FIN 7
WHAT IS CAPITAL MARKET?
The core responsibility of capital markets is to connect
people and organizations that want capital with people
and organizations that have capital.
A very important area of the financial services industry
is the capital markets.
-The capital markets are fundamental to the economy
of the country.
- It promotes economic growth by providing
corporations and governments access to capital which
enables these organizations to invest in businesses,
create jobs, and build infrastructure.
-Capital markets are venues where savings and
investments are channeled between the suppliers who
have capital and those who are in need of capital.
-The entities that have capital include retail and
institutional investors while those who seek capital are
businesses, governments, and people.
-Capital markets seek to improve transactional
efficiencies. These markets bring those who hold
capital and those seeking capital together and provide a
place where entities can exchange securities.
For companies, there are many reasons why
they would want to raise capital. It is typically to
finance:
 Startup businesses – investing in new and
innovative ideas
 Ongoing operations – one reason a company
may have to do this is because of an
unexpected decline in revenue
 Expansions – at home or abroad, with existing
or new products/services, companies often
need to borrow in order to grow
 Strategic acquisitions – sometimes the best
strategy is to buy another company such as a
competitor
The reason why a person or organization would
want to provide capital is more straightforward. As
you might have guessed, those who provide capital to
borrowers expect to make a profit from their financing
efforts.
INTRODUCTION TO FINANCIAL MARKETS
Financial markets are places where people and
companies come to buy and sell assets like shares,
bonds (debt), commodities and other products.
 any marketplace where the trading of securities
occurs, including the stock market, bond market,
forex market, and derivatives market, among
others.
 Financial markets are vital to the smooth operation
of capitalist economies.
Financial markets play a vital role in facilitating the
smooth operation of capitalist economies by allocating
resources and creating liquidity for businesses and
entrepreneurs.
The markets make it easy for buyers and sellers to
trade their financial holdings.
Financial markets create securities products that
provide a return for those who have excess funds
(Investors/lenders) and make these funds available to
those who need additional money (borrowers).
Types of Financial Markets
 Stock Markets
These are venues where companies list their shares
and they are bought and sold by traders and
investors.
Stock markets, or equities markets, are used by
companies to raise capital via an initial public
offering (IPO), with shares subsequently traded
among various buyers and sellers in what is known
as a secondary market.
 Over-the-Counter Markets
An over-the-counter (OTC) market is a
decentralized market—meaning it does not have
physical locations, and trading is conducted
electronically—in which market participants trade
securities directly between two parties without a
broker.
While OTC markets may handle trading in certain
stocks (e.g., smaller or riskier companies that do
not meet the listing criteria of exchanges), most
stock trading is done via exchanges.
Certain derivatives markets, however, are
exclusively OTC, and so make up an important
segment of the financial markets.
Broadly speaking, OTC markets and the
transactions that occur on them are far less
regulated, less liquid, and harder.
 Bond Markets
A bond is a security in which an investor loans
money for a defined period at a pre-established
interest rate.
You may think of a bond as an agreement between
the lender and borrower that contains the details of
the loan and its payments.
 Bonds are issued by corporations as well as by
municipalities, states, and sovereign governments
to finance projects and operations.
The bond market sells securities such as notes and
bills issued by the United States Treasury, for
example.
The bond market also is called the debt, credit, or
fixed-income market.
 Money Markets
Typically the money markets trade in products
with highly liquid short-term maturities (of less
than one year) and are characterized by a high
degree of safety and a relatively low return in
interest.
At the wholesale level, the money markets involve
large-volume trades between institutions and
traders.
At the retail level, they include money market
mutual funds bought by individual investors and
money market accounts opened by bank
customers. Individuals may also invest in the
money markets by buying short-term certificates
of deposit (CDs), municipal notes, or U.S.
Treasury bills, among other examples.
 Derivatives Markets
A derivative is a contract between two or more
parties whose value is based on an agreed-upon
underlying financial asset (like a security) or set of
assets (like an index).
Derivatives are secondary securities whose value
is solely derived from the value of the primary
security that they are linked to. In and of itself a
derivative is worthless.
Rather than trading stocks directly, a derivatives
market trades in futures and options contracts,
and other advanced financial products, that derive
