23/08/2022

Fundamental Principles in Finance

Money has time value

 A peso received today is worth more than a peso received in the future

There is a risk-return tradeoff

 Investors will hold risky investments if they expect to be compensated with additional
return.

Cashflows are the source of value

 Cash-Not Profit – Is king!!

Market price reflect information

 Investors respond to new information by buying and selling their investments

The Principal’s and Agent’s interests may differ

 Managers’ decisions may not necessarily be aligned with the owners’ interests unless
incentivized adequately.
 Managers put their interest first. Actions conducted by the managers will differ from that of
the owner. There will be a conflict of interest between the manager and the owner.


Sabi sabi lang ni sir

 How to avoid agency cost. To avoid losing investors. The solution is to conduct seminars,
performance monitoring
 Quota based incentives is not good Imao. Share based compensation is better.
 Bonus or compensation exceeding 90,000 is taxable
 To split stocks you need to re-register in sa SEC and submit a new articles of incorporation to
amend the previous AOI.
 Financial managers work for the company as the decision maker. Financial advisor you work
as a front liner in giving financial advice for [wdgsdngko
 Demanders of funds – Supplier of Funds
 Demanders – Individuals, business and other private orgs, the government
 Supplier –
 Securities – Terms and conditions
The Financial System

What is the financial system?

 The institutional mechanism established by the society to produce and deliver financial
services and allocate resources participated by different economic units, which takes into
account the use of money, credit and the various instruments associated with money.

 It consists of the business firms supplying financial services, the customers of the financial
service firms, and the government regulatory entities that enforce the rules prevailing the
financial sector.

 It is where the suppliers and users of funds meet to finance their needs and satisfy their
objective

Other discussions

 Some individuals and firms may have a surplus of funds which can be made available for
savings or investments.
 Business, Government, and Individuals often need to raise capital:
- Support in increasing firm’s
- Operations (Operational Expansion)
- Investment in project proposals (Capital Expenditures)
- Infrastructure projects
- Investment in real estate

The Capital Allocation Process

 Direct transfer – Savers give the funds directly to the Demanders. No middle-man. The
demander and supplier know each other. The savers give the cash and the demanders
provide securities.
 Indirect Transfer (Through investment banks) – There is a middle-man which are often
financial institutions. Helps you find investors and helps finds companies that need investing.
Securities are given to the bank from the demanders and the bank provides the securities to
the savers. The savers provides the cash to the bank and then the bank gives the cash to the
demanders.
- Investment banks provide liaison services to the market.
- The current conditions require that demanding and saving parties must have a
broker.

 Indirect Transfer (Through financial intermediaries) – Bank and non-bank institutions except
for investment banks. Financial Intermediaries offer intermediary securities to savers and
the savers provide cash to the F.I. For demanders of funds, the F.I provides cash while the
demanders provide the F.I with securities.
- The financial intermediary lump sums the money from savers and then provides the
savers with a variety of securities. The F.I then offers the gathered funds to the
demanders of