Professional Documents
Culture Documents
Finance
3rd Quarter: Module 1
This part includes an activity that aims to check what you already
know about the lesson to take. If you get all the answers correct
What I Know (100%), you may decide to skip this module.
This is a brief drill or review to help you link the current lesson with
the previous one.
What’s In
This section provides an activity which will help you transfer your new
knowledge or skill into real life situations or concerns.
What I Can Do
Answer Key
Using the dual-learning approach of theory and application, this module will help you to explore all stages of
the learning process from knowledge, analysis, evaluation, and application to preparation and development of financial
plans and programs suited for a small business. 1
In this module you need to have knowledge about the financial management. You will be able to encounter
terminologies such as finance, financial management and budgeting. You are expected to identify and understand
each function of financial manager such as financing, investing, operating and dividend policies. Also, you need to
determine the different the financial institutions and markets.
There are various activities that will help you understand the definition of finance, the activities of the financial
manager, and the financial institutions and markets. It is hope that you will learn to successfully enjoy the objectives of
this module. Have Fun!
Before we start any discussion, we have to determine if you have background knowledge about the topic.
What I Know
Instruction: Write the letter of the best answer.
______ 1. What is the major role of financial manager?
A. Shareholder’s wealth maximization C. Interest of the employees
B. Paying suppliers and creditors D. Supporting the community
______ 2. Who is the highest policy making body in a corporation?
A. Board of Directors C. CEO
B. Shareholders D. VP for Administration
______ 3. What organization provides a system for the trading of equity securities of publicly listed companies?
A. Philippines Stock Exchange (PSE)
B. Philippine Dealing & Exchange Corp (PDex)
C. Bangko Sentral ng Pilipinas (BSP)
D. Government Agencies
______ 4. Which of the following is an example of a Financial Instrument?
A. Banks C. Common Stock
B. Credit Union D. SSS
______ 5. Which of the following is NOT example of financial institution?
A. Commercial Banks C. Capital Market
B. Insurance Companies D. Mutual Funds
______ 6. Which of the following financial instruments have very low risk of default?
A. Treasury Bonds C. Common Stock
B. Corporate Bonds D. Preferred Stock
______ 7. Which of the following is NOT included as functions of a Financial Manager?
A. Financing C. Organizing
B. Operating D. Investing
______ 8. Why does a Financial Manager need to choose which source of financing a company should use?
A. Because the company must have enough retained earnings to support cash dividend declaration
B. Because creditors are not willing to finance entirely the cost of a company’s long-term investment
C. Because the choice between short- and long-term sources depends on the risk and return trade off that
management is willing to take
D. Because companies have limited access to capital and have target capital structure
______ 9. Which of the following is not a service provided by financial institutions?
A. Buying the businesses of customers
B. Investing customers’ savings in stocks and bonds
C. Paying savers’ interest on deposited funds
D. Lending money to customers
______ 10. Where do most businesses selling their securities to raise money?
A. direct placement C. stock exchange
B. public offering D. private placement
You have already discussed in your Grade 11 the Fundamentals of Accountancy, Business and Management
which provides you the knowledge on preparing, analyzing and interpreting financial statements. Let’s do a review for
some terms.
2
What’s In
Instruction: Categorize the following terms inside the box whether an Asset (A), Liability (L), or Equity (E)
What’s New
Finance is part of everyday life. Being financially literate is utmost importance that teenagers should learn to
be successful individuals. Finance can be defined as the science and art of managing money. (Gitman & Zutter, 2012).
As a student, most of the activities that involve financial decisions are budgeting of allowance. Budgeting is the act of
estimating revenue and expenses over a period of time. You are responsible where to use your allowance by identifying
the expenses you incurred such as fare, lunch/snack or loads. At a young age, you also need to appreciate the value
of savings and opportunity for investing your money coming from the different sources of funds.
