Module 4 Finance
Module 4 Finance
Module 4 Finance
LEARNING MODULE
IN
BUSINESS FINANCE
(FIN. 1)
1st semester 2022-2023
1. Must have android cellphone. Downloaded / installed with WPS & GOOGLE CLASSROOM.
2. Must have email add account most probably GMAIL ACCOUNT.
3. Must have face book account with the EXACT NAME APPEARING ON REGISTRATION FORM with
half body single profile picture.
4. Must have messenger account for our group chat.
COURSE POLICIES
Active and substantive participation in online discussion. Students are expected to share their
knowledge gained from reading the modules.
Online quizzes will be given after each chapter to measure and evaluate the knowledge gained
by the students from their interactive learning and online discussions.
Students must be present during the scheduled time as appeared on the registration form.
Attendance will be checked via Google Classroom / group chat.
Accomplish the activities stated in the module and submit it on the prescribed schedule.
Questions / inquiries / requests will only be entertained during the class / time schedule.
Student initiative and independent learning is encouraged and emphasized.
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TABLE OF CONTENTS
TOPICS Pages
Week 1
Chapter 1 An overview of the Philippine Financial System 8
Chapter 2 Forms of organization 12
Chapter 3 Starting a Business in the Philippines 17
Week 2
Chapter 4 The fundamentals of securities 22
Chapter 5 The economy & security analysis 29
Chapter 6 Merger 32
Week 3
Chapter 7 Importance of money & capital markets 35
Chapter 8 Role of Securities and Exchange Commission at the
Philippine Stock Exchange 37
Chapter 9 Philippine Stock Exchange 40
Week 4
Chapter 10 Common & Preferred Stocks 42
Chapter 11 Debt & Equity Capital 45
Chapter 12 Portfolio Management 48
Chapter 13 Business Failures 50
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MODULE 4 / WEEK 4 (Chapter 10 – 13)
Chapter 10 – Common and Preferred stock
LEARNING OUTCOMES
By the end of this module, students will have completed the following objectives:
TO DO LIST:
Readings:
Introduction
The equity ownership, or capital of the firm can be raised through the sale of common and
preferred stock. All corporations initially issue common stock to raise equity capital. Some of these
firms’ later issue preferred stock to raise additional equity capital. Although both common and
preferred raise additional equity capital, preferred stock has some similarities to debt capital that
significantly differentiate it from common stock.
Common stock
They are the true owners of the business firms.
Common stock holders are sometimes referred to as residual owners.
They have no guarantee of receiving any cash inflows, but received what is left (the
residual) after all other claims on the firms’ income and assets have been satisfied.
They are assured of only one thing, that they cannot lose any more than what they have
invested in the firm.
They expect to be compensated with adequate dividends and capital gains.
b. Par value
Common stock may be sold with or without par value
The par value is generally quite low about P 1. And the par value is usually stated in
the firm’s corporate charter.
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c. Preemptive right
Allows common stockholder to maintain their proportionate ownership in the
corporation when a new share is issued.
Allows existing shareholders to maintain their voting control and protect against the
dilution of their ownership.
d. Voting rights
Each share of common stock entitles the holder to one vote in the election of
directors and on special issues.
e. Dividends
The payment of corporate dividends is at the discretion of the board of directors.
Most corporations paid dividends quarterly.
Dividends may be paid in cash, check or merchandise.
Before dividends are paid to common stockholders, the claims of the government,
all creditors, preferred stockholders, must be satisfied.
Preferred Stock
Preferred stock gives its holders’ certain privileges that make them senior to common
stockholder.
They are promised a fixed periodic return, which is stated either as a percentage or as a
dollar amount.
The way the dividend is specified, depends on whether the preferred stock has a par
value.
Is most often issued by public utilities, by acquiring firms in merge transactions, or by
the firm that are experiencing losses and need additional financing.
Basic rights of preferred stockholder.
Basic rights are more favorable than the rights of common stockholder.
It specifies a fixed periodic (dividend) payment.
When it comes to ownership, preferred stock has no maturity date
Are not exposed to the same degree of risks to common stockholders.
They are consequently not given a voting right.
If stated preferred stock dividend is passed (not paid) by the board of directors, the payment of
dividends to common stockholder is prohibited.
They are usually given preference over common stock holders in the liquidation of assets as a
result of a firm’s bankruptcy, although they must stand in one line, behind creditors.
Major provisions of preferred stock issues
2. par value
3. cumulative dividends
4. convertibility
Proxy voting – is the grant of authority by shareholders to someone else to vote in behalf of his shares.
For convenience, much of the voting in large public corporations is actually done by proxy.
Each share of stock has one vote. The owner of 10,000 shares has 10,000 votes.
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Chapter 11 – Debt and Equity Capital
LEARNING OUTCOMES
By the end of this module, students will have completed the following objectives:
Discuss the flow of the long-term financing society’s longer term investment
Explain the essential debt and capital funding requirements
Distinguished between debt and equity capital
Define corporate long-term debt
TO DO LIST:
Readings:
Debt is anything owed, especially a sum of money, that one person owes to another.
A person who owes the debt is the debtor & the one to whom it is owed is the creditor.
If the debtor is unwilling or unable to pay the debt, the creditor may bring suit to recover the
money.
