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Business Finance Reviewer

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NAVIGATION
Note: Pakipindot na lang yung words in order to navigate :)

CHAPTER 4 ……………………………………………………………… 2

CHAPTER 5 ……………………………………………………………… 5

CHAPTER 6 ……………………………………………………………… 6

CHAPTER 7 ……………………………………………………………… 9

QUIZZES:
● Quiz 1 ………………………………………………………………… 10
● Quiz 2 ……………………………………………………………….. 11
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CHAPTER 4
Sources & Uses of Short-term & Long-term Bonds
4.1 Sources of Funds for Business Operations
● Short-term funds - used for business operations’ working capital. Examples are bank loans, credit
from suppliers (increasing accounts payable), and accrued liabilities.
● Funding Working Capital - as defined by Eugene F. Brigham and Joel F. Houston in Essentials of
Financial Management, these are the current assets of your business that are used in operations.
Usually your cash, cash equivalents or marketable securities.
● Short-term debt - usually a one-year loan or less.
● Net working capital or working capital - current assets less current liabilities, helps carry out the
normal operations of business. It is used to generate sales and profits for a business.
● Cash - churned to either invest in inventory or to pay-off short-term obligations so that the cost of
doing business is reduced.
● Marketable Securities - used to generate investment income through capital appreciation in stock
investments or trading through bond investments
● Accounts Receivables - increase sales by making buying more attractive to the customer with the
availability of credit.
● Inventory - product roster
● Long-term Funds - usually used for start-up business requirements, or capital expenditures or
business expansion for existing businesses.
Normal Corporate Setup

Long-term funding is from banks; may include a May come from 2 major sources— debt & equity
five-year or a twenty-year loan. from the investing public. Corporations may acquire
debt by issuing bonds, or may raise capital by
issuing preferred & common stock

● Bank - a financial intermediary that brings together depositors and borrowers. They are a major
source of funding for our working capital requirements and common sources of short and
long-term loans. Regulated by the Bangko Sentral ng Pilipinas (BSP)
Different types of Banks
● Commercial Banks - mostly retail customers, its main business is lending. Other services of
Commercial Banks include: (1) loans for vehicles or home improvement, (2) requiring collateral,
security, and credit history of loans, (3) personal installment loans and credit card loans, (4)
offering passbook, loans, and second mortgages.
● Universal Banks - commercial banks but are licensed to do more sophisticated banking services
than commercial banks. Their clientele comprises of the top corporations of the country and global
businesses, transactions are usually bigger in size than commercial bank transactions,
multicurrency, and global in nature.
● Investment Banks - An institution that transfers the share of stock to investors, similar to
universal banks in terms of sophisticated banking services. They do not have branches all around
the country, they perform market making activities such as trading, fund management, and
portfolio management.
● Non-banks - financial intermediaries as well as supervised and regulated by another government
body, the Securities and Exchange Commission (SEC).
Different types of Non-banks
● Investment Companies - pools your money together with the money of other investors and invest
these in financial instruments— stocks, bonds, currencies, commodities, financial derivatives.
● Mutual funds - sold based on a net asset value per unit.
● Insurance Companies - sell coverage or protection from events such as (1) a death of a loved one,
(2) fure, or (3) accident.
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● Private Equity Funds - funds of private investors used to finance lucrative projects that are
projected to give good returns.
4.2 Credit and its Characteristics
● Credit - ability to obtain goods and services with a promise to pay in the future. a loan or money
extended to a person or business in exchange for a return. Once issued, it becomes the debt of the
borrower.
● Debt - obligation to pay back property or cash borrowed in accordance to an agreement, and this
may be in the form of notes, bonds, or mortgages.
● Cost of Credit - Refers to the cost of loan by the borrower to the bank.
● Credit analyst - The person who investigates the background of the debtor, holds the important
role of analyzing the financial track record of the person or the business that borrows , as well as
its financial transaction.
● Credit Manager - The approving officer in loan application.
● Credit Ratings- A way to formally investigate the historical background of the borrower.
● Debtor - The borrower of short and long-term funds.
● Credit bureau - agency that gathers information about the credit history of the borrower and sells
this information for a fee.
● Appraiser - The person who appraises the value of collateral.
● Ocular Inspection - Action taken by the Cl and appraiser in the physical condition of collateral.
● Interest - payment for the use of the property or money
CHARACTERISTICS OF CREDIT
1. It is a BI-PARTITE Contract CREDIT DEPARTMENT
2. It is a FIDUCIARY ● Credit manager
3. It is PECUNIARY ○ Credit Investigator
4. It has Futuristic ○ Credit Analyst
5. It involves RISK ○ Appraiser

THE FOUR C's OF CREDIT

1. Character - Refers to an individual’s intention and determination to pay bills promptly and to
repay loans, the willingness to pay an obligation
2. Capacity - An individual’s income and cash flows as an indicator of his or her ability to pay a loan
on schedule, the ability to pay a loan.
3. Capital - Summarizes an application’s financial structure: his or her assets, liabilities, and net
worth.
4. Collateral - the pledging of specific assets to secure a loan in the event of default, Property of
value used to secure the loan.

