 Finance

- Permeates the entire business organization by

providing guidance for firm’s strategic and day-to-
day decisions.
 Objective
- Usually in quantitative terms and are set within a time
frame.
 Objective Setting
- Important phase in the business enterprise since
upon correct objectives settings will the entire
structure of the strategies, policies, and plans of a
company rest.
Two kinds of Objectives:
> Financial Objectives
 ex:
 To increase total revenue by 20% annually for the
next 5 years.
 To decrease marketing expenses by 5% for the
next years.
> Non-Financial Objectives
 ex:
 To improve customer satisfaction with customer
services.
 To be a leader in technology in the industry.
 Strategic Financial Management
- Means not only managing a company’s
finances but managing them the intention to
succeed, and that is to attain the company’s
goal and objectives.

Two Categories:
1. Strategic Planning
- A long-range in scope and has its focus on
the organization as a whole.
2. Strategic Financial Planning
- Involves financial planning, financial
forecasting, provision of finance and
formulation of finance policies which should
lead the firm’s survival and success.

 Financial Plan:
i. Budget Development
ii. Employee Structure, payroll and benefits
iii. Corporate Tax Planning
SHORT AND MEDIUM-TERM
 Maximization of return on capital employed
or return on investment
 Growth in earnings per share and
price/earnings ratio through maximization
of net income or profit and adoption of
optimum level of leverage
 Maximization of finance charges
 Efficient procurement and utilization of
short-term, medium-term, and long-term
funds
LONG-TERM
 Growth in the market value of the equity
shares through maximization of the firm’s
market share and sustained growth in
dividend to shareholders
 Survival and sustained growth of the firm
 The owner’s perspective which hold that
the only appropriate goal is to maximize
shareholders or owner’s wealth, and:
 The stakeholders’ perspective which
emphasizes social responsibility over
profitability (stakeholders include not
only the owners and shareholders, but
also include the business’s customers,
employees, and local commitments).
Financial practitioners and academics now
tend to believe that the manager’s primary
responsibility should be to maximize
shareholder’s wealth and give secondary
consideration to other stakeholders’
welfare.
Adam Smith, an 18th century economist was
one of the first and well known proponent
of this viewpoint. He argued that in
capitalism, “an individual pursuing his own
interest tends also to promote the good of
his community”.

“Acting through competition and the free

price system, only those activities and
efficient and beneficial to society as a
whole would survive in the long run”.
 It considers the risk and time value of
money
 It considers all future cash flow,
dividends, and earnings per share
 It suggest the regular and consistent
dividend payments to the shareholders
 The financial decisions are taken with a
view to improve the capital appreciation
of the share price
 Maximization of firm’s value is reflected in
the market price of share since it depends
on shareholder’s expectations regarding
profitability, long run prospects, timing
difference of returns, risk, distribution of
returns of the firm
This objective is narrow and ignores the
concept of wealth maximization of society
since society’s resources are used to the
advantage only of a particular firm.
Finance deals with funds, and
funds denote money. The earnings
on money lent and the cost of
money borrowed are expressed
as a percentage of the principal
amount of money lent or
borrowed called Interest Rate.
 Interestrates play a major role in finance.
Since finance is a major concern of
monetary policy, we have also seen that
the BSP uses interest rate as the primary
instrument of monetary control.
Remember that the official interest rate is
the reverse repo rate (RRP) or the
overnight borrowing rate, which is the
borrowing rate on the reverse
requirements for banks set by the BSP.
 Important roles in the economy:
1) Ensure that current savings will flow into
investment to promote economic
growth.
2) Ration the available supply of credit to
provide loanable funds to those
investment projects with the highest
expected returns.
3) Bring into balance the supply of money
with the public’s demand for money.
 The finance manager is responsible for
determining how scarce resources or funds
are committed to projects. The investing
function deals with managing the firm’s
assets.
 The investment decisions should aim at
investments in assets only when they are
expected to earn a return greater than a
minimum acceptable return which is also
called as hurdle rate.
The following areas are examples of
investing decisions of a finance manager:
a) Evaluation and selection of capital
investment proposal
b) Determination of the total amount funds
that a firm can commit for investment
c) Prioritization of investment alternatives
d) Funds allocation and its rationing
e) Determination of the levels of
investments in working capital
f) Determination of fixed assets to be
acquired
g) Asset replacement decisions
h) Purchase or lease decisions
i) Restructuring reorganization mergers
and acquisition
j) Securities analysts and portfolio
management
 The finance manager is concerned with the
ways in which the firm obtains and manages
the financing it needs to support its
investments.
 The financing objective asserts that the mix of
debt and equity chosen to finance investments
should maximize the value of investments
made.
 Financing decisions call for good knowledge of
costs of raising funds, procedures in hedging
risk, different financial instruments and
obligation attached to them.
The finance manager will be involved in the following finance
decisions:
a) Determination of the financing pattern of short-term,
medium-term and long-term funds requirements
b) Determination of the best capital structure or mixture
of debt and equity financing
c) Procurement of funds through the issuance of
financial instruments such as equity shares,
preference shares, bonds, long-term notes, and so
forth
d) Arrangement with bankers, suppliers, and creditors
for its working capital, medium-term and other long-
term funds requirement
e) Evaluation of alternative sources of funds
 This third responsibility area of the
finance manager concerns working
capital management.
 The term working capital refers to a firm
short-term asset and its short-term
liabilities.
 Managing the firm’s working capital is
day-to-day responsibility that ensures
that the firm has sufficient resources to
continue its operations and avoid costly
interruptions.
Some issues that may have to be resolved
in relation to managing a firm’s working
capital are:
a) The level of cash, securities and
inventory that should be kept on hand
b) The credit policy
c) Source of short-term financing
d) Financing purchases of goods
GREEN POLICY is your
company’s statement about the
commitment to sustainability and
environmental management that
your business is prapared to
make.
A commitment to prevent
pollution.