Functions of a Financial Manager
1. Financing decisions include making decisions on how to fund long term investments (such as company
expansions) and working capital which deals with the day-to-day operations of the company (i.e., purchase of
inventory, payment of operating expenses, etc.). The role of the VP for Finance of the Financial Manager is
to determine the appropriate capital structure of the company. Capital structure refers to how much of your
total assets is financed by debt and how much is financed by equity.
3. Operating decisions deal with the daily operations of the company. The role of the VP for finance is
determining how to finance working capital accounts such as accounts receivable and inventories. The
company has a choice on whether to finance working capital needs by long term or short-term sources. Short
Term sources are those that will be payable in at most 12 months. This includes short-term loans with banks
and suppliers’ credit. For short-term bank loans, the interest rate is generally lower as compared to that of
long-term loans. Hence, this would lead to a lower financing cost. Suppliers’ credits are the amounts owed to
suppliers for the inventories they delivered or services they provided. While suppliers’ credit is generally free
of interest charges, the obligations with them have to be paid on time to maintain good supplier relationship.
Such relationships should be nurtured to ensure timely delivery of inventories. Short term sources pose a
trade-off between profitability and liquidity risk. Because this source matures in a short period, there is a 3
possibility that the company may not be able to obtain enough cash to pay their obligation (i.e. liquidity risk).
Long term sources, on the other hand, mature in longer periods. Since this will be paid much later, the lenders
expect more risk and place a higher interest rate which makes the cost of long term sources higher than short
term sources. However, since long term sources have a longer time to mature, it gives the company more
time to accumulate cash to pay off the obligation in the future. Hence, the choice between short and long term
sources depends on the risk and return trade off that management is willing to take.
4. Dividend Policies. Cash dividends are paid by corporations to existing shareholders based on their
shareholdings in the company as a return on their investment. Some investors buy stocks because of the
dividends they expect to receive from the company. Non-declaration of dividends may disappoint these
investors. Hence, it is the role of a financial manager to determine when the company should declare cash
dividends. Before a company may be able to declare cash dividends, two conditions must exist:
1. The company must have enough retained earnings (accumulated profits) to support cash
dividend declaration.
2. The company must have cash.
What is it
Since the managers of the company are making decisions for the interest of the board of directors and the
board of directors does the same for the interest of the shareholders, it follows that the goal of each individual in a
corporate organization should have an objective of shareholders’ wealth maximization. Below is the corporate
organization structure
Financial Instruments
When a financial instrument is issued, it gives rise to a financial asset on one hand and a financial liability or
equity instrument on the other.
Common Examples of Debt and Equity Instruments.
● Debt Instruments generally have fixed returns due to fixed interest rates. Examples of debt instruments are
as follows:
o Treasury Bonds and Treasury Bills are issued by the Philippine government. These bonds and
bills have usually low interest rates and have very low risk of default since the government assures
that these will be paid.
o Corporate Bonds are issued by publicly listed companies. These bonds usually have higher interest
rates than Treasury bonds. However, these bonds are not risk free. If the company which issued the
bonds goes bankrupt, the holder of the bonds will no longer receive any return from their investment
and even their principal investment can be wiped out.
● Equity Instruments generally have varied returns based on the performance of the issuing company. Returns
from equity instruments come from either dividends or stock price appreciation. The following are types of
equity instruments:
o Preferred Stock has priority over a common stock in terms of claims over the assets of a company.
This means that if a company were to be liquidated and its assets have to be distributed, no asset
will be distributed to common stockholders unless all the claims of the preferred stockholders have
been given. Moreover, preferred stockholders have also priority over common stockholders in cash 4
dividend declaration. Dividends to preferred stockholders are usually in a fixed rate. No cash
dividends will be given to common stockholders unless all the dividends due to preferred
stockholders are paid first. (Cayanan, 2015)
o Holders of Common Stock on the other hand are the real owners of the company. If the company’s
growth is spurring, the common stockholders will benefit on the growth. Moreover, during a profitable
period for which a company may decide to declare higher dividends, preferred stock will receive a
fixed dividend rate while common stockholders receive all the excess.
