MACC 212│2nd Year Level│1st Semester

Deguma, Sophia S.

Decision-making is an inherent function of

INTRODUCTION TO FINANCIAL MANAGEMENT management since all management functions
require a certain level of decision-making; this
- Business is like gambling; it is too risky. makes management accounting information
- In a corporate form of business, there is a useful in all stages of management.
need to employ separate managers who
will govern the business in behalf of the CONTROLLER
owners, known as shareholders.  A controller is the chief management
accounting executive responsible for
GOALS OF CORPORATION managing control functions, including
financial reporting, cost and
 Ultimate goal: SHAREHOLDER’S
management accounting, and special
WEALTH MAXIMIZATION
studies. They provide advice and
 The increase in the value of stock price
assistance to other departments and
resulting to capital gains that
have line authority over subordinates.
shareholders will yield on their
investments.
LINE vs STAFF FUNCTIONS
 Stock Price or market value per share
LINE is the authority to give orders (e.g.,
considers both cash flows for the
FUNCTION VP-operations over operations
current and future years. Profit on the
manager)
other hand, may refer to either current
exercises direct downward authority
year’s profit or future year’s profit.
over line departments
 If the goal is profit maximization, the
NOTE: line managers are directly
question is which year’s profit are we
involved in achieving company
referring to?
objectives
MANAGEMENT ACCOUNTING – the use of STAFF is the authority to advise but not to
accounting information by the company FUNCTION command others
managers to make rational economic decisions is commonly exercised laterally or
in performing its function of planning, upward in an organization
organizing and controlling business operations. NOTE: staff managers provide
support via assistance or advice to
COST ACCOUNTING – is a subset of both other managers.
management and financial accounting
FINANCIAL MANAGEMENT - concerns the
duties of the financial manager, who is
MANAGEMENT FUNCTIONS
responsible for making significant corporate
PLANNING deciding on company goals
investment and financing decisions.
and objectives and figures out
how to achieve them.
GOAL OF FINANCIAL MANAGEMENT
(Associated terms: Road
- Modern managerial finance theory
Mapping; Goal Setting)
suggests that a firm's primary goal is to
ORGANIZING deciding on how to use
maximize shareholders' wealth, rather
company resources to put
than just profit, by making decisions that
plans into action.
maximize company stock market value.
(Associated terms: Directing &
Motivating; Staffing & ROLE OF FINANCIAL MANAGERS
Subordinating) • Involves financial analysis and planning,
CONTROLLING deciding on what corrective investment decisions, financing and capital
actions to do should there be structure decisions, financial resource
any difference between actual management, and risk management.
results and planned results • No single person is responsible for all
(Associated terms: responsibilities.
Monitoring; Feedback • Tasks are dispersed throughout the firm.
Mechanism)
MACC 212│2nd Year Level│1st Semester
Deguma, Sophia S.

• In large firms, treasurer/controllers handle

financial responsibilities, CFO oversees their
work.
• Responsible for managing the monetary
resources of the corporation. B. Indirect Transfers through Investment
• To raise additional capital or funds to support Bankers
the investments and operations of the  Go through an investment bank
corporation. which underwrites the issue.
- OPERATING DECISION  The businesses’ securities and the
- INVESTING DECISION savers’ money merely “pass
- FINANCING DECISION through” the IB.
 It is taking a risk for IB.
BASIC PRINCIPLES OF FINANCIAL  Also called as Primary Market
MANAGEMENT Transaction.

 Risk-return trade-off: a company does

not take additional risks unless it
expects to be compensated with
additional returns.
Underwriter
 Time value of money: a peso received
today is worth more than a peso
- A financial organization member
received in the future.
evaluates and assumes risk in mortgages,
 Cash – not profit – is king.
insurance, loans, or investments.
 Incremental cash flows: it is only what
- Investors rely on underwriters to assess
changes that counts.
the worth of business risks.
 Tax consideration: virtually all financial
- Risk refers to the likelihood of actual
decisions are influenced by the effect of
gains differing from expected returns.
taxes.
 Ethical behavior – doing the right thing
C. Indirect Transfers through Financial
– is always relevant
Intermediaries
 Financial Intermediaries – bank,
insurance company, mutual funds.
TOPIC 1 FINANCIAL MARKETS AND  Here the intermediary obtains
INSTITUTIONS funds from savers in exchange for
its securities.
1. CAPITAL ALLOCATION PROCESS  The intermediary uses this money
- Individuals, businesses, and to buy and hold businesses’
governments frequently raise capital. securities, and the savers hold the
- Overspending funds expect return on intermediary’s securities.
investments.
- Needing organizations pay interest to
providers.
- Ways where capital is transferred
between savers and borrowers.
2. FINANCIAL MARKETS
- Is where people and organizations
A. Direct Transfers wanting to borrow money are
 Business sells its stocks or bonds brought together with those who
directly to savers, without going have surplus funds.
through any type of financial - Different financial markets serve
institution. different types of customers
 Used mainly by small firms, and - Financial markets also vary
relatively little capital is raised by depending on the maturity of the
direct transfers. securities being traded and the
MACC 212│2nd Year Level│1st Semester
Deguma, Sophia S.

types of assets used to back the

securities.
1. Physical Asset Market – are for
those products that has physical
substance
2. Financial Asset Markets – deals
with financial securities like stocks,
bonds, notes, mortgages, and
derivatives.
3. Spot Markets– the market in which
assets are bought or sold for “on-the-
spot” delivery.