● Bankruptcy - A legal process wherein assets are paid to the creditor and are
● distributed to pay their debts
● Insolvency - inability to pay debts on time when they are due, it is insufficiency in cash flow and is
temporary.
● Lending - the action of allowing a person or organization the use of a sum of money under an
agreement to pay it back later.
● Amortization - The term used in the repayment of the loan.
● Return - The positive cash inflows in a given investment.
● Risk - The uncertainty on the size of future return on an investment.
● Fiduciary Contract - Credit based on trust and confidence.
● Import Credit - A type of credit intended to finance the purchase of goods abroad.
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Sources of Credit Info Sources of Credit Types of Credit

1.) Application 1.) Bank 1.) Personal Credit

2.) Personal Interview 2.) Lender Companies A. Charge accounts
3.) Plant visit/Ocular Insp. 3.) SSS - GSIS - PAG-IBIG B. Installments
4.) Financial Statements 4.) Individual money 2.) Business Loan
5.) ITR - income tax return 5.) Pawnshop 3.) Agricultural Loan
6.) Bank Credit Dept. 6.) Insurance 4.) Investment credit
7.) Trade Interchange Ledg 7.) Investment 5.) Import/Export
8.) Newspaper 8.) Credit 6.) Investment House/Co.
9.) Public Record 9.) SM

CHAPTER 5
Basic Long-term Financial Concepts
5.1 Sources of Funds for Business Operations
● Opportunity cost - anything given up after choosing an option, it is the possible income from one
option or investment opportunity given up.
● Good money management - a decision to invest either in money market, fixed-income securities,
stocks, bonds, real estate, or in small business ventures
● Future Value of Money - The amount your original funds will be worth in the future
● Compounding - makes money increase over time, given a certain rate.
● Present Value - today’s worth of future money, determining today’s worth of this future value
(investment + earned income) and also known as discounting.
● Nominal Interest - sometimes called annual percentage rate or quoted rate, indicates the interest
rate paid or earned in one year without compounding. Also known as simple interest rate.
● Effective annual rate - also known as effective interest rate indicates the compound interest rate
paid or earned in one year.
● Monthly factor rate - to determine the amount of payment for the loan on a monthly basis
(principal plus interest).
● Balance Sheet - shows the assets of the business and its liabilities and the value of the owner’s
equity
● Income Statement - shows if the business is earning. It reports revenues and costs and expenses
of a business during a period. Also known as Profit and Loss Statement
● Risk-return tradeoff- there is a commensurate return for every risk a business owner or investor
takes, and that the return expected is usually greater for more risk taken
● Personal Investment: money market, fixed-income securities, and bonds. Stocks, a combination
of fixed-income and stocks, real estate, ang the entrepreneur.
ADVANTAGES AND DISADVANTAGES OF INVESTING REAL ESTATE

Advantages Disadvantages

1.) Hedge against inflation
2.) Rent Income
3.) They are real and tangible properties,
assets owned by the investor or by the
business.
1.) Real Estate investments are illiquid investments.
2.) Although they offer some protection against inflation,
real estate investments may also experience a decline in
value
3.) Lack of diversification
4.) Management and operating expense are issues come
with real estate investments
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CHAPTER 6
Introduction to Investments
6.1 Different Types of Investments
● Inflation - happens with the rise in the price of goods and commodities.
● Investing - the act of committing money or capital to an endeavor with the expectation of
obtaining an additional income or profit. Committing funds with the expectation of future return.
○ Qualitative
○ Quantitative
■ Economic Condition
■ Industry
■ Business
● Saving - the act of putting away some money for future use.
● Gambling - game of chance.
● Stock - evidence of ownership, represents small pieces of ownership in a business that trades in
the stock market.
● Bond - evidence of indebtedness, represents the debt of a government or a business promising to
pay a fixed interest to the holder of the bond for a definite period of time.
○ Corporate Bond - issued by business
○ Government Bond - also known as treasury bonds, issued by the government
● Capital Market - A venue for trading securities like stocks and bonds.
● Primary Market - A market for Initial Public Offering (IPO) of shares.
● Secondary Market - A market for outstanding share of stock.
● Stock Market - place where buyers and sellers congregate to trade goods.
5 Industry Category
1. Banking & Financial Service 3 types of Dividend
2. Commercial Trading 1. Cash Dividend
3. Property 2. Property
4. Mining 3. Stocks
5. Oil
STOCKS VS. BONDS

Securities Stock (fixed-income) Bond (variable)

Owner Stockholder Bondholder

Evidence Stock Certificate Bond Certificate

Income Dividend Interest

2 TYPES OF STOCK

Common Preferred

1.) Has voting rights 1.) 1st to receive dividend

2.) Has management rights 2.) 1st to receive capital contribution
● Capital Appreciation - when the current market price of the investment in stock is higher than its
purchase price, making the investor money in the process if they choose to sell these stocks.
● Cash Dividend payment - when the business pays out a portion of its earnings to its stockholders.
● PSE or Phil. Stock Exchange - .An organized platform for trading securities.
● SEC or Security and Exchange Commision - A government agency that approves the security
trading of a corporation.
● Portfolio Diversification - Spreading of funds to various investments.
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● Coupon - regular interest payments