their value from underlying instruments like
bonds, commodities, currencies, interest rates,
market indexes, and stocks.
 Forex Market
The forex (foreign exchange) market is the market
in which participants can buy, sell, hedge, and
speculate on the exchange rates between currency
pairs.
The forex market is the most liquid market in the
world, as cash is the most liquid of assets. The
currency market handles more than $5 trillion in
daily transactions, which is more than the futures
and equity markets combined.
As with the OTC markets, the forex market is also
decentralized and consists of a global network of
computers and brokers from around the world.
The forex market is made up of banks,
commercial companies, central banks, investment
management firms, hedge funds, and retail forex
brokers and investors.
 Commodities Markets
Commodities markets are venues where producers
and consumers meet to exchange physical
commodities such as agricultural products (e.g.,
corn, livestock, soybeans), energy products (oil,
gas, carbon credits), precious metals (gold, silver,
platinum), or "soft" commodities (such as cotton,
coffee, and sugar).
These are known as spot commodity markets,
where physical goods are exchanged for money.
The bulk of trading in these commodities,
however, takes place instead on derivatives
markets that utilize spot commodities as the
underlying assets.
 Cryptocurrency Markets
The past several years have seen the introduction
and rise of cryptocurrencies such as Bitcoin and
Ethereum, decentralized digital assets that are
based on blockchain technology.
Today, hundreds of cryptocurrency tokens are
available and trade globally across a patchwork of
independent online crypto exchanges. These
exchanges host digital wallets for traders to swap
one cryptocurrency for another, or for fiat monies
such as dollars or euros.
Because the majority of crypto exchanges are
centralized platforms, users are susceptible to
hacks or fraud.
Decentralized exchanges are also available that
operate without any central authority. These
exchanges allow direct peer-to-peer (P2P) trading
of digital currencies without the need for an actual
exchange authority to facilitate the transactions.
Futures and options trading are also available on
major cryptocurrencies
What Are the Main Functions of Financial
Markets? Financial markets exist for several
reasons, but the most fundamental function is to
allow for the efficient allocation of capital and
assets in a financial economy.
By allowing a free market for the flow of capital,
financial obligations, and money the financial
markets make the global economy run more
smoothly while also allowing investors to
participate in capital gains over time.
Why Are Financial Markets Important?
Without financial markets, capital could not be
allocated efficiently, and economic activity such as
commerce & trade, investment, and growth
opportunities would be greatly diminished.
Who Are the Main Participants in Financial
Markets?
Firms use stock and bond markets to raise capital
from investors;
speculators look to various asset classes to make
directional bets on future prices;
hedgers use derivatives markets to mitigate
various risks; and arbitrageurs seek to take
advantage of mispricings or anomalies observed
across various markets.
Brokers often act as mediators that bring buyers
and sellers together, earning a commission or fee
for their services.
AN INTRODUCTION TO THE FINANCIAL
MARKETS
Whatever you call them, financial markets are
where traders buy and sell assets. These include
stocks, bonds, derivatives, foreign exchange, and
commodities
. The markets are where businesses go to raise
cash to grow. It’s where companies reduce risks
and investors make money.
The Stock Market
This market is a series of exchanges where
successful corporations go to raise large amounts
of cash to expand. Stocks are shares of ownership
of a public corporation that are sold to investors
through broker-dealers.
The investors profit when companies increase their
earnings. This keeps the U.S. economy growing.
It's easy to buy stocks, but it takes a lot of
knowledge to buy stocks in the right company.
The Bond Market
When organizations need to obtain very large
loans, they go to the bond market. When stock
prices go up, bond prices go down.
There are many different types of bonds, including
Treasury Bonds, corporate bonds, and municipal
bonds. Bonds also provide some of the liquidity
that keeps the U.S. economy functioning smoothly.
The Commodities Market
A commodity market is where companies offset
their futures risks when buying or selling natural
resources. Since the prices of things like oil, corn,
and gold are so volatile, companies can lock in a
known price today.
Since these exchanges are public, many investors
also trade in commodities for profit only. For
example, most investors have no intention of
taking shipment of large quantities of pork bellies.
Oil is the most important commodity in the U.S.
economy. It is used for transportation, industrial
products, plastics, heating, and electricity
generation. When oil prices rise, you'll see the
effect in gas prices about a week later. If oil and
gas prices stay high, you'll see the impact on food
prices in about six weeks.4 The commodities
futures market determines the price of oil.
Derivatives
Derivatives are complicated financial products that
