Summarize the discussion by pointing out that,

for individuals, Finance is concerned with

decisions about:
* How much of their earnings they spend
* How much you save or how much you need
*How will you invest your savings
*How will you raise additional funds you need
(Gitman)
Review of Prerequisite Knowledge
Remember once you graduate
from school, you will no longer
receive your daily daily
allowance. Either you would be
employed by a company, manage
family business, or start up with
your own business.
Ask the learners:

•Who among you wants to own

business?
•What type of business organization
is owned by one person who
operates it for his or her own profit?
The forms of business organizations:

•Sole Proprietorship - A business

owned by one person and operated
for his or her own profit.
•Partnership - A business owned by
two or more people and operated for
profit.
•Corporation – An entity created by
law owned by shareholders.
Ask the learners if they recall:

•How you can be a

shareholders of a
corporation?
How and where
can you buy
stocks?
Answers:
• Corporations may either be privately owned or publicly owned.
• Privately owned corporations are often owned by family members whose
stocks may not be offered to outsiders unless consent by the family
members is secured.
• Companies which are publicly listed are owned by unrelated investors and
are traded in organized exchanges like the Philippine Stock Exchange. While
there are many stockholders, there is generally a group of investors or a
family which controls each listed company. For example, in the case of BPI,
the biggest stockholder is Ayala Corporation and in the case of Banco De
Oro, it is SM Investment Corporation. Prices of stocks of listed corporations
are driven by several factors such as the earnings of the companies, the
prospects of the industry where these companies operate, the general
market sentiment, and the economic prospects of the country, among
others
Knowing the Shareholder
•To assume that you are the
biggest shareholder in a
corporation. What is your
objectives you want to
achieve as owners of the
corporation?
QUESTION???
•Do you think a profitable company is a
successful company?
• Can success be attributed to profitability
only?
•Is it possible that a company can have
profits but still does not have enough cash
to pay its obligations (i.e. suppliers,
lenders)?
• What will happen if the company cannot
pay its obligations?
•What do think of a
company who has
very large amount
of cash?
•The overall objective
of a shareholder
should be wealth
maximization.
What defines a
shareholder’s
wealth?
1. Measurement of the shareholder’s wealth
- Assume a learner bought 10 shares of
Globe Telecom at PHP2,510 each on
September 9, 2018.
- This brings his investments to PHP25,100.
What happens to the value of his investment
if the price goes up to PHP2,600 per share or
it goes down to PHP2,300 per share?
COMPUTATION:
10 shares X P2,510 each = P25,100
Problem Analysis:
What happens to the value of his investment if the price goes up
to PHP2,600 per share or it goes down to PHP2,300 per share?
SOLUTION:
10 shares X P2,600 = 26,000 – P25,100 = P900
P2,600 – P2,510 = P90
10 shares X P2,300 = P23,000
P25,100 – P23,000 = P2,100
2. Factors that Influence Market Price

•The factors group into two:

1.Factors that the Management
can control, and
2.External factors that cannot be
controlled by management.
Discuss how each factor influences market price

Profitability
Profit is a measure of the financial performance
of a company for a period of time.
Although it is a major driver for increasing the
value of stock, an investor should not rely on
profits alone. As discussed earlier, it is possible
that the company has profits but its cash flow is
negative.
Examples: Suppose the following Income Statements and Cash
Flow Statements of companies A, B and C were presented to you.
Which do you think is a more attractive company?
• Company A is profitable but generated negative cash flows which
resulted from the uncollected accounts receivable of PHP100,000.
Without adequate cash inflows to meet its obligations, the
company will face liquidity problems, regardless of its level of
profits.
• Company B on the other hand has a positive cash flow but is
unprofitable. This is a result of the company’s delay in payment of
its costs. Accordingly, the Company will soon have to pay the
remaining PHP100,000 liability and its cash will no longer be
sufficient. Again, without adequate cash inflows to meet its
obligations, the company will face liquidity problems.
• Company C is profitable and has a positive cash flow. Based on
the information provided, Company C seems to be the best.
Good liquidity and reasonable leverage
position.
Liquidity and leverage refers to
the company’s management of
the type and amount of assets
and liabilities that it will hold in
the course of its operations. This
will further be discussed in
Lesson 2.
Dividends
• Holders of shares receive dividends from a corporation
as returns on their investments in form of cash or other
properties. Companies which have better dividend
policies are generally more attractive than companies
who do not pay out dividends.
• Note that there may be times that companies do not
pay out dividends because of future expansions. Same
with the other factors affecting share price, dividend
policies should go hand in hand with other factors in
determining market price.
Competent management
Competent managers may have any of the following
attributes:
1) visionary
2) decisive
3) people-oriented,
4) Inspiring
5) innovative,
6) Respected
7) experienced/seasoned manager
Case Analysis: Corporate plans that improve the
business prospects.
• Company A which is in the business of selling Halo-halo in the Dapitan
area (or any other area) for 5 years. Company A is consistently
earning profits and has a positive cash flow. When asked how
Company A sees itself after 5 more years, Company A answered that
it would continue to sell Halo-halo in Dapitan (or any other area).
• On the other hand, Company B sells Buko Juice in Katipunan area (or
any other area different from Company A’s area) for 5 years.
Company B is consistently earning profits and has a positive cash flow.
When asked how Company B sees itself after 5 more years, Company
B answered that it has generated enough cash to expand its business
to Cubao area (or any other area) to take advantage of the growing
demand of Buko Juice in Cubao.
• Between Company A and Company B, which would be a better
investment?
Answer:
•Company B. Since it has
more concrete future
prospects allowing investors
to hope for better revenues
and net income.
External Factors
- These factors influences
the general reaction of
investors in making an
investment decision.
- Its effect is not only to a specific
company but on all companies or a
group of companies under similar
circumstances.
- Such factors are a result of the
environment a company operates in
rather than the decisions of the
company’s management.
Role of Financial Management
Given the factors that
influence market price, how
will the company ensure that
such objectives will be
achieved?
Financial management
deals with decisions that
are supposed to maximize
the value of shareholders’
wealth. (Cayanan)
•These decisions will ultimately affect the
markets perception of the company and
influence the share price.
•The goal of financial management is to
maximize the value of shares of stocks.
•Managers of a corporation are
responsible for making the decisions for
the company that would lead towards
shareholders’ wealth maximization.
ENRICHMENT:
•Aside from the factors mentioned during
class, what other factors can influence the
investor’s perception on the company’s
performance which would ultimately affect
share price?
•Why is the study of finance important to
you?
Homework:
Go to a business in your locality. Ask
who is in charge of the finances of the
business. Interview the “Chief
Financial Officer (“CFO”) or the Vice-
President for Finance” and ask them to
report about their roles and functions
within the organization.