● Bond issuer - borrower
● Investor - lender
● Coupon/coupon rate - interest rate
● Term/Tenor - the time it takes for all payments to be made by the issuer and received by the
lender
● Face Value/Par Value - borrowed amount
● Bills - debt security that matures in a year or less
● T-Bills or Treasury Bills - A security backup by government assets or resources
● Yield - the return that you would expect if you hold the bond for a year and is expressed in
percentage.
● Managed funds - companies or trust funds that pool money from various investors and through a
fund manager, invests the collected money in stocks, bonds, or a combination of various
investments.
● Unit Investment Trust Fund (UITF)
○ Equity fund - invests primarily in stocks
○ Bond fund - invests in bonds
○ Balanced fund - invests in the combination of stock and bond
○ Money market fund - invests primarily in short-term securities representing high-quality,
liquid debt, and monetary instruments.
● Regulator - The watchdog in the security trading.
● Insurance Policy - An investment for securing life and property.
● Real Estate - Refers to ownership of the real property investment.

INVESTMENT PYRAMID
HIGH RISK | HIGH RETURN

LOW RISK | LOW RETURN

Types of Investment
A. Financial Market
a. FOREX
b. Money market
c. capital
B. Insurance
a. Life
b. Non-life
C. Business
D. Pre-need Product
a. Educational Plan
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b. Health Plan
c. Memorial Plan
d. Pension Plan
CHAPTER 7
Managing Personal Finance
7.1 The Value of Savings and Investments
FORMULAS
Income - Saving = Expenses
Income - Expenses = Savings
● Bo Sanchez - ultimate purpose of money is to help others
● Quote - it is said money is the root of all evil
● Saving - also known as “paying yourself first”
● Inflation - happens with the rise in the price of goods and commodities
● Why should we be concerned with inflation?
○ If inflation goes up, the value of our goods in general goes down, meaning we will not be
able to afford the same amount of goods.
● Purchasing Power - the amount of goods and services money can buy.
● Wants - things that you want but can live without
● Needs - things that you need to survive

SURVIVING A CRISIS IN PERSONAL FINANCE

1. Set up emergency fund
2. List all debts
3. Cut back on unnecessary spending
4. Pay off credit card debts
5. Apply for a credit line for emergency use
6. Talk to a financial adviser
7. Monitor all your accounts’ cash flow
8. Trust that things will work out in time
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QUIZ 1
Credit 1.Ability to obtain goods and services with a promise to pay in the future.

Credit Analyst 2.The person who investigates the background of the debtor.

Collateral 3.Property of value used to secure the loan.

Bank 4.Common sources of short and long-term loans.

Capacity 5.The ability to pay a loan.

Appraiser 6.The person who appraises the value of collateral.

Ocular Inspection 7.Action taken by the Cl and appraiser in the physical condition of collateral.

Import Credit 8. A type of credit intended to finance the purchase of goods abroad.

Bankruptcy 9. A legal process wherein assets are paid to the creditor.

Credit Ratings 10.A way of to formally the historical background of the borrower.

Cost of Credit 11.Refers to the cost of loan by the borrower to the bank.

Future Value of 12.The amount your original funds will be worth in the future.
Money

Risk 13.The uncertainty on the size of future return on an investment.

Return 14.The positive cash inflows in a given investment.

Amortization 15.The term used in the repayment of the loan.

Credit Manager 16.The approving officer in loan application.

Credit Analyst 17.The person analyzing the background of a borrower.

Fiduciary Contract 18.Credit based on trust and confidence.

Debtor 19.The borrower of short and long-term funds.

Character 20. The willingness to pay an obligation

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QUIZ 2
Investment 1.Committing funds with the expectation of future return.

Gambling 2. A game of chance.

Stock 3. Evidence of ownership in the business.

Bonds 4. Evidence of debt of a corporation and government.

Real Estate 5. Refers to ownership of the real property investment.

Portfolio 6. Spreading of funds to various investments.

Diversification

Capital Market 7. A venue for trading securities like stocks and bonds.

Primary Market 8. A market for IPO of share.

Secondary Market 9. A market for outstanding share of stock.

Insurance Policy 10.An investment for securing life and property.

PSE or Phil. Stock 11.An organized platform for trading securities.

Exchange

Regulator 12.The watchdog in the security trading.

Dividend 13.Income received in a stock investment.

Interest 14.Income from debt investment.

Stockholder 15.The owner of a stock or equity investment.

Bond Certificate 16.Evidence of ownership in bond investment.

SEC or Security 17. A government agency that approves the security trading of a corporation.
and Exchange
Commision

Common Stock 18. Stock with voting and management rights.

Investment Bank 19. An institution that transfers the share of stock to investors.

T-Bills or Treasury 20. A security backup by government assets or resources

Bills