base their value on underlying assets.5
Sophisticated investors and hedge funds use them
to magnify their potential gains. In 2007, hedge
funds increased in popularity due to their supposed
higher returns for high-end investors. Since hedge
funds invest heavily in futures, some argued they
decreased the volatility of the stock market and,
therefore, the U.S. economy. The hedge fund
investments in subprime mortgages and other
derivatives caused the 2008 global financial crisis.
Forex Trading
Forex trading is a decentralized global market in
which currencies are bought and sold. About $6.6
trillion were traded per day in April 2019, and
88% involved the U.S. dollar. Almost one-fourth
of the trades are done by banks for their customers
to reduce the volatility of doing business overseas.
Hedge funds are responsible for another 11%, and
some of it is speculative.
This market affects exchange rates and, thus, the
value of the dollar and other currencies. Exchange
rates work on the basis of demand and supply of a
nation’s currency, as well as of that nation’s
economic and financial stability.
Functions of Financial Markets
Financial markets create an open and regulated
system for companies to acquire large amounts of
capital.7 This is done through the stock and bond
markets. Markets also allow these businesses to
offset risk. They do this with commodities, foreign
exchange futures contracts, and other derivatives.
Since the markets are public, they provide an open
and transparent way to set prices on everything
traded. They reflect all available knowledge about
everything traded. This reduces the cost of
obtaining information because it's already
incorporated into the price.
The sheer size of the financial markets provides
liquidity. In other words, sellers can unload assets
whenever they need to raise cash. The size also
reduces the cost of doing business. Companies
don't have to go far to find a buyer or someone
willing to sell.
 SESSION 1 | WORKING CAPITAL
MANAGEMENT & CAPITAL BUDGETING
WORKING CAPITAL MANAGEMENT
-management of current assets and liabilities
-to achieve a balance between profitability and risk
that contributes positively to the firms value.
- IS ALL ABOUT RISK AND RETURN TRADE
OFF. Generally, higher the risk, higher the return =
yield curve is upward sloping.
Working capital management is a business tool that
helps companies effectively make use of current assets,
helping companies to maintain sufficient cash flow to
meet short term goals and obligations.
By effectively managing working capital, companies
can free up cash that would otherwise be trapped on
their balance sheets.
As a result, they may be able to reduce the need for
external borrowing, expand their businesses, fund
mergers or acquisitions, or invest in R&D.
Working capital is essential to the health of every
business, but managing it effectively is something of a
balancing act.
Companies need to have enough cash available to
cover both planned and unexpected costs, while also
making the best use of the funds available.
This is achieved by the effective management of
accounts payable, accounts receivable, inventory and
cash.
WORKING CAPITAL = CURRENT ASSETS –
CURRENT LIABILITIES
Other important metrics include:
Days Sales Outstanding (DSO) – the average number
of days taken for the company’s customers to pay their
invoices.
Days Payables Outstanding (DPO) – the average
number of days that the company takes to pay its
suppliers.
Days Inventory Outstanding (DIO) – the average
number of days that the company takes to sell its
inventory.
Cash Conversion Cycle (CCC) – the average time
taken for the company to convert its investment in
inventory into cash.
CCC is calculated as follows:
CCC = DIO + DSO – DPO
The shorter a company’s CCC, the sooner it is
converting cash into inventory and then back to cash.
Companies can reduce their cash conversion cycle in
three ways: by asking customers to pay faster
(reducing DSO), extending payment terms to suppliers
(increasing DPO) or reducing the time that inventory is
held (reducing DIO).
Summary
 Working capital management involves
balancing movements related to five main
items – cash, trade receivables, trade payables,
short-term financing, and inventory – to make
sure a business possesses adequate resources
to operate efficiently.
 The levels of cash should be enough to deal
with ordinary or small unexpected needs, but
not so high to determine an inefficient
allocation of capital.
 Commercial credit should be used properly to
balance the need to maintain sales and healthy
business relationships with the need to limit
exposure to customers with low
creditworthiness.
 Managing short-term debt and accounts
payable should allow the company to achieve
enough liquidity for ordinary operations and
unexpected needs, without an excessive
increase in financial risk.
 Inventory management should make sure there
are enough products to sell and materials for
its production processes while avoiding
excessive accumulation and obsolescence.
Net working capital is defined as the excess of
current assets over current liabilities. Working capital
mentioned in the balance sheet is an indication of the
company’s current solvency in repaying its creditors.
That is why when companies indicate shortage of
working capital they in fact imply scarcity of cash
resources.