Equity capital or financing is money raised by business in exchange for a share of ownership in
the company.
Equity capital refers to money that you and any business associate inject directly into the
operation.
Feature of debt
In a special type of debt called secure debt, the debtor promises that, if the debt is not paid on
time, the creditor may seize specified property from the debtor before a suit is brought.
The courts ordinarily state that debtor should pay their debts even though the creditor does not
demand payment.
Debt capital is represented by funds borrowed by a business that must be repaid over a period
of time, usually with interest.
Equity capital is represented by funds that are raised by a business, in exchange for a share of
ownership in the company.
Equity capital can be raised internally through retained earnings, or externally by selling
common or preferred stocks.
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1. Voice in Management
Holders of equity capital (common & preferred stockholders) are owners of the firm.
Holders of common stock have voting rights that permit them to select the firm’s
directors and to vote on special issue.
Debt holders and preferred stock holders may receive voting privileges only when the
firm has violated its stated contractual obligations to them.
2. Claims on income & assets
Equity is a permanent form of financing. It does not mature, and will be liquidated only during
bankruptcy proceedings.
4. Tax treatment
Interest payments to debt holders are treated as tax deductible expenses on the firms income
statement; whereas dividend payments to common & preferred stockholders are not taxable.
Different Types of Debt
Notes
Debentures
Bonds
Notes – refers to unsecured debt with maturity shorter than that of the debenture (less than 10yrs).
Repayment
Seniority
It indicates preference in position over other lenders. Some debt is subordinated & holders of
subordinated debt must give preference to other specified creditors.
Security
It is a form of attachment to property; it provides that the property can be sold in the event of default to
satisfy the debt for which security is given.
A mortgage is used for security in tangible property. Debt can be secured by mortgages on plant &
equipment. Holders of such debt have prior claim on the mortgage property & is sold in the event of
default.
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Chapter 12 - Portfolio Management
LEARNING OUTCOMES
By the end of this module, students will have completed the following objectives:
TO DO LIST:
Readings:
Having placed some amount of stocks, one should spend some time and effort in studying his
investment. He should keep track of the stock price and follow closely the developments of a company.
Tis way, he would be able to foresee possible gains or losses that will guide him in making a sound and
wise decisions. Daily quotations of stock prices, can be obtained from a stock broker or from all leading
newspapers.
A. capital gains – these are profits made due to an increase in the market price of a stock from
the buying price.
B. cash dividend – it is usually computed by multiplying the number of shares held by the cash
dividend declared.
3. stock dividend – it is computed by multiplying the number of shares held by the percentage of
the stock dividend declared.
4. stock rights – stock rights offering is the option given to the present shareholders to buy
additional shares of stock at a price lower than its market price.
Classification of stocks
1. Blue chip stocks – high grade issues of major companies that have a long and favorable
history of earnings & dividend payment.
2. growth stock – stock of corporations whose sales, earnings and market shares are expanding
faster than the general economy & their industry.
3. 3. defensive stocks- characterized by their degree of stability during periods of a declining
economy.
4. cyclical stocks – stocks of corporations whose earnings fluctuate with the business cycle.
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Functions of portfolio management
Selection of securities
It entails the analysis and selection of securities to be purchased in accordance with
the investment plan.
Investor requirements
1. Safety
2. Current income
3. Growth of capital
4. Liquidity
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Chapter 13 – Business Failures
LEARNING OUTCOMES
By the end of this module, students will have completed the following objectives:
TO DO LIST:
Readings:
Business firms operate in an environment that is dynamic. Changes happen every now and then.
These changes could be favorable to some firms and the resulting growth and expansion in activities are
desirable developments. To some firms however, environmental changes bring unwanted
consequences and one of this is business failure. The list of business failures is long and the way to
avoid one is to know its nature and causes, and unawareness of the remedies available if business
failure is imminent or is already at hand.
Business failure occurs when a business had reached appoint where it can no longer continue
trading without encountering further problems. These problems may offer no feasible solutions and by
continuing to trade, the business man puts himself in deeper trouble.
Inadequate sales
Incompetence or mismanagement
Inadequate records
A firm is insolvent when either two conditions exist:
Reorganization – is the creation of a plan to restructure a debtor’s business and restore its financial
health.
Bankruptcy – is a condition in which a business cannot meet its debt obligations and petitions a regional
trial court for either reorganization of its debts or liquidation of its assets.
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deals with the seizure of the debtor’s assets and their distribution to the debtor’s various
creditors.
Is a legal process by which a person or business that is unable to meet financial obligations is
relieved of those debts by the court.
Financial failure – occurs when the firm becomes insolvent or unable to pay its debts.
1. Mismanagement
2. Economic activity
3. Corporate maturity
Business Failure
a. external
b. internal
External causes
Recession
Changes in government regulation or contracts
Burdensome taxes or tariffs
Court decisions
Legislation unfavorable to the specific type of business
Strikes or boycotts
Labor costs
Dishonest employees
Disasters or Acts of God
Internal causes
Overcapitalization in debt
Undercapitalization in equity
Inefficient management of income
Inferior merchandise
Improper costing with excessive expenditures
Errors of judgment concerning problems or expansion
Inefficient pricing decisions
Inability to improve a weak competitive position
Financial distress
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