Financial Markets
Financial Markets organized forums in which the suppliers and users of various types of funds can make
transactions directly.
● Primary vs. Secondary Markets - To raise money, users of funds will go to a primary market to issue new
securities (either debt or equity) through a public offering or a private placement. The sale of new securities
to the general public is referred to as a public offering and the first offering of stock is called an initial public
offering. The sale of new securities to one investor or a group of investors (institutional investors) is referred
to as a private placement. However, suppliers of funds or the holders of the securities may decide to sell the
securities tha have previously been purchased. The sale of previously owned securities takes place in
secondary market. The Philippine Stock Exchange (PSE) is both a primary and secondary market.
● Money Markets vs. Capital Markets - Money markets are a venue wherein securities with short-term
maturities (1 year or less) are sold. They are created because some individuals, businesses, governments,
and financial institution have temporarily idle funds that they wish to invest in a relatively safe, interest-bearing
asset. At the same time, other individuals, businesses, governments, and financial institutions find themselves
I need of seasonal or temporary financing. On the other hand, securities with longer-term maturities are sold
in Capital markets. The key capital market securities are bonds (long-term debt) and both common stock and
preferred stock (equity, or ownership).
_______________________________________________
VP Marketing _______________________________________________
_______________________________________________
_______________________________________________
VP Production _______________________________________________
_______________________________________________
_______________________________________________
VP Administration _______________________________________________
_______________________________________________
_______________________________________________
VP Finance _______________________________________________
What I can Do
Activity 1.3 Budget your Money
6
1. Write how much is your daily allowance or average allowance per day?
2. Write down all the items you spend money on. List the description and the exact or estimated peso amount.
3. Compute for the balance of your allowance by deducting the expenses you listed from your daily allowance.
a. If the answer is positive, what do you do with the money left? Or if the answer is negative, where do
you get additional money?
b. Which items do you think should be dropped off from the list of your expenses?
Assessment
Activity 1.4 Write the letter of the correct answer that best complete the sentence.
___1. The ______ is created by a financial relationship between suppliers and users of short-term funds.
A. financial market C. money market
B. stock market D. capital market
___2. Firms that require funds from external sources can obtain them from _____.
A. financial markets C. private placement
B. financial institutions D. All of the above
___3. The major securities traded in the capital markets are ____.
A. stocks and bonds C. commercial paper and Treasury bills
B. bonds and commercial paper D. Treasury bills and certificates of deposit
___4. The primary goal of the financial manager is _____.
A. minimizing risk C. maximizing profit
B. 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 _____.
Additional Activity
Activity 1.5 Save and Invest
Direction: Analyze the scenario below and answer the questions. 7
Mr. Lim knew that Mrs. Cruz had excess money and approached her to lend him the capital he needs to
expand his business for a 20% interest. Since Mrs. Cruz observed that Mr. Lim’s business has been profitable, she is
willing to lend him the money since she is confident that Mr. Lim can repay his loan. Mrs. Cruz is now expecting to be
20% richer from his lending to him and Mr. Lim can now expand his operations to gain more profit from his business.
1. What happens if they did not meet?
2. What if Mrs. Cruz will not lend him money? Where can Mr. Lim get the additional funding?
3. Aside from lending her money, where would Mrs. Cruz save or invest it? Explain why.
---------------------------------------------------------------------------------------------------------------------------------------------
REFERENCES:
I. The Commission on Higher Education in collaboration with the Philippine Normal University. (2016). Teaching
Guide for Senior High School Business Finance [PDF file]. Commission on Higher Education
II. Borja, Daniel Vincent H. and Cayanan, Arthur S. (2017). Business Finance. Rex Book Store, Inc.
III. Reh F. John, 2019, Glossary of Business Management Terms A Comprehensive Dictionary of
Business Management Term, Dotdash, viewed 15 June 2020,
<https://www.thebalancecareers.com/glossary-of-business-management-terms-2275721>.