BUSINESS

FINANCE
Week 1 - Quarter 1
Introduction to Financial
Management
After going through this module, you are going to:
1.Define Finance
2.Describe who are responsible for financial management within
an organization
3.Describe the primary activities of the financial manager
4.Describe how the financial manager helps in achieving the goal
of the organization
5.Describe the role of financial institutions and markets
FIX ME I AM
CRUMBLED
1.ANNCFIE = _______________

It describes activities associated with

banking, leverage or debt, credit, capital
markets, money, and investments.
 2. NAEMMAENGT =
_______________
It is the interlocking functions of creating
corporate policy and organizing, planning,
controlling, and directing an organization's
resources in order to achieve the objectives
of that policy.
 3. ICISDEON =
_______________
It is a conclusion or resolution reached
after consideration.
 4. DINGEBUTG =
_______________
It is the process of creating a plan to
spend your money.
 5. ENIOLVEMTNV =
_______________
It is the fact or condition of
being involved with or
participating in something.
 PRE-TEST
_____1. It is a financial intermediary handling individual savings. It
receives premium payments placed in loans or investments to
accumulate funds to cover future benefits.
A. life insurance company
B. savings bank
C. commercial bank
D. credit union

_____2. Which of the following is not a financial institution? A.

A. pension fund
B. A commercial bank
C. A newspaper publisher
D. An insurance company
_____3. It is a set up so that employees of corporations or
governments can receive income after retirement.
A. life insurance company
B. Savings bank
C. Pension fund
D. credit union

_____4. It is a type of financial intermediary that pools savings of

individuals and makes them available to business and
government users. Funds obtained through the sale of shares.
E. Mutual Funds
F. Savings and loans
G. Commercial banks
H. Credit Union
_____5. Most businesses raise money by selling their
securities in a.
A. direct placement
B. public offering
C. stock exchange
D. private placement

_____ 6. Which of the following is not a service provided by

financial institutions.
E. Buying the businesses of customers
F. Investing customers’ savings in stocks and bonds
G. Paying savers’ interest on deposit
H. Lending money to customers
_____7. By definition, the money market involves the buying
and selling of.
A. funds that mature in more than one year.
B. flows of funds.
C. stocks and bonds.
D. short-term funds.

_____8. It creates financial relationship between suppliers

and users of short-term funds.
E. financial market
F. stock market
G. money market
H. capital market
_____9. Firms that require funds from external sources can
obtain them from
A. financial markets.
B. financial institutions.
C. private placement.
D. All the above.

_____10. The science and art of managing money.

E. Financial Management
F. Management
G. Finance
H. Personal Finance
What is Finance and Financial Management?
Finance is always of great importance, be it in a business or in
one's everyday life. It is important to manage risks in business, it is
equally important to manage risks in life as well. Some books define
Finance as the science and art of managing money. (Gitman &
Zutter, 2012)

Financial Management deals with that decisions that are supposed

to maximize the value of shareholder’s 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 shareholder’s wealth maximization.

Organizational structure of the company is important especially in the

financial aspect of the business and the particular set of people, each
play a role in the decision making of the company. See diagram below.
 From the diagram presented, emphasized that each line is working for
the interest of the person on the line above them. Since the managers of
the company are making decisions for the interest of the board of
directors and the board of directors do the same for the interest of the
shareholders, it follows the goal of each individual in a corporate
organization should have an objective of shareholders wealth
maximization.

The roles of each position identified.

1.Shareholders: The shareholders elect the Board of Directors
(BOD). Each share held is equal to one voting right. Since the
shareholders elect the BOD, their responsibility is to carry out the
objectives of the shareholders. Otherwise, they would not be
elected in that position.
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2.Board of Directors: The board of directors is the highest policy
making body in a corporation. The board’s primary responsibility is to
ensure that the corporation is operating to serve the best interest of the
stockholders. The following are among the responsibilities of the board
of directors:
a.Setting policies on investments, capital structure and dividend
policies.
b.Approving company’s strategies, goals and budgets.
c.Appointing and removing members of the top management including
the president.
d.Determining top management’s compensation.
e.Approving the information and other disclosures reported in the
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 financial statements (Cayanan, 2015)

