ERICA CRISTSL BOLANTE BSBA FM 1

Module 3: Fundamental Concepts and Tools of Business Finance

Focus and question

Discuss your answers on the following questions briefly:

1. Distinguish private finance from public finance.

*Private finance deals with the area of general finance not classified under public finance.
*Public finance which deals with the revenue and expenditure patterns of the government and their
various effects on the economy.

2. Define the term business finance.

*Business finance refers to the provision of money for commercial use. It is also concerned with the
effective use of funds.

3. A prospective investor has three investment choices. In investment proposal A, he is 50% sure to
make a P100,000 profit. In proposal B, an P80,000 profit is 55% certain, while in proposal C, a
P120,000 profit is 45% certain. In terms of expected value, which is the best choice?
A. He is 50% sure to make a P100,000 profit.

3. What are presented in the balance sheet? In the profit and loss statement?
*A balance sheet is a financial statement that reports a company’s assets, liabilities, and
shareholders equity. The balance sheet is a snapshot, representing the state of a company’s
finances(what it owns and owes) as of the date of publication.

4. What does net worth represent?

The net worth section of the balance sheet shows the interest of the owner or
owners in the company. Net worth is what you own minus what you owe.

Focus question
Compile balance sheets of three companies representing three different industries. Point out
and provide reasons for the differences in the information provided by the balance sheets.

*The balance sheet is the statement produced periodically, normally at the end of a financial
year, showing an organization’s assets, liabilities, and the shareholders equity.
The assets section of the balance sheet shows everything that the firm owns and which
has monetary value. Assets have value because a business can use or exchange them to produce the
service or products of the business.
The liabilities are the debts owed by a business to others-creditors, supplies, tax, authorities,
employee. A business incurs many of its liabilities by purchasing items on credit to fund the business
operation. A company’s equity represents retained earnings and funds by its owners or
shareholders(capital), who accept the uncertainly that comes with ownership risk in exchange for
what they hope will be a good return on their investment.

Assessment

True or False. Write I like to if the statement is True and Move it if the statement is False.

I like to 1. The budget is sent out each year by the company to its stockholders or members.
I like to 2. Financial statements and budgets of the firm are the concern of the owners, the
management, the creditors, the government, and prospective investors.
Move it 3. Public finance may be subdivided into: (1) personal finance; (2) the finance of non-
profit organizations; and (3) business finance.
I like to 4. Business finance refers to the provision of money for commercial use, as well as the
effective use of funds.
I like to 5. The various goals of business finance are; (1) maximizing profits; (2) maximizing
profitability; (3) maximizing profit subject to cash constraint; (4) maximizing net present worth; and
(5) seeking an optimum position along a risk- return frontier.
Move it 6. In the performance of the finance function of the manager, the budget, which is an
estimate of income and expenditures for a future period, is a useful tool.
I like to 7. Finance refers to the study of acquisition and investment of cash for the purpose of
enhancing value and wealth. It may be categorized as either public finance or private finance.
I like to 8. The production budget is an estimate of the quantity of the products that should be
produced in accordance with the sales budget.
I like to 9. Revenues refer to the gross income from the production and sale of a firm’s product
or service.
I like to 10. Net profit or net income refers to the difference between revenues less period
expenses and product costs.

MODULE 4: FINANCIAL MARKETS

Focus Questions
Discuss your answers on the following questions briefly:
1. Why is knowledge of financial markets an important requirement in business finance?
* Because it is a part of business that possessing a good understanding and knowledge of
the financial markets can help individuals and companies achieve success and Strong knowledge of
how the markets work can help you improve your business in effective ways to increase its share
price and gain more investment. This in turn can be used to grow the company.

2. What methods do financial markets use to transfer funds?

* There are the two methods may be transferred; .one method is through financial intermediation
which involves the use of a commercial banking system to attract deposits from individuals and
institutions and make loans to other individuals or institutions.
*A second methods is know as direct finance when borrower and lender directly interact through
activity in equity or dept markets. In this case the lender will buy financial instruments ( share of stock
or bonds) being sold by borrowers.

3. What is traded in the money market?

*The money market is that financial market on which dept securities with an original maturity of one
year or less are traded. The money market refers to trading in very short-term debt investments. At
the wholesale level, it involves large-volume trades between institutions and traders. At the retail
level, it includes money market mutual funds bought by individual investors and money
market accounts opened by bank customers.

