMITATIONS OF FINANCIAL STATEMENTS
It should be remembered that financial statements are prepared by the accountant primarily for tax purposes. Hence,
tax avoidance, considerations influence very substantially their content and presentation. Valuation of fixed assets, for
instance, would be under a method which is acceptable to the tax authorities and at the same time would yield the
lowest tax liability. Again, values are set on a going concern basis and not on a liquidation basis, yet the finance analyst
often does the acid test of pessimistically imagining the credit applicant having to liquidate. Should such eventuality take
place would the borrower’s assets then realise enough cash to pay all debts in full?
Also, clients have a way of dictating to their accountants the picture the financial statement should present (window
dressing) and of course this can mislead a not so careful analyst. Likewise, we must keep in mind the inflationary
pressures which bear upon the Philippine economy and the Philippine peso. Erosion in purchasing power or real value
makes difficult the comparison of today’s peso with that of prior years.
Measurements used in financial statement analysis may be grouped into two:
1. Those which measure the relationships among the items in a single set of statements (static analysis)
2. Those which measure the changes in these items as shown by successive statements (dynamic analysis)
The first measures financial position at one point in time or for a period; the second measure changes in financial
position. Both analyses are necessary for comprehensive interpretation, because it is important to know not only the
proportions or ratios as a particular date but also the trends or changes being undergone by the enterprise.
Financial statements are made up of data which are the result, singly or in combination of,
1. Recorded and historical facts concerning transactions of the business
2. Conventions adopted to facilitate the accounting technique
3. Postulates or assumptions, made to implement the conventional procedures
4. Personal judgments or opinions used in the application of the conventions and postulates
Recorded facts are such data as the amount of cash on hand, the amounts due from customers, the total sales for the
period or the amounts paid for operating expenses. Conventions include such method as the lower of cost or market for
merchandise inventory valuation, depreciation methods to establish book value of fixed assets, and the estimation of
uncollectible accounts. Postulates are assumptions such as that the enterprise will continue in business (going concern
basis) and the monetary postulate (that the value or purchasing power of money does not fluctuate) Personal judgments
include the choice from among first-in-first-out, last-in-first-out, average cost, or standard cost in applying the cost or
market rule (obviously the results will differ as one or the other method is applied), or the treatment of cash discounts
on purchases, or the size of the allowance for bad debts.
Financial statements are affected by the judgment and procedural choices of the accountant; and opinions and
procedures other than those employed will cause material differences in the data and net result. Statements are
comparable from year to year only if the accountant consistently follows for successive periods the same procedures
and in any change in procedures should be so stated in the report.
Factor material to the financial condition of a business which are not always reflected in the accounts;
*contingent asset
*contingent liabilities
*unfilled customers order
*technical problems of the enterprise
*market conditions
*tax problems
*fluctuation in consumer demand
*changes in key management personnel and
*labour union relations
RATIO ANALYSIS
The relation of one part of the financial statement to another is usually expressed as a ratio. Ratio analysis rest on the
principle that the proportion or relation of one item to another is of greater significance for finance management
purposes than the amount of each item expressed in pesos. Ratios are of three kinds:
1. Balance sheet ratios
2. Income statement ratios
3. Mixed ratios
A balance sheet ratio relates two balance sheet items. An income statement ratio relates two income statement items.
A mixed ratio relates a balance sheet item and an income statement item. Ratios are useful for financial analysis, but are
not necessarily conclusive.
The proper use of a ratio involves two considerations:
1. The purpose of the ratio
2. The inherent limitations of the ratio
The desirability of the account
Working capital ratio or current ratio. Divide total current assets by total current liabilities. This ratio gives a good clue to
ability to pay short-term debts promptly. The standard has generally been current assets to be not less than twice the
current liabilities, or a current ratio of not less than 2:1 But if it takes longer to liquidate inventories, this ratio should be
higher.
Acid-test ratio. Divide cash and receivables (the so-called “quick assets”) by current liabilities. This is a better measure of
ability to repay current debts promptly. Generally, a quick ratio of 1:1 is considered good. But if accounts and notes
receivables run for longer periods than the notes and account payable, the ratio should be higher than 1:1, i.e, quick
assets should be more than 100% of current liabilities.
Merchandise inventory turnover. Divide the cost of goods sold by the average merchandise inventory, to learn how often
an inventory is turned, or sold during a given period. A higher frequency is an indication of management efficiency, of
merchandise not growing stale, and of good clientele. When turnover slows down from one period to another or when
compared with turnover figures of competitors, a serious situation may have developed. Turnover figures vary greatly
from industry to industry and for different seasons.
Ratio of net profit to net sales. Divide net operating profit by net sales, for a good picture of the residual benefit
obtained from every peso of sales. When sales figures are high but net operating profit is slow for that line of business,
then the cost of purchases, of marketing, or of administration might be too high.
Ratio of net profit to equity or ownership interest. Divide net profit by equity or ownership interest, to learn how much is
being earned on the investment. It shows whether investors or owners are getting a satisfactory return and whether
management is efficient in utilising the resources made available to it.
Ratio of accounts receivables to net sales. Divide accounts receivable by net sales, to know how well the debts due the
company are being collected. If the ratio is within the usual credit period, this is an indication of accounts being collected
on time.
Ratio of fixed assets to long-term liabilities. Divide the total fixed assets by total long-term liabilities, to find out whether
long-term liabilities are adequately covered by the long-term assets.
Ratio of equity or ownership interest to liabilities. Divide equity or ownership interest to total liabilities to obtain an
indication as to who is financing the business and how the growth of the business is being financed. Merchants try to
buy goods on credit and endeavour to sell them within the credit period at a profit. Thus, financing the inventory with
creditor’s money----or the use creditor equity---is known as “trading on the equity”. The degree of risk is higher when a
business is financed to a large extent by creditors, and it is preferable to have owner’s investment at a substantial level
when compared with borrowed capital.
Hereunder is a list of various ratios useful in financial statement analysis:
A. Liquidity Ratios (indications of the ability of the enterprise to meet its maturing obligations)

