1st Prelim Reviewer in Finance
1st Prelim Reviewer in Finance
1st Prelim Reviewer in Finance
Sources of funds
Profitability
When faced with financial difficulties (in this case,
- Profit is a measure of the financial performance
the lack of funds to meet the current expenses) we
of a company in a period of time.
look for people or institutions that will give us the
- Although it is a major driver for increasing the
money we need.
value of stock, an investor should not rely on
profits alone. As discussed earlier, it is possible
Finance is concerned with decisions about:
that the company has profits but its cash flow is
- How they invest their savings
negative.
- How much of their earnings they spend
Good liquidity and reasonable leverage position
- How much they save or how much they need
- Liquidity and leverage refers to the company’s
- How to raise additional funds they would need
management of the type and amount of assets and
liabilities that it will hold in the course of its
Corporations may either be privately owned or publicly
operations.
owned.
Dividends
- Holders of shares receive dividends from a
Privately owned corporations are often owned
corporation as returns on their investments in form
by family members whose stocks may not be
of cash or other properties. Companies which have
offered to outsiders unless consent by the family
better dividend policies are generally more attractive
members is secured.
than companies who do not pay out dividends.
Publicly listed companies that are owned by
- Note that there may be times that companies do not
unrelated investors and are traded in organized
pay out dividends because of future expansions.
exchanges like the Philippine Stock Exchange.
Same with the other factors affecting share price,
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dividend policies should go hand in hand with other - Such factors are a result of the environment a
factors in determining market price. company operates in rather than the decisions of the
Competent management company’s management.
- Competent managers may have any of the following
attributes: Role of Financial Management
1) Visionary - Given the factors that influence market price, how
2) Decisive will the company ensure that such objectives will be
3) People-oriented achieved?
4) Inspiring - Financial management deals with decisions that are
5) Innovative supposed to maximize the value of shareholders’
6) Respected wealth. (Cayanan)
7) Experienced / Seasoned manager - These decisions will ultimately affect the markets
perception of the company and influence the share
Corporate plans that improve the business price.
prospects - The goal of financial management is to maximize the
- Example: Company A which is in the business of value of shares of stocks.
selling Halo-halo in the Dapitan area (or any other - Managers of a corporation are responsible for
area) for 5 years. Company A is consistently earning making the decisions for the company that would
profits and has a positive cash flow. When asked how lead towards shareholders’ wealth maximization.
Company A sees itself after 5 more years, Company A
answered that it would continue to sell Halo-halo in CORPORATE ORGANIZATION STRUCTURE
Dapitan (or any other area).
Shareholders
- Between Company A and Company B, which would
- The shareholders elect the Board of Directors
be a better investment? Company B. Since it has more
(BOD). Each share held is equal to one voting right.
concrete future prospects allowing investors to hope
Since the BOD is elected by the shareholders, their
for better revenues and net income.
responsibility is to carry out the objectives of the
shareholders otherwise, they would not have been
External Factors
elected in that position.
- These factors influences the general reaction of
Board of Directors
investors in making an investment decision.
- The board of directors is the highest policy making
body in a corporation. The board’s primary
- Its effect is not only to a specific company but on all
responsibility is to ensure that the corporation is
companies or a group of companies under similar
operating to serve the best interest of the
circumstances.
stockholders.
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The following are among the responsibilities of the VP for Administration
board of directors: - Coordinating the functions of administration,
- Setting policies on investments, capital structure finance, and marketing departments.
and dividend policies. - Assisting other departments in hiring employees.
- Approving company’s strategies, goals and budgets. - Providing assistance in payroll preparation,
- Appointing and removing members of the top payment of vendors, and collection of receivables.
management including the president. - Determining - Determining the location and the maximum amount
top management’s compensation. of office space needed by the company. Identifying
- Approving the information and other disclosures means, processes, or systems that will minimize the
reported in the financial statements (Cayanan, 2015) operating costs of the company. (Cayanan, 2015)
Roles and responsibilities of different positions ***The role of the VP for Finance of the Financial
Manager is to determine the appropriate capital
President (Chief Executive Officer) structure of the company. Capital structure refers to
- Overseeing the operations of a company and how much of your total assets is financed by debt and
ensuring that the strategies as approved by the board how much is financed by equity.
are implemented as planned.