4. How does funds and securities flow in primary and secondary markets?
The primary markets refers to the market where securities are created, while the secondary market
is one in which they are traded among investors and those securities are traded by investors.

5. What situation is remedied by the negotiation market?

A negotiated market is a type of secondary market exchange in which the prices of each security are
bargained out between buyers and sellers. In a negotiated market, there are no markets makers or
order matching. Instead, buyers and sellers actively negotiate on the price at which a transaction is
finalized either directly or through the use of brokers. These markets are considered very inefficient in
pricing are large issues that can’t be resolved for this type of trading.

Learning Activities
Discuss your answers on the following questions briefly:
Prepare a list of financial intermediaries in your area providing indirect financing.
Assessment

True or False. Write I like to if the statement is True and Move it if the statement is False.

I like to 1. Financial markets transfer funds directly or indirectly.

I like to 2. Financial markets are useful in two aspects: (1) funds are directed to DS Us which
can use them most efficiently; and (2) liquidity is provided to savers.

I like to 3. The options market is that financial market with fixed trading rules.

I like to 4.The mortgage market is that portion of the financial market which deals with loans
on residential, commercial, and industrial real estate, and on farmland.

Move it 5. Direct finance refers to lending by an ultimate lender to a financial intermediary that then
re lends to ultimate borrowers.

I like to 6. Direct finance refers to lending by ultimate borrowers with no intermediary.

I like to 7. The foreign exchange market is the market where people buy and sell foreign
currencies.

Move it 8. The options market is that market consisting of large collection of brokers and
dealers, connected electronically by telephones and computers that provide for trading in unlisted
securities.

I like to 9. When buyers and sellers of securities negotiate with each other regarding price and
volume, either directly or through a broker or dealer, they are engaged in the financial market called
negotiation market.

Move it 10. The market for debt instruments of any kind is called the stock market.

MODULE 5: CAPITAL BUDGETING

Focus Questions; Thinking to Learning Thoroughly

Discuss your answers on the following questions briefly:

1. What is capital budgeting? Explain the reasons why this activity cannot be disregarded by
management.
*capital budgeting is the process a business undertakes to evaluate potential major projects or
investments. Construction major projects or investment in an outside venture are examples of
projects that would require capital budgeting before they are approved or rejected.
*The reasons why this activity cannot be disregarded by management because it is a capital
budgeting on which the foundation of a project is laid so that is is formed and finished in accordance
with man the budget allocated so that it is better.

2. Cite examples of the different classes of capital expenditures.

-Computer equipment
-office equipment
-Building
-Furniture and fixtures
-Land(including the cost of upgrading the land, such as the cost of an irrigation system or a parking
lot
-Software
 -vehicles

3. Cite specific examples applicable to each of the six primary factors that must be considered by
management in the evaluation of proposed capital expenditures.

* Capital expenditures refers to funds that are used by a company for the purchase, improvement, or
maintenance of long-term assets are usually physical, fixed and non-consumable assets, such as
property, equipment, or infrastructure, and that have a useful ife of more than one accounting
period.

4. Why must risk, uncertainty, and sensitivity be included as factors in the evaluation of proposed
capital expenditures?

*Risk, it is variability between actual return and estimated return in a certain future. The decisions
maker draws a probability of certain return based on historical data. Uncertainly, the decision makers
are not to draw probability of an outcome in uncertain future. The facts are unknown uncertain
future while sensitivity analysis in the study of how the uncertainty in the output of a model can be
apportioned to different sources of the input.

5. Discuss the importance of obsolescence as a risk factor.

*Obsolescence risk is the risk that a process, product, or technology, used or produced by a
company for profit will become obsolete, and thus no longer competitive in the market place. This
would reduce the profitability of the company.

Learning activities

A firm is considering the purchase of a forty-year old building. The following pertinent data
were provided:
Acquisition Cost P12,000,000
Economic Life (remaining) 10 years
Salvage value P200,000
Annual Rental Income P5,000,000
Annual Expenses P3,000,000
Net Income before Tax and Depreciation P2,000,000
Depreciation (straight line method) P1,000,000
Net Income before Tax P1,000,000
Income Tax (withheld by lessors) P50,000
Average net Annual Earnings P950,000
Required: Evaluate the proposal using the three basic methods.