Current assets
1. Current Ratio = -----------------------
Current liabilities

Cash and equivalent

2. Acid-test ratio = ---------------------------
Current liabilities

Sales
3. Cash velocity = -----------------------------
Cash and equivalent

Inventory
4. Inventory to net = ---------------------------
Working capital Current assets – current liabilities

B. Leverage Ratios (indications of the contributions of financing by owners compared with financing provided by
creditors)

Total debt
1. Debt to equity = ----------------------
Net worth
Net profit before

Fixed charges
2. Coverage of fixed charges = ----------------------
Fixed charges

Current Liabilities
3. Current liabilities to net worth = -----------------------------
Net worth

Fixed assets
4. Fixed assets to net worth = -------------------------
Net worth

C. Activity Ratios (indications of the effectiveness of the employment of resources)

Cost of sales
1. Inventory turnover = --------------------
Inventory

Sales
2. Net working capital turnover = ---------------------------
Net working capital

Sales
3. Fixed-assets turnover = -----------------------
Fixed assets
 Receivables
4. Average collection period = -------------------------------
Averages sales per day

Sales
5. Equity capital turnover = -------------------------
Net worth

Sales
6. Total capital turnover = ------------------------
Total assets

D. Profitability Ratios (indications of degree of success in achieving desired profit levels)

Gross operating profit

1. Gross operating margin = ----------------------------------
Sales

Net operating profit

2. Net operating margin = -------------------------------
Sales

Net profit after taxes

3. Sales margin = ------------------------------
Sales

Gross income less taxes

4. Productivity of assets = -------------------------------
Total assets

Net profit after taxes

5. Return on capital = ----------------------------
Net worth

Net operating profit

6. Net profit on working capital = ---------------------------
Net working capital

E. Securities Market Ratios (indications of marketability of shares of stock)

Net income
1. Earnings per share = -----------------------------------------
Number of shares outstanding