Aconcise description of what

your company is trying to
achieve with your
environmental goals.
A healthier, safer workplace.

Theability to meet customer

green contractual
requirements.
 Interest- The amount paid in addition to
the principal for the use of money.

 Interest Rate--- Refers to the percentage

of the principal, that is, the ratio of the
interest and the principal.
- Expressed as an annual percentage,
although it could also be on a per month,
per quarter, or per day basis.
INTEREST RATE
DEMAND FOR MONEY
 VELOCITY OF MONEY- HOW MANY TIMES
THAT THE MONEY GETS USED IN A YEAR

INTEREST RATE DEMAND FOR MONEY VELOCITY OF MONEY

WHEN THE INTEREST RATE INCREASES, THE DEMAND FOR

MONEY DECREASES, RESULTING IN AN INCREASE IN THE
VELOCITY OF MONEY. WHEN THE INTEREST RATE DECREASES,
THE DEMAND FOR MONEY INCREASES, RESULTING IN A
DECREASE IN THE VELOCITY OF MONEY
PRICES DEMAND FOR MONEY
 DEMAND VELOCITY
INTEREST RATE PRICES
FOR MONEY OF MONEY

WHEN THE INTEREST RATE FALLS, THE DEMAND

FOR MONEY INCREASES, THE VELOCITY OF
MONEY GOES DOWN, AND PRICES GO UP, AND
VICE VERSA.
 Nominal Interest Rate
-Simplest type of interest rate.
-Referred to as the coupon rate for bonds and
other fixed-income investments or loans
granted by financial institutions.
 Ex:
You are going to borrow P5000 then nominal
interest rate is 2% per thousand, so you are
expected to add P100 of interest per
thousand per month.
 Real Interest Rate
- Interest rate that is adjusted for expected
changes in the price level to accurately reflect
the true cost of borrowings.
ex:
The nominal interest rate is 6% and the expected
inflation rate is 3%, therefore the real interest rate
is 3%. where:
RIR - Real Interest Rate RIR = NIR – EIR
NIR - Nominal Interest Rate
EIR – EXPECTED INFLATION RATE
 Fixed Interest Rate
- This means that the interest rate that you
will be charged over the term of your loan
will not change, no matter how high or low the
market may drive interest rates.
ex:
Consider a loan of P20,000 from a bank to a
borrower. Given a fixed interest rate of 5%,
the actual cost of the loan, with the principal
and interest combined, is P21000
 Variable Interest Rate
- Also called “floating rate”
- The interest you are charged changes as
whatever index your loan is based on
changes.
 Index – plus a credit-based margin
determined by the lender.
 Margin – it will not change until the loan is
paid off.
ex:
You took out a loan with a variable rate of
LIBOR (index) + 5% (margin), and let’s say
that the LIBOR is 2.76% at the time they took
out the loan, then the variable rate would have
been 7.76%.
Interest Rate is the measurement of
interest income, yields, dividend,
income, or profit directly derived
from the investment.
Capital Gain is the increase in value.
Rates of Return is generally applied
to financial assets.
To illustrate, let us take an
investment in bonds of ₱10,000 with
an interest rate or coupon rate of
10% and a market value at the end of
the year acquisition of ₱11,000:
 𝒓 = 𝑰Τ𝑷

Where,
r = Interest rate
I = Interest received for the period or
coupon payment
 𝑴𝑽 − 𝑷
𝒄𝒈 =
𝑷
Where,
Cg = Capital gain
MV = Market value
P = Principal
MV-P = Change in value/Gain in peso

Therefore,
ROR = r + cg
 Ifthe bond has decreased in value from
₱10,000to ₱9,000, the second part would
give us:
₱𝟗, 𝟎𝟎𝟎 − ₱𝟏𝟎, 𝟎𝟎𝟎 (−₱𝟏, 𝟎𝟎𝟎)
= = (−𝟏𝟎%)
₱𝟏𝟎, 𝟎𝟎𝟎 ₱