Assessment

True or False. Write I like to if the statement is True and Move it if the statement is False.
I like to 1. Capital budgeting is an important segment of business finance. It includes relevant
aspects of investment, valuation, risk, and uncertainty.

I like to 2. The substantial outlay of funds for the purpose of lowering costs and increasing net
income for several years in the future is called capital expenditure.

Move it 3. The planning and control of capital expenditure is called valuation.

I like to 4. When the real worth to the firm of any proposal for capital expenditure is
determined, the process is called valuation.

I like to 5. Sensitivity refers to the effect on investment of changes in some factors, which were
not previously determined with certainty.

I like to 6. Under the discounted cash flow method, a desired rate of return is used tor
discounting purposes.

I like to 7. Credit as a factor should be considered in the sense that some credit terms may be
highly favorable to the company.

I like to 8. The payback method determines the number of years required to recover the cash
investment made on a project.

I like to 9. This Average Return on Average Investment method is similar to the average return on
investment method except that the effect of the depreciation charge on the investment is taken into
consideration.

I like to 10. Risk is defined as the uncertainty concerning loss.

MODULE 6: WORKING CAPITAL

Focus and question

1. What is meant by working capital? Gross working capital? Net working capital?

*Working capital is a financial metric which represents operating liquidity available to a business,
organization, or other entity, including governmental entities. Along with fixed assets such as plant
and equipment, working, working capital is considered a part of operating capital.
*Gross working capital is the sum total of all the current assets and the current liabilities of a
company, whereas net working capital is the difference between the current assets and the current
liabilities of a company.
*Net working capital (NWC) is the difference between a company’s current assets and current
liabilities. A positive net working capital indicates a company has sufficient funds to meet its current
financial obligations and invest in other activities.

2. What factors determine the need for cash in the firm’s operations?

*The factors that determine the required cash balances are:(I) synchronization of cash flows,(j) short
costs, (iii)excess cash balance,(iv) procurement and management, and (v) uncertainty.

3. Why are accounts receivables inevitable? What advantages do selling on account offer?

*Because few going concerns are paid the moment someone buys their product.the customers are
billed at certain times during the month and if paid the amount in A/R will go down and cash will go
up. They no longer owe money for their purchase, their cash will go down as well because they had to
take the money out to pay the supplier. Cash flow, the advantage to selling your accounts receivables
is an immediate influx of cash. The factoring company pays upfront for the receivables purchased, less
their fee for the service going forward, they will qualify each new sale the company makes and
purchase the receivables upon the sale.as sale increase, so does the cash flow.
4. What is the function of inventories?

*The main function of inventory is to provide operations with on ongoing supply of materials to
achieve this function effectively, your business should strive to find way a sweet spot between too
much and too little, without ever running out of stock.

5. What basic criteria are commonly used in evaluating credit risk?

*In general when evaluating credit risk, you look at 5 main things; character, collateral,capacity to
repair, capital, and conditions.

Identify a retailing firm in your area. Find out the device used in the achievement of its
inventory goals. State the reason why such device is used.

Assessment

True or False. Write I like to if the statement is True and Move it if the statement is False.

I like to 1. Working capital is needed tor the following purposes: (1) replenishment of
inventory; (2) provision tor operating expenses; (3) support for credit sales; and (4) provision of a
safety margin.

I like to 2. That portion of the total capital of the firm which finance the day-to-day activities is called
gross working capital, and it is continually circulating.

Move it 3. The net working capital is the total amount of current assets minus current liabilities.

I like to 4. The gross working capital refers to the firm's total current assets.

I like to 5. Inventory management refers to the activity that keeps track of how many of the
procured items needed to create a product of service are on hand, where each item is, and who has
responsibility for each item.

I like to 6. The economic order quantity (EOQ) method is used to determine what quantity to
order so as to minimize total inventory costs.

I like to 7. Capacity refers to the reputation for honesty and fair dealing of the applicant or the owners
of the firm applying for credit.

Move it 8. Inter business financing refers to credit flowing from a large business to small
business.

I like to 9. Liquidity management refers to the ability of the firm to pay its bills on time or
otherwise its current obligations.

I like to 10. The firm should have sufficient amount of capital to provide for unexpected
expenditures, delays in the expected inflow of cash, and possible decline in revenue.