Market price per share

2. Price-earnings Ratio = -------------------------------
Net earnings per share

Net earnings per share

3. Capitalisation rate = ---------------------------------
Market price per share

Annual cash dividend per share

4. Cash Yield = ------------------------------------------
Market price per share

COMPARATIVE OR TREND ANALYSIS

 Comparison should also be with the financial statements of similar enterprises in order to learn the competitive
position of the enterprise and the conditions and prospects of the industry.
When a comparative statement is constructed with data from more than two accounting periods, there are two ways of
showing increases and decreases:
1. The data of each accounting period after the first may be compared with the data of the immediately preceding
accounting period;
2. The data of each accounting period after the first may be compared with the data of the first accounting period
(known as the base year)
The second method is more useful as it avoids the confusion of different bases in the calculation of percentages. Trend
percentages or index numbers are useful in the comparison of data from several of a company’s financial statements
since they indicate the changes which occurred over the years. Calculation is done by:
1. Selecting a base year which should preferably be representative for the various items
 2. Assigning a weight of 100% to the amount of each item on the statements of the base year
3. Expressing each item from the statements of the years after the base year as a percentage of its base year
amount. To find these percentages, the amounts of an item in each year after the base year are dividend by the
amount of the item in the base year.
An upward sales trend where cost of goods sold runs upward at a more rapid rate would indicate a contracting rate of
gross profit.
A downward trend of sales with an upward trend of merchandise inventory, account receivable, and loss on bad debts
would indicate unfavourable development.
A downward trend of sales accompanied by an upward trend of cost of goods sold and selling expenses would also
appear unfavourable.
An upward trend of sales with a higher upward trend of accounts receivable, merchandise inventory, bad debts, and
selling expense would indicate that the growth in sales is being achieved at too great a cost.
An upward trend of sales with a downward or a slower uptrend of accounts receivable, merchandise inventory, and
selling expense would indicate an increase in operating efficiency.
COMMON-SIZE STATEMENTS
 To know the proportional changes in balance sheet or income statement items, common-size statement should
be prepared. On a common-size balance sheet, the total of the assets is assigned a value of 100% , the total of
the liabilities and proprietorship is also assigned a value of 100% and each individual asset, liability, and
proprietorship item is presented as a fraction or percentage of the 100% totals.
 Comparative financial statements may be analysed horizontally and vertically. The horizontal analysis consists
of a study of the behaviour of each of the items in the statement. The vertical analysis is a study of quantitative
relationships existing among the items in a single statement.
INVESTMENT
 Investment is the commitment of the present resources in a productive venture with the object of obtaining for
the investor an improvement in his net worth.
There are seven test or criteria of equity investment which should be evaluated carefully when making any
commitment:
1. The safety of investment test.
2. The capital growth test.
3. The interim income test.
4. The liquidity test.
5. The collateral value test.
6. The economic and social desirability test.
7. The inflation hedge test.
SECURITIES INVESTMENT
 Securities is the term applied to stocks and bonds. A stockholder is a part-owner of the enterprise, while a
bondholder is the creditor of the enterprise.
TYPES OF STOCK MARKET INVESTORS
1. Long-term investors. He buys after careful study and intends to stay on the issue for as long as advisable.
2. Short-term investors. He watches the stock market quotations daily and buys and sells more readily---his
objective being mainly to trade for profit or for capital appreciation.
3. Speculator. He is willing to take a bigger risk for the prospect of a better or earlier profit upon re-sale.
4. Gambler. He is the individual who “plays” the stock market as he would the horse-races.
PORTFOLIO DEVELOPMENT
It is often advisable to start with a long-term investment objective in developing our securities investment portfolio.
 By investing first in “blue chips” (securities with a good dividend record, prospects of continued profitability and
growth and progressive management) His first objective is to form a sound investment base made up of “blue
chip” securities, a base which should largely be “ for keeps “ and thus insulated from the impulse to trade the
shares because of day-to-day fluctuations in market price.
 After such a basic, “ blue chip “ portfolio, he may consider developing an active “ trading “ portfolio for
opportunities to trade advantageously on short or medium-term outlook.
 Only after this point should an investor, if he has expendable funds, consider higher risk paper. He may placed
limited amounts in ventures which may be termed “ speculative “if he already has both long-term and short-
term securities and has become knowledgeable about the risks and the opportunities.
THE STOCK EXCHANGE
 The stock exchange is a continuous market where transactions in publicly-issued and publicly-held securities are
quickly executed, in full view of the public, at openly posted bid and asked price quotations.
 It is the mainly secondary market because the securities offered are already in the hands of the investing public.
THE CHOICE OF STOCKBROKER
Commissions- is the main source of income of the stockbroker