- Performing all areas of management: planning, SAMPLE CAPITAL STRUCTURE
organizing, staffing, directing and controlling.
- Representing the company in professional, social,
and civic activities.
VP for Marketing
- Formulating marketing strategies and plans.
- Directing and coordinating company sales.
- Performing market and competitor analysis.
- Analyzing and evaluating the effectiveness and cost
of marketing methods applied.
- Conducting or directing research that will allow the
company identify new marketing opportunities, e.g. Assets = Liabilities + Owner’s Equity
variants of the existing products/services already - To be able to acquire assets, our funds must have
offered in the market. come somewhere. If it was bought using cash from
- Promoting good relationships with customers and our pockets, it is financed by equity.
distributors. (Cayanan, 2015) On the other hand, if we used money from our
borrowings, the asset bought is financed by debt.
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- Moreover, the company should choose which type higher than short term sources. However, since long
of investment it should invest in that would provide term sources have a longer time to mature, it gives
an most optimal risk and return trade off. the company more time to accumulate cash to pay off
the obligation in the future.
• Long term investments should be supported by a
capital budgeting analysis which is among the ***Hence, the choice between short and long term
responsibilities of a finance manager. sources depends on the risk and return trade off that
- Capital budgeting analysis is a tool to assess management is willing to take.
whether the investment will be profitable in the long
run. Dividend Policies
- The lenders should have the confidence that the Cash dividends are paid by corporations to existing
investments that management will push through with shareholders based on their shareholdings in the
will be profitable or else they would not lend the company as a return on their investment. Some
company any money. investors buy stocks because of the dividends they
expect to receive from the company.
Operating decisions deal with the daily operations of
the company. The role of the VP for finance is Non-declaration of dividends may disappoint these
determining how to finance working capital accounts investors. Hence, it is the role of a financial manager
such as accounts receivable and inventories. The to determine when the company should declare cash
company has a choice on whether to finance working dividends.
capital needs by long term or short term sources.
• Short Term sources are those that will be payable in Before a company may be able to declare cash
at most 12 months. This includes short-term loans dividends, two conditions must exist:
with banks and suppliers’ credit. For short-term bank 1. The company must have enough retained earnings
loans, the interest rate is generally lower as (accumulated profits) to support cash dividend
compared to that of long-term loans. Hence, this declaration.
would lead to a lower financing cost. 2. The company must have cash.
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• Examples: Notes Payable, Loans Payable, Bonds
Payable
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
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declaration. Dividends to preferred stockholders - However, suppliers of funds or the holders of the
are usually in a fixed rate. No cash dividends will securities may decide to sell the securities that have
be given to common stockholders unless all the previously been purchased. The sale of previously
dividends due to preferred stockholders are paid owned securities takes place in secondary markets.
first. (Cayanan, 2015) The Philippine Stock Exchange (PSE) is both a
Holders of Common Stock on the other hand are primary and secondary market.
the real owners of the company. If the company’s Money Markets vs. Capital Markets
growth is spurring, the common stockholders will Money markets are a venue wherein securities with
benefit on the growth. Moreover, during a short-term maturities (1 year or less) are sold. They
profitable period for which a company may are created because some individuals, businesses,
decide to declare higher dividends, preferred governments, and financial institutions have
stock will receive a fixed dividend rate while temporarily idle funds that they wish to invest in a
common stockholders receive all the excess. relatively safe, interest-bearing asset. At the same
time, other individuals, businesses, governments, and
Which of the financial instruments presented is financial institutions find themselves in need of
the most appealing? seasonal or temporary financing.