4. Futures Markets– The markets in

which participants agree today to
buy or sell an asset at some future
date.
- A non-spot, or futures
transaction, is agreeing to a price
now, but delivery and transfer of
funds will take place at a later
date
5. Money Markets– the financial
markets in which funds are borrowed
or loaned for short periods (less than
one year)
6. Capital Markets– the financial
markets for stock and for
intermediate – or long-term debt
(one year or longer)
7. Primary Markets – markets in
which corporations raise capital by
issuing new securities.
8. Secondary Markets– markets in
which securities and other financial
assets are traded among investors
after they have been issued by
corporations.
9. Private Markets – markets in which
transactions are worked out directly
between two or more parties.
10. Public Markets– markets in which
standardized contracts are traded on
organized exchanges.
MACC 212│2nd Year Level│1st Semester
Deguma, Sophia S.

3. Financial Services Corporations - a firm

that offers a wide range of financial
services, including investment banking,
brokerage operations, insurance and
commercial banking.
4. Credit Unions - are cooperative
association whose members are supposed
to have common bond, such as being
employees of the same firm.

3. FINANCIAL INSTITUTIONS
- Direct fund transfers are common
among individuals and small businesses
and in economies where financial
markets and institutions are less
developed.
- But large businesses in developed
economies generally find it more
efficient to enlist the services of a
financial institution when it comes time
to raise capital.
1. Investment Banks – An organization that 5. Pension Funds – are retirement plans
underwrites and distributes new funded by corporations or government
investment securities and helps businesses agencies for their workers and
obtain financing. administered primarily by the trust
- They: ✓Help corporations design departments of commercial banks or by life
securities with features that are insurance companies.
currently attractive to investors 6. Life Insurance Companies – take savings
✓Buy these securities from the in the form of annual premiums; invest
corporation ✓Resell them to these funds in stocks, bonds, real state, and
savers mortgage; and make payments to
2. Commercial Banks – are traditional beneficiaries of the insured parties.
department stores of finance because they 7. Mutual Funds - Organizations that pool
serve a variety of savers and borrowers. investor funds to purchase financial
instruments and thus reduce risks through
diversification. ➢When an individual buys
shares in a mutual fund, they gain part
ownership of all the underlying assets the
MACC 212│2nd Year Level│1st Semester
Deguma, Sophia S.

fund owns. ➢The fund's performance (also known as 'equity') to

depends on how its collective assets are investors.
doing. ➢When these assets increase in - as a whole, is an exchange
value, so does the value of the fund's mechanism that helps investors
shares. Conversely, when the assets buy and sell shares in publicly
decrease in value, so does the value of the traded companies.
shares. - defined as the collective trading
network involving company
shares and their derivatives.
- is a central part of modern
economies since it's where
companies raise vast sums of
money to accelerate successful
startups, expand existing
businesses, or consolidate
operations and pay off debt.
- Public companies are open to all,
traded on stock exchanges and other
platforms.
- Subject to reporting and
transparency regulations.
- Stocks sold to institutional investors,
8. Exchange Traded Funds – Are similar to high-net-worth individuals, and those
regular mutual funds and are often with modest means.
operated by mutual fund companies. - Profits can be shared, sold at higher
- Funds that trade on exchanges, generally prices, or shareholders can influence
tracking a specific index. company operations.
- When you invest in an ETF, you get a - The Securities and Exchange
bundle of assets you can buy and sell Commission (SEC) oversees the PH
during market hours—potentially stock market
lowering your risk and exposure, while
helping to diversify your portfolio  Investors decide to buy or sell based
9. Hedge Funds - Are similar to mutual funds on the company’s performance,
➢While mutual funds are registered and economic conditions, the current
regulated by SEC, hedge funds are largely price of the shares, and other
unregulated. ➢The term “hedge fund” factors.
refers to an investment instrument with  Not every investor makes decisions
pooled funds that is managed to based on the same criteria, and
outperform average market returns. ➢The what might not seem rational to one
fund manager often hedges the fund’s investor, will seem perfectly
positions to protect them from market risk. acceptable to another.
10. Private Equity Companies - Are  People purchase stocks for a lot of
organizations that operate much like hedge reasons
funds, but rather than purchasing some of How does Stock Market works?
the stock of a firm, private equity players o The stock market is a vast, complex
buy and then manage the entire firms. network of trading activities where
➢Private equity firms buy companies and shares of companies are bought and
overhaul them to earn a profit when the sold, protected by laws against fraud
business is sold again and other unfair trading practices.
o It plays a crucial role in modern
4. THE STOCK MARKET economies by enabling money to
- a place where companies raise move between investors and
capital by selling shares of stock companies
MACC 212│2nd Year Level│1st Semester
Deguma, Sophia S.