3.President (Chief Executive Officer): The roles of a

president in a
corporation may vary from one company to another.
Among the responsibilities of a president are the following:
a. Approving the information and other disclosures reported in
the financial statements. Overseeing the operations of a
company and ensuring that the strategies as approved by the
board are implemented as planned.
b. Performing all areas of management: planning, organizing,
staffing, directing and controlling.
c.Representing the company in professional, social, and civic
4.VP for Marketing: The following are among the
responsibilities:

a.Formulating marketing strategies and plans. Directing and

coordinating company sales.
b.Performing market and competitor analysis.
c.Analyzing and evaluating the effectiveness and cost of
marketing methods applied.
d.Conducting or directing research that will allow the company
identify new marketing opportunities, e.g. variants of the
existing products/services already offered in the market.
e.Promoting good relationships with customers and distributors.
(Cayanan, 2015)
5. VP for Production: The following are among the
responsibilities:
a.Ensuring production meets customer demands.
b.Identifying production technology/process that minimizes
production cost and make the company cost competitive.
c.Coming up with a production plan that maximizes the
utilization of the company’s production facilities.
d.Identifying adequate and cheap raw material suppliers.
(Cayanan, 2015)

4.VP for Administration: The following are among the

responsibilities:
a.Coordinating the functions of administration, finance, and
marketing departments.
a.Assisting other departments in hiring employees.
b.Providing assistance in payroll preparation, payment of
vendors, and collection of receivables.
c.Determining the location and the maximum amount of office
space needed by the company. Identifying means, processes, or
systems that will minimize
the operating costs of the company. (Cayanan, 2015)

The role of the VP for Finance/Financial Manager is to

determine the appropriate capital structure of the company.
Capital structure refers to how much of your total assets financed
by debt and how much is financed by equity.
 To be able to acquire assets, our funds must have come
somewhere. If it has bought using cash from our pockets, it has
financed by equity. On the other hand, if we used money from our
borrowings, the asset bought has financed by debt.

What are the functions of Financial Managers?

1.Financing decisions- include making decisions as to how to
finance long-term investments and working capital-which deals
with the day-to-day operations of the company.

2.Investing Decisions- To minimize the probability of failure,

long-term investments have supported by a capital budgeting
analysis.
3.Operating Decisions – deal with the daily operations of the
company especially on how to finance working capital
accounts such as accounts receivable and inventories.

4.Dividend Policies – Dividend is a part of profits that are

available for distribution, to equity shareholders. The
Finance manager must decide whether the firm should
distribute all the profits or retain them or distribute a portion
and retain the balance.
 OVERVIEW OF THE FINANCIAL
SYSTEM

The financial system links the savers and the users of funds. Savings can
come from households, individuals, companies, government agencies, or
any other entity whose cash inflows are greater than their cash outflows.
The financial system through financial intermediaries provides a
mechanism by which these savings can be channeled to users of funds,
borrowers, and investors.
 Some of the financial instruments issued by users of funds such as the
shares of stocks and corporate bonds of publicly listed companies and the
debt securities issued by the National Government has traded.

Differentiate the Financial instruments,

financial institutions and financial markets
1.Financial institutions are companies in the financial sector that
provide a broad range of business and services including banking,
insurance, and investment management.
Identify examples of financial institutions/Intermediaries:

a.Commercial Banks - Individuals deposit funds at commercial

banks, which use the deposited funds to provide commercial loans to
firms and personal loans to individuals, and purchase debt securities
 firms or government agencies.

b. Insurance Companies - Individuals purchase insurance (life,

property and casualty, and health) protection with insurance premiums.
The insurance companies pool these payments and invest the proceeds in
various securities until the funds needed to pay off claims by
policyholders. Because they often own large blocks of a firm’s stocks or
bonds, they frequently attempt to influence the management of the firm to
improve the firm’s performance, and ultimately, the performance of the
securities they own.

c.Mutual Funds - Mutual funds owned by investment companies

that
enable small investors to enjoy the benefits of investing in a diversified
portfolio of securities purchased on their behalf by professional
invest in newly issued debt or equity securities, they finance new
investment by firms. Conversely, when they invest in debt or equity
securities already held by investors, they are transferring ownership of the
securities among investors.

d.Pension Funds - Financial institutions that receive payments

from employees and invest the proceeds on their behalf.
Other financial institutions include pension funds like Government
Service Insurance System (GSIS) and Social Security System (SSS), unit
investment trust fund (UITF), investment banks, and credit unions,
among others.