Working Capital Management Ratios
 Current Ratio (Working Capital Ratio)
The working capital ratio or current ratio is calculated
as current assets divided by current liabilities.
It is a key indicator of a company's financial health as
it demonstrates its ability to meet its short-term
financial obligations.
 Although numbers vary by industry, a working
capital ratio below 1.0 generally indicates that a
company is having trouble meeting its short-term
obligations. That is, the company's debts due in the
upcoming year would not be covered by its liquid
assets. In this case, the company may have to
resort to selling off assets, securing long-term debt,
or using other financing options to cover its short-
term debt obligations.
 Collection Ratio
The collection ratio is a measure of how efficiently a
company manages its accounts receivables.
The collection ratio is calculated as the product of the
number of days in an accounting period multiplied by
the average amount of outstanding accounts
receivables divided by the total amount of net credit
sales during the accounting period.
 The collection ratio calculation provides the
average number of days it takes a company to
receive payment after a sales transaction on credit.
If a company's billing department is effective at
collections attempts and customers pay their bills
on time, the collection ratio will be lower. The
lower a company's collection ratio, the more
efficient its cash flow.
 Inventory Turnover Ratio
The final element of working capital management is
inventory management. To operate with maximum
efficiency and maintain a comfortably high level of
working capital, a company must keep sufficient
inventory on hand to meet customers' needs while
avoiding unnecessary inventory that ties up working
capital.
 Companies typically measure how efficiently that
balance is maintained by monitoring the inventory
turnover ratio.
 The inventory turnover ratio, calculated as
revenues divided by inventory cost, reveals how
rapidly a company's inventory is being sold and
replenished. A relatively low ratio compared to
industry peers indicates inventory levels are
excessively high, while a relatively high ratio may
indicate inadequate inventory levels.
Frequently Asked Questions
What Is Working Capital Management?
Working capital management involves tracking the
current, collection, and inventory ratios to ensure that a
company operates efficiently thereby helping to
maximize a company's profitability.
The primary purpose is to enable the company to
maintain sufficient cash flow to meet its short-term
operating costs and short-term debt obligations.
Working capital management helps maintain the
smooth operation of the net operating cycle, also
known as the cash conversion cycle (CCC)—the
minimum amount of time required to convert net
current assets and liabilities into cash.
Why Is the Current Ratio Important?
The current ratio (working capital ratio) is a company's
current assets divided by current liabilities.
It is a key indicator of a company's financial health as
it demonstrates its ability to meet its short-term
financial obligations.
Current ratios of 1.2 to 2.0 are considered desirable,
but a ratio higher than 2.0 may suggest that the
company is not managing its working capital
efficiently. Conversely, a current ratio below 1.0
generally indicates that a company's debts due in the
upcoming year would not be covered by its liquid
assets.
Why Is the Collection Ratio Important?
The collection ratio is a measure of how efficiently a
company manages its accounts receivables.
It is calculated as the product of the number of days in
an accounting period multiplied by the average amount
of outstanding accounts receivables divided by the
total amount of net credit sales during the accounting
period. Essentially, this ratio shows how effective a
company is at collecting payment after a sales
transaction on credit. The lower a company's collection
ratio, the more efficient its cash flow.
Why Is the Inventory Ratio Important?
To operate with maximum efficiency and maintain a
comfortably high level of working capital, a company
must keep sufficient inventory on hand to meet
customers' needs while avoiding unnecessary
inventory that ties up working capital.
The inventory turnover ratio, calculated as revenues
divided by inventory cost, reveals how rapidly a
company's inventory is being sold and replenished.
An abnormally low ratio compared to industry peers
indicates inventory levels are excessively high, while
an abnormally high ratio may indicate inadequate
inventory levels.
CAPITAL BUDGETING
Capital budgeting is the process a business undertakes
to evaluate potential major projects or investments.
Construction of a new plant or a big investment in an
outside venture are examples of projects that would
require capital budgeting before they are approved or
rejected.
As part of capital budgeting, a company might assess a
prospective project's lifetime cash inflows and
outflows to determine whether the potential returns
that would be generated meet a sufficient target
benchmark. The capital budgeting process is also
known as investment appraisal.
Importance:
Ideally, businesses would pursue any and all projects
and opportunities that enhance shareholder value and
profit. However, because the amount of capital or
money any business has available for new projects is
limited, management uses capital budgeting techniques
to determine which projects will yield the best return
over an applicable period.
Capital budgeting is important because it creates
accountability and measurability. Any business that
seeks to invest its resources in a project without
understanding the risks and returns involved would be
held as irresponsible by its owners or shareholders.
A capital budgeting decision is both a financial
commitment and an investment. By taking on a
project, the business is making a financial
commitment, but it is also investing in its longer-term
direction that will likely have an influence on future
projects the company considers.
How Capital Budgeting Works
When a firm is presented with a capital budgeting
decision, one of its first tasks is to determine whether
or not the project will prove to be profitable.
The payback period (PB), internal rate of return (IRR)
and net present value (NPV) methods are the most
common approaches to project selection.
MARKET UPDATE

