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Business Finance 1ST Midterm 2021-2022
BSED English (BLAW 2019, English 3)
Cebu Roosevelt Memorial College
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SOUTHERN MASBATE ROOSEVELT COLLEGE, INC.
KATIPUNAN, PLACER, MASBATE
ABM XII
BUSINESS FINANCE
QUARTER 1 WEEK 3 MODULE 3
Name:
Let us analyze the situation so you can understand easily the next topic. If Company A knows that Company B is in need of funds, or if Company B knows that Company A is willing to invest funds, Company A and B may agree to make a private placement. However, if these facts are unknown to them, Companies A and B can go to a Financial Market which is an organized forum that lets A, along with other suppliers of funds, and B, along with other users of funds, meet and make transactions. Once A and B have met in the Financial Market, they can now agree to make a private placement. If the two companies do not want to make an effort to find counterparty in the Financial Markets, they may go to a Financial Institution. Financial Institutions serve as an intermediary to the suppliers and users of funds. Moreover, financial institutions actively participate in the financial markets as both suppliers and users of funds.
Financial System
This is a diagram of a Financial System. The solid lines represent the flow of cash/funds, while the broken lines represent the flow of financial instruments which represent obligations to transfer cash or other assets in the future.
Note: Due to the increased need for security for the performance of obligations arising from these transactions, the transfers of funds from one party to another are made through Financial Instruments.
Financial Instruments
When a financial instrument is issued, it gives rise to a financial asset on one hand and a financial liability or equity instrument on the other. Recall from your ABM class the following definitions:
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
- Examples: Notes receivable, loans receivable, investment in stocks, investment in bonds
A Financial Liability is any liability that is a contractual obligation:
- To deliver cash or other financial instrument to another entity.
The Flow of Funds within an Organization through and from the
Enterprises
BRIEF INTRODUCTION
- To exchange financial instruments with another entity under conditions that are potentially unfavorable. (IAS 32) 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.
When companies are in need of funding, they either sell debt securities (or bonds) or issue equity instruments. The proceeds from the sale of the debt securities and issuance of bonds will be used to finance the company’s plans.
Common examples of Debt and Equity Instruments
Debt Instruments have fixed returns due to fixed interest rates. Examples of debt instruments are as follows:
• Treasury Bonds and Treasury Bills are sued 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 will be paid.
• Corporate Bonds are 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 which issued the bonds goes bankrupt, the holder of the bonds will no longer receive any return from their investment and even their principal investment can be
wiped out. 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 were to be liquidated and its assets have to be distributed, no asset will be distributed to common stockholders unless all the claims of the preferred stockholders have been given. Dividends to preferred stockholders are usually in a fixed rate. No cash dividends will be given to common stockholders unless all the dividends due to preferred stockholders are paid first. (Cayanan, A. 2015)
Holders of Common Stock on the other hand are the real owners of the company. If the company’s growth is
spurring, 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.
Who are the holders of Financial Assets? Who are the makers of Financial Liabilities and Equity instruments?
- Suppliers of Funds are the holders of financial assets. The users of funds are the makers of financial liabilities and equity instruments
Which of the financial instruments presented to you find the most appealing to you? Please on the box your answers.
I. Present the schematic diagram of the corporate organizational chart based on the last provided module. Discuss briefly.
POSTTEST
II. MULTIPLE CHOICE Direction: Choose the letter corresponding to the correct answer for each of the questions provided below.
- The role of the _______________________ is to determine the appropriate capital structure of the company.
a. VP for Marketing b. VP for Finance of the Financial Manager c. VP for Production d. VP for Administration
- ______________is a tool to assess whether the investment will be profitable in the long run.
a. Capital budgeting analysis b. Chief Financial Officer c. Shareholders d. Dividend policies e. short term investment
- ______________include making decisions on how to fund long term investments (such as company expansions) and working capital which deals with the day-to-day operations of the company.
a. Sources of funds b. short term investment decisions c. Issuance of new shares d. Financing decisions
- refers to how much of your total assets is financed by debt and how much is financed by equity.
a. Capital structure b. Dividend Policies c. Retained earnings for investment d. long term investment decisions
- If we used the money from our borrowings, the asset bought is financed by.
a. Equity b. Raw material suppliers c. Debt d. Cash dividends
- The ___________ is created by a financial relationship between suppliers and users of short-term funds.
A. financial market B. money market C. Stock Market D. capital market
- Firms that require funds from external sources can obtain them from ______________________.
A. financial market B. private placement C. financial institutions. D. all of the above
- The major securities traded in the capital markets are ________________.
A. stocks and bonds B. bonds and commercial paper C. commercial paper and Treasury bills D. Treasury bills and certificates of deposit
A. a direct placement. B. a stock exchange. C. a public offering. D. a private placement.
- Which of the following is not a service provided by financial institutions?
A. Buying the businesses of customers B. Investing customers’ savings in stocks and bonds C. Paying savers’ interest on deposited funds D. Lending money to customers
- Government usually
A. borrows funds directly from financial institutions. B. maintains permanent deposits with financial institutions. C. is a net supplier of funds. D. is a net demander of funds.
- 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.
- The _____________________ is created by a financial relationship between suppliers and users of short-term funds.
A. financial market B. money market C. stock market D. capital market
Instructor: EDMARK P. CATAGBO
“God Bless”
Business Finance 1ST Midterm 2021-2022
Course: BSED English (BLAW 2019, English 3)
University: Cebu Roosevelt Memorial College
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