Business Finance

Governor Pack Road, Baguio City, Philippines 2600

Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 12- ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 9 – FINANCE Subject Teacher:

CONCEPTS ON INVESTMENTS
Learning objectives:
At the end of this module, students must be able to:
1. explain the nature of investments;
2. state the reasons why business firms and/or individuals invest in debt or equity securities;
3. describe the types of investment alternatives;
4. explain the factors and/or areas to be considered in choosing an investment alternative.

CONTENTS:

What is investment?
The word “investment” doesn’t only mean putting your money into a business. This deals with profit, risk, speculation,
bankruptcy, and wealth of the owner.

People invest for variety of reasons. Some invest in debt securities such as Bonds and Notes, while some invest in equity
securities such as ordinary shares and preference shares.

Most common reasons why people invest:

1. Safety cushion – Storing substantial amount of cash and short-term interest-earning investments as the company’s
ready source of funds in order to still operate for a year even without any revenue or in extreme case of economic
adversity.

2. Cyclical cash needs – Companies that operate in seasonal business environments are building a cyclical
inventories and large amount of cash followed by voluminous sales and cash collection. During those times that
that company has excess cash, it invests the money to earn a return.

3. Investment for a return – Some companies invest their money for the sole purpose of earning a return through
receipts of dividends from equity securities or interest income from debt securities or income arising from
appreciation in the value of investment.

4. Investment for influence – Companies invest not to earn a return but in order to gain access or influence in other
companies. An example of this is when a company invest in its supplier to gain access to its research and
technology or to have a steady and sure supply of raw materials needed in its production. This can be done either
thru vertical or horizontal business combination.

5. Investment for control – Some companies acquire equity shares of other companies for the primary reason of
having significant influence or control over their operation, investment, and financing decision. By doing this,
they can expand their operations or increase control over key markets in the industry. This is discussed more in
Business Combination topic under Advanced Financial Accounting and Reporting.

Various types of investment alternatives:

1. Equity Securities
A. Ordinary shares – represents ownership interest in issuing corporation.
 Class A – These are stocks that can be exclusively traded by Filipino investors.
 Class B – These are stocks that can be bought and sold by both Filipino and foreign investors.
B. Preference shares – Usually non-voting but have priority over ordinary shares in payment of dividends
and/or net assets in case of corporate liquidation.

Par Value – refers to the nominal value of the shares of stocks on the face of the stock certificate. Shares of stock
that have no par value are called no-par value stock. No-par value shares are issued at their stated value which
should not be lower than ₱5.00 as required by B.P. 68. The shares of stock can be issued higher than its par value
(premium) and the difference between the par value and payment received is to be recorded in the books as share
premium. No shares of stock should be issued below its par value because this will violate the trust fund
doctrine.
How to compute price of stocks?
Stock valuation formula:
a) Discounted dividend model

Business Finance Page 1 of 6

 Business Finance
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 12- ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 9 – FINANCE Subject Teacher:

dps
P 0=
^
r −g
Where:
^P0= value of common stock today
dps = dividend per share
r = required rate or discount rate on stock
g = dividend growth rate (calculated using Average Method of Least Square Method or ROE x 1-Pay-out
Ratio)

b) Constant growth rate model

^
D1
^
P 0=
r s−g
Where:
^
D0= current dividend
^
D1 = next year dividend at time 1
r = required rate or discount rate on stock
g = dividend growth rate (calculated using Average Method of Least Square Method)

2. Short-term Securities
A. Negotiable certificates of deposits – Issued by authorized commercial banks.
B. Commercial papers – Negotiable promissory notes issued by large and well-known corporations.
C. Banker’s acceptances – Used by importers to secure trade credits from exporters. The accepting bank
(importer’s bank) guarantees the payment of the goods.
D. Treasury bills (T-bills) – Obligations issued by the government treasury and sold at a discount from face
value.

3. Intermediate and Long-term Debt Securities – obligations that mature in more than one year.
A. Philippine government securities – Debt securities issued by the government.
 Treasury notes (T-notes) – issued by the government treasury with maturity between 1-10 years. Risk is
almost equal to zero.
 Treasury bonds (T-bonds) – issued by the government treasury with maturity over 10 years. Risk is
almost equal to zero.
B. Corporate bonds – debt securities issued by corporations. Bonds may differ in the way the principal and
interest payments are made and in the collateral used to back the bonds.