ECONOMY
House committee approves P10 plastic bag tax
03/03/21

A HOUSE committee approved Wednesday a bill that will impose a P10 excise tax on single-use plastic bags at the
factory level or upon the arrival of imported bags.
At a hearing of the House Committee on Appropriations on Wednesday, members approved House Bill No. 178,
which seeks to limit the use of single-use plastic bags by imposing a tax as a deterrent. The bill covers single-use
carrier bags with or without handles.
If enacted, P10 will be levied and collected per single use-plastic bag released from the place of production or from
the customs house, exposing producers and importers to a tax regime

IMPLICATION:
 Plastic waste is one of many types of wastes that take too long to decompose. Taxing single-use plastic bags will
help reduce their presence in the market because properly disposing of plastic bags has proved to be difficult and
this causes clogging of waterways and canals.
 The law encourages other environment-friendly alternatives to plastic carriers, which are normally used by
consumers.
 Of course, it affects somehow our living. Though in the bill, they will not ban it. As a consumer, plastic bags are
also helpful as carrier of heavy things and other than that, it is also recyclable and reusable.
-but let us also keep in mind that, not all people are responsible in using such things like this—so, I understand the
bill and support it. Especially in our country, when there heavy rains, what we see in canal are mostly these plastic
thingy.
This will be good not just to us, but to all living things to be exact. We are not just doing this to protect ourselves but
also, our nature as well.

BANKING AND FINANCE

LANDBANK offers loan for online class gadgets
03/04/21

LAND BANK of the Philippines (LANDBANK) expanded the coverage of its lending program for students to offer
them up to P50,000 in credit to buy electronic gadgets for their online schooling.

A student can borrow up to P150,000 under the I-STUDY lending program while a parent-borrower can take out up to
P300,000 for tuition and other enrolment fees. The maximum loanable amount already includes the allocation for the
gadget purchase.
The expanded I-STUDY Program now allows students of legal age to apply. Only parents and guardians were allowed
to apply when the program was launched last year.

 LandBank said it also increased the maximum age eligibility of students to 50 years old from 30 years
previously.
 It also included scholar students whose scholarships do not fully cover tuition fees, as well as non-scholar
students from private pre-school, primary, and secondary schools.
 It also offers term loans for tertiary students payable up to a maximum of three years, inclusive of one year
grace period on the principal.

IMPLICATION:
 This will further help the need to support students in adapting to distance learning modalities.
 Not all have the means to this online class. Going to an internet shop to cope up with this situation is also
costly. So, this is helpful for students to cover the financial requirements to purchases needed learning
equipment and participate in online classes.
 As a student, I am interested especially I can relate I only borrow laptop from my siblings. These days, in my
college years, I realized how important and convenient a laptop is. So, this is a great news to students, and
also, to a parent.
CORPORATE
Plans for soft launch, interconnection deals drive DITO stock
03/02/21
https://www.bworldonline.com/plans-for-soft-launch-interconnection-deals-drive-dito-stock/

its interconnection agreements and its plan to start commercial operations on March 8 in Mindanao and the Visayas,
led market players to take profits on the DITO CME Holdings Corp. stock with some loading positions in the last
trading day last week.
A total of 535.77 million shares of DITO CME shares worth P8.90 billion were traded on Feb. 22-24 and 26, making
it the most traded stock that week, data from the Philippine Stock Exchange showed.
The Dennis A. Uy-led firm closed at P16.14 apiece, down by 10% from the Feb. 19 finish of P17.94 each. Since the
first trading day of the year, the stock has grown by 24%.

IMPLICATIONS
 The movement influenced regarding the deal and as market participants digested the news that the company is set
for its commercial launch on [March 8]—this will further increase the movement or grow.
 This will drive up as Investors are very excited and it is clearly showing in the price movement. This is despite the
fact that several insiders have been unloading shares recently… why? Because there is also news about vaccine
roll out nitaas so might probably one if the cause sa unloading shares as well as inflation.
As an alternative, strategic post office lockboxes for customer remissions