Primary Market - Financial market in which On the other hand, securities with longer-term
securities are initially issued; the only market in maturities are sold in Capital markets. The key
which the issuer is directly involved in the capital market securities are bonds (long-term debt)
transaction. and both common stock and preferred stock (equity,
Public offering - The sale of either bonds or or ownership).
stocks to the general public. Financial Institutions
Private placement - The sale of a new security Commercial Banks - Individuals deposit funds at
directly to an investor or group of investors. commercial banks, which use the deposited funds
Secondary market - Financial market in which to provide commercial loans to firms and
preowned securities (those that are not new personal loans to individuals, and purchase debt
issues) are traded. securities issued by firms or government
Money market - A financial relationship created agencies.
between suppliers and users of short-term funds.
Capital market - A market that enables suppliers Insurance Companies - Individuals purchase
and users of long-term funds to make insurance (life, property and casualty, and health)
transactions. protection with insurance premiums. The
insurance companies pool these payments and
Financial Markets invest the proceeds in various securities until the
funds are needed to pay off claims by
Primary vs. Secondary Markets policyholders. Because they often own large
- To raise money, users of funds will go to a primary blocks of a firm’s stocks or bonds, they frequently
market to issue new securities (either debt or attempt to influence the management of the firm
equity) through a public offering or a private to improve the firm’s performance, and
placement. ultimately, the performance of the securities they
- The sale of new securities to the general public is own.
referred to as a public offering and the first offering Mutual Funds - Mutual funds are owned by
of stock is called an initial public offering. The sale of investment companies which enable small
new securities to one investor or a group of investors to enjoy the benefits of investing in a
investors (institutional investors) is referred to as a diversified portfolio of securities purchased on
private placement. their behalf by professional investment
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managers. When mutual funds use money from 3. Investment is the art of estimating revenue.
investors to invest in newly issued debt or equity (TRUE/FALSE)
securities, they finance new investment by firms. 4. Investment is the process where cash will be
Conversely, when they invest in debt or equity generated or appreciate in the future.
securities already held by investors, they are (TRUE/FALSE)
transferring ownership of the securities among 5. Cooperative is the business where owners are
investors. called shareholders or stock holders.
Pension Funds - Financial institutions that (TRUE/FALSE)
receive payments from employees and invest the 6. A business owned by members of the family is a
proceeds on their behalf. type of corporation that is public. (TRUE/FALSE)
Other financial institutions include pension 7. Shareholders maximization is measured based on
funds like Government Service Insurance System the current price of share in the stock market.
(GSIS) and Social Security System (SSS), unit (TRUE/FALSE)
8. Politics is a factor for the price of shares that is
not controllable by the management.
(TRUE/FALSE)
9. Financial managers are responsible for
maximizing the shareholder’s wealth.
(TRUE/FALSE)
10. Being energetic is a characteristic of a competent
manager. (TRUE/FALSE)
11. Board of directors elects for CEO. (TRUE/FALSE)
12. Ensuring customers’ demands is a role of VP for
Productions. (TRUE/FALSE)
13. Identifying the materials is a role of VP of
Administration. (TRUE/FALSE)
14. Determining appropriate capital is a role of VP of
Finance. (TRUE/FALSE)
15. Financing working capital accounts is a role of VP
for marketing
16. Board of Directors appoints the Vice Presidents.
(TRUE/FALSE)
17. If president have vice presidents, then
shareholders have CEO or presidents.
(TRUE/FALSE)
18. Doing payroll is a role of VP of Finance.
(TRUE/FALSE)
19. Performing all areas of management is a role of a
president. (TRUE/FALSE)
20. Financial Manager is to determine the
QUIZ appropriate capital structure of the company.
1. Investment is the science and art of managing (TRUE/FALSE)
money. (TRUE/FALSE)
2. Source of funds is the process when you get extra
cash or extra source of cash. (TRUE/FALSE)
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