What are Public Companies? Investors and Traders

o Not all companies can offer stock to the
public. - Those in the stock market include
o Only public companies that have offered institutional investors, such as pension
their shares for the first time in an initial funds, mutual funds, insurance companies,
public offering (IPO) can have their stock and hedge funds, that manage large
bought and sold on exchanges. amounts of money and often have a
o Since the primary market is where a significant influence over the market since
company sells its securities directly, today they are trading in large volumes.
it includes IPOs, follow-on public offerings,
private placements, debt offerings, and
- Retail investors buy and sell securities for
their personal accounts—not for an
other times when a company sells part of
organization.
itself to raise funds.
What are stocks? – buying and selling - Another key group is accredited investors,
o When you buy a stock or a share, you're high-net worth individuals with the money
getting a piece of that company. and investing experience, so the SEC allows
o owning shares gives you the right to part of them access to more complex investments,
the company's profits, often paid as like venture capital and private equity
dividends, and sometimes the right to vote a. Traders - ore short-term approach to the
on company matters stock market.
What is a stock exchange? - aim to capitalize on the market’s
o Once a company goes public, its stocks can volatility
be traded freely on the stock market. - rely on technical analysis
o This means that investors can buy and sell - While trading can offer the potential
shares among themselves. for quick profits, it also comes with
o This is the secondary market for stocks, and higher risks than long-term investing.
most trading is done through stock b. Investors - investors approach the market
exchanges. from a long-term perspective.
What is Over-the-Counter market? - concerned with the fundamental
strength of the companies or assets
o where you buy or sell stocks directly with
they invest in
another investor, typically without the
- They decide on investments after
same level of regulation or public scrutiny.
research and analysis or after getting
o OTC trading involves a network of brokers recommendations from financial
and dealers who negotiate directly over advisors while trying to build wealth
computer networks and by phone. steadily through a portfolio that
o This type of trading is commonly used for increases in value over time
smaller, less liquid companies that may not
meet the stringent listing requirements of Role of Brokers
the stock exchanges.  Brokers in the stock market play the same
Other assets sold in the stock market role as in insurance and elsewhere, acting
as a go-between for investors and the
a. Derivatives - the stock market A. securities markets.
Derivatives: This is a broad category that  They are licensed organizations that buy and
includes options and futures, whose value is sell stocks and other securities for
derived from the value of an underlying asset, individual and institutional clients
such as stocks, bonds, commodities,
currencies, interest rates, or market indexes. BROKERS
b. Funds - pool money from many investors  is an intermediary who facilitates
transactions between buyers and sellers.
for a basket of stocks, bonds, and other
securities, and exchange-traded funds  In the financial real, a broker acts as an
agent who helps investors buy and sell
MACC 212│2nd Year Level│1st Semester
Deguma, Sophia S.

financial assets such as stocks, bonds or 5. Raising capital: Most importantly, the stock
currencies. market offers a platform where companies
 Their main function is to execute client raise funds by issuing stocks.
orders in the corresponding markets and 6. Resource allocation: By reflecting the
obtain best possible price. collective judgment of traders and investors
 May also provide financial advice and through the price of different companies, the
analysis to their clients. stock market is said to help efficiently
distribute capital to companies more likely to
REGULATORS succeed and away from those that are not
 The SEC enforces laws against market
manipulation, insider trading, and other
THE MARKET COMMON STOCK
forms of fraud while verifying that public
Types of Stock Market Transactions
companies reveal any significant financial
information investors should know when 1. Outstanding shares of established publicly
trusting a firm with their money by buying owned companies that are traded: the
its stock. secondary market
 The SEC also oversees stock exchanges, 2. Additional shares sold by established publicly
broker-dealers, investment advisors, owned companies: the primary market
mutual funds, and public utility holding 3. Initial Public Offerings made by privately held
companies firms: the IPO market

How does stock prices are determined?

STOCK MARKET EFFICIENCY
o Most investors find prices as they are listed
A. Market Price – The current price of a stock
in online brokerage accounts or online
B. Intrinsic Value – The Price at which the stock
graphs of stock prices over time, not as
would sell if all investors had all knowable
coming from tough negotiations.
information about a stock.
o The factors that influence these prices fall
C. Equilibrium Price – The price that balances
into two main types: fundamental and
buy and sell orders at any given time.
technical.
D. Efficient Market – A market at which prices
o Fundamental factors are rooted in a
are close to intrinsic values and stock seem to
company's earnings, profitability from its
be in equilibrium
operations, and the goods or services it
offers.
o Meanwhile, technical factors relate to
market sentiment and statistical analyses
of historical market activity and stock price
trends

What does the stock market do?

1. Corporate governance: Publicly traded
companies follow stringent reporting
regulations, which makes them far more
transparent and accountable.
2. Economic indicator: The stock market's
performance is often considered a gauge of an
economy's health.
3. Investment opportunities: The stock market
offers the chance to invest in companies and
potentially grow a portfolio over time.
4. Liquidity: The stock market enables investors
to buy and sell shares of companies and other
securities quickly when needed.