Stockbroking- is a complex service and requires full time professional competence and attention.
Brokers should be:
 Reliable
 Competent
 Experienced
 Reputable
Guidelines for stock market investment
1. After having carefully chosen your stockbroker, ask for and listen to his advice, but make your own decisions
unless you prefer to leave the decisions to the discretion of your broker.
 2. Be well-informed about the issuing corporations, the stock market in general and the country’s economic
situation.
3. Take your profits and cut your losses.
4. Aim for a good average buying price and a good average selling price.
5. Do not panic.
6. Aim for a balanced portfolio.
7. Do not marry a stock.
8. Limit your exposure to risk.
9. Do not punish yourself with worries and regrets.
10. Learn to sell in a downward market and later buy back at a lower price.
MONEY MARKET
 The money market is the inter-action of the demand for and supply of short-term funds through the purchase
and sale on an impersonal basis of evidences of short-term in debtedness. The basic short-term money market
forms are:
1. Treasury bills
2. Special Treasury Bills
3. Dealer’s Repurchase Agreements
4. Commercial Paper’s
5. Bank Acceptances
6. Treasury Notes or Central Bank Certificates of Indebtedness (CBCI’s)
7. Dealer Promissory Notes
MONEY MARKET PARTICIPANTS
Four participants make up the money market:
1. The borrowers of the primary issuers of debt instruments specifically the government, prime corporations and
institutions
2. The investors (either a corporation, a financial institution or an individual) who subscribe to or purchase the
issue
3. The money market dealer or intermediary who packages the investments requirement of the borrower to meet
the needs and conditions of the investors
4. The regulatory bodies of the government which oversee the transactions in the money market
EVALUATION OF LONG-TERM INVESTMENT OPTIONS
For such evaluation, we may employ three methods:
1. Payback Period
2. Present Value
3. Discount cash flow rate of return
BUSINESS EXPANSION AND VALUATION
 An acquisition is the purchase by a corporation of enough shares of stock of another corporation so as to gain
controlling interest.
 A merger is the change in the ownership status of a corporation when its total assets, total capital structure and
legal identity is absorbed by another corporation.
 A consolidation or amalgamation is the combining of assets and capital structures by two or more corporations
so as to result in the formation of a new company.
The basic methods of valuation are:
1. Book value basis- The book value of the business is readily obtainable from the book of accounts and financial
statements, but seldom is the book value basis acceptable to sellers.
2. Capitalisation of earning basis – The real value of an asset is the stream of income it will produce over its useful
life, discounted at an acceptable rate of return. The simplest formula would be:
𝐸
V= 𝑅
Where V is the value of the asset or business, E is the anticipated average annual earning or income, and R is the
acceptable rate of return for the industry. The validity of this formula would depend on the correctness of E and
agreement as to what figure R should be.
If it is desired to relate capitalised earnings to the peso price which the surviving corporation can bid for the purchase of
the withdrawing corporation, the formula would be:
X : Es = Vw : Vs
Where X is the purchase price to be place on the withdrawing corporation, Es is the equity or net worth of the surviving
corporation, Vw is the value of the capitalised earnings of the withdrawing corporation and Vs is the value of the
capitalised earning of the surviving corporation.
3. Market value basis – if the shares of the corporations being merged are actively traded in a stock of exchange,
the prices at which they are brought and sold may be taken as the valuations placed by knowledgeable
investors.
FINANCIAL DIFFICULTIES
 The finance manager is first in becoming aware of such difficulties and the better finance managers can read
beforehand the indicators of financial trouble developing within the enterprise.
 Prompt and competent action may bring resolution of the financial problem otherwise the worsening of the
financial difficulty will lead to failure.
 Early warning of financial difficulty may come in the form of inability to pay bills or obligations on time, more
receivables becoming past due, merchandise inventory moving very slowly, or continued failure to earn a profit.
BANKRUPTCY is a situation declared through a court proceeding, either initiated voluntarily by the debtor or instituted
by the unsatisfied creditors. The bankruptcy law serves two purposes:
 1. It is a means for proper distribution of the proceeds from the sale of assets among the creditors so that all
receive a fair share.
2. It relieves unfortunate but honest debtors from further obligation upon issuance by the court of a discharge in
bankruptcy.
BUSINESS FAILURES
The causes of business failure may range from inadequacy of resources, to poor planning, fraud and dishonesty, and
natural disasters such as earthquakes and floods. Other causes can be the insufficiency of the feasibility study,
extravagance in operation, cost over-runs, inadequate records, staff discontent, excessive competition, economic
recession, the pressure of inflation, technological developments, radical changes in legislation or taxes or tariff charges,
shifts in consumer preferences or habits, overexpansion, or incompetent management.
REORGANISATION
If signs of weakness or inadequacy persist in an enterprise, management should consider the need for a reorganisation
in staff, in objectives, in operations, or in the financial structure. The reorganisation may be along the following lines:
1. Reduction of fixed charges.
2. Improvement in working capital position.
3. Assignment of stockholder’s voting power.
4. Providing a new management or correcting management deficiencies.