2. Financial Instruments-is a real or a virtual document representing a

legal agreement involving some sort of monetary value. These can be
debt securities like corporate bonds or equity like shares of stock. When
a financial instrument issued, it gives rise to a financial asset on one hand
and a financial liability or equity instrument on the other.
a. A Financial Asset is any asset that is:
•Cash
•An equity instrument of another entity
•A contractual right to receive cash or another financial asset from
another entity.
•A contractual right to exchange instruments with another entity under
conditions that are potentially favorable. (IAS 32.11)
•Examples: Notes Receivable, Loans Receivable, Investment in Stocks,
Investment in Bonds

b.A Financial Liability is any liability that is a contractual obligation:

•To deliver cash or other financial instrument to another entity.
 •To exchange financial instruments with another entity under conditions
that are potentially unfavorable. (IAS 32)
•Examples: Notes Payable, Loans Payable, Bonds Payable

c. An Equity Instrument is any contract that evidences a residual

interest in the assets of an entity after deducting all liabilities. (IAS 32)
•Examples: Ordinary Share Capital, Preference Share Capital
•Identify common examples of Debt and Equity Instruments.

d. Debt Instruments generally have fixed returns due to fixed

interest rates. Examples of debt instruments are as follows:
•Treasury Bonds and Treasury Bills 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 has
been paid.
 •Corporate Bonds 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 issued the bonds goes
bankrupt, the holder of the bonds will no longer receive any return from
their investment and even their principal investment has wiped out.

e. 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:
•Preferred Stock has priority over a common stock in terms of claims
over the assets of a company. This means that if a company has liquidated
and its assets have to be distributed, no asset be distributed to
 common stockholders unless all the claims of the preferred stockholders
has given. Moreover, preferred stockholders have also priority over
common stockholders in cash dividend declaration. Dividends to
preferred stockholders are usually in a fixed rate. No cash dividends
given to common stockholders unless all the dividends due to preferred
stockholders paid first. (Cayanan, 2015)
•Holders of Common Stock on the other hand are the real owners of the
company. If the company’s growth is encouraging, 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.

3. Financial Market - refers to a marketplace, where creation

 trading of financial assets, such as shares, debentures, bonds,
derivatives, currencies, etc. take place.
Classify Financial Markets into comparative groups:
- 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 public referred to as a

public offering and the first offering of stock named 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.
 securities takes place in secondary markets.
•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 have created because some individuals, businesses,
governments, and financial institutions 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 in need of seasonal or temporary financing.
•On the other hand, securities with longer-term maturities sold in Capital
markets. The key capital market securities are bonds (long-term debt) and
 both common stock and preferred stock (equity, or ownership).
The role of Financial Managers: make financing decisions that require
funding from investors in the financial markets.

How do we measure wealth maximization?

For example, Assume that Mr. Y bought 10 shares of Globe Telecom at
PHP2, 510 each on September 9, 2010. 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?

Explanation: An increase of the share price to PHP2, 600 per share

means that people are willing to buy the shares for that amount. If the
learners were to sell their shares at this point, it will result to a profit of
PHP90 per share or PHP900 on their whole investment. Hence, the value
of their
 investment increased from PHP25, 100 to PHP26, 000. Therefore, there
is an increase in shareholder’s wealth.

On the other hand, a decrease in the share price to PHP2, 300 per share
means that people are only willing to buy shares for PHP2, 300. If the
learners were to sell their investment at this point, they will receive
PHP23, 000 which would result to a loss of PHP2, 100. The decrease in
value of their investment leads to a decrease in shareholder’s wealth.
 Activity
Direction: Write three
examples of each circle
and describe it briefly.
For example: Financial
Instruments: My answer
is cash-It is used for
exchange of something
you want to buy
(describe your
answer on each
circle)
 ASSESSMENT
Directions: Write T if the statement is True and F if the statement is False.

_______1. High cash flow is generally associated with a higher share price
whereas higher risk tends to result in a lower share price.
2. The wealth of corporate owners has measured by the share price of
the stock.
3. When considering each financial decision alternative or possible
action in terms of its impact on the share price of the firm's stock,
financial managers should accept only those actions that expected to
maximize shareholder value.
4. Stockholders expect to earn higher rates of return on investments
of lower risk and lower rates of return on investments of higher risk.
5. Financial markets are intermediaries that channel the savings of
individuals, businesses, and government into loans or investments.
 6. Commercial banks obtain most of their funds from borrowing in
the capital markets.
7. The money market involves trading of securities with maturities
of one year or less while the capital market involves the buying and selling
of securities with maturities for more than one year.
8. Primary and secondary markets are markets for short-term and
long-term securities, respectively.
9. A mutual fund is a type of financial intermediary that obtains funds
through the sale of shares and uses the proceeds to acquire bonds and
stocks issued by various business and governmental units.
10. Credit unions are the largest type of financial intermediary
handling individual savings.