Types of bonds:
1. Term bonds
2. Serial bonds
3. Callable bonds
4. Convertible bonds

How to compute price of bonds?

Bond valuation formula:
1−(1+r )−n
B0=I [ r ]
+ F [ (1+ r)−n ]
Where:
B0 = value of the bond at time zero
I = annual interest paid
n = number of years to maturity
F = par/face value
r = required return on the bond

Yield to maturity (YTM) – can be calculated in three ways:

a. Trial And Error
b. Using a financial calculator
c. Using Microsoft® Excel
d. Approximation
Business Finance Page 2 of 6
 Business Finance
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 12- ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 9 – FINANCE Subject Teacher:

Formula:
I F−B0
YTM =
m
+
mt ( )
.60 ( B0 ) + .40 ( F )
Where:
B0 = value of the bond at time zero
I = annual interest paid
m = number of payment
t = term of the bond
F = par/face value

4. Hybrid Securities – securities that have the characteristics of both equity and debt.
A. Convertible preferred stock – the convertible feature of this security allows the investor to convert the
preferred share to a specific number of shares of ordinary shares.
B. Convertible bonds – the convertible feature of this security allows the investor to convert the bond to a
specific number of shares of ordinary shares.

5. Derivatives Securities – securities that derive their value from the value of an underlying asset.
A. Options – Provide the right to buy or sell shares of ordinary share of specific corporation within a limited
period of time at a designated price.
B. Commodity futures – Provide the contract holder the right to sell a specified amount of an agricultural or
natural resources commodity at a designated price within a specified period of time.
C. Financial futures – Provide the contract holder the right to sell a specified amount of an ordinary share
index, bonds, or foreign currencies at a designated price within a specified period of time.
D. Options on futures – Provide the right to buy or sell a specified commodity or financial future within a
limited period of time at a designated price.
E. Rights – Issued by a corporation to existing ordinary share in connection with the sale of additional shares.
F. Warrants – Issued by a corporation that provide the holder the right or option to purchase additional bonds or
ordinary shares from the issuing corporation at a specified price within a designate period of time.

6. Real Assets – known as Non-financial assets

A. Precious metal – Includes gold, silver, copper, etc.
B. Real estate – Includes single of multi-family residences (condominium), undeveloped land, commercial
property, and farm land.
C. Collectibles – Include diamond, fine art, numismatic (collection of) coins.

7. International investments – investment by individuals in debt or equity securities issued by organizations outside
the country of residence of the investor.
A. Multinational corporations – Shares and bonds issued by large corporations with significant interests in
more than one country.
B. Foreign shares traded on a local exchange – Shares of large firms that have established trading for their
securities on domestic as well as foreign exchanges.
C. Foreign currencies – Include US$, Euros, British pounds, etc.

8. Other Investment Alternatives

A. Pension funds – Public or private investment funds that provide retirement and other benefits to eligible
employees.
B. Mutual funds – Investment companies that sell shares of ordinary share that represent an ownership interest
in a portfolio of domestic and/or foreign securities.

Areas to be considered in choosing an investment alternative:

1. Basic investment objectives
2. Expected rate of return
3. Expected risk
4. Taxes – considering the tax effect on an expected return (net after-tax return).
5. Risk-taking capability
A. Risk-neutral investor – willing to accept equal levels of expected return for higher level of risk.
B. Risk-taker investor – willing to accept lower levels of expected return for higher level of risk.

Business Finance Page 3 of 6

 Business Finance
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 12- ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 9 – FINANCE Subject Teacher:

C. Risk-averse investor – select a portfolio that maximizes expected return for any given level of risk or
minimizes risk for any level of expected return.
6. Investment strategies – deals with selection, timing, and diversification of investments.

References:
 BAL 658.15 C1128, 2017. Cabrera, Ma. Elenita Balatbat and Cabrera, Gilbert Anthony B., Business Finance for
Senior High School, GIC Enterprises
 BAL 658.15 G4476, 2017. Gitman, Lawrence J., et. al. Business Finance. JO-ES Publishing House, Inc.
 BAL 332.4 L161, 2015. Laman, Rose Marie B. et. al. Financial System, Market & Management. GIC Enterprises
 BAL 658.15 An15, 2010. Anastacio, Ma. Flordeliza, Dacanay, Roberto C. Fundamentals of Financial
Management, Rex Book Store
 https://www.pseacademy.com.ph/LM/investors~details/id-1316266249549/Types_of_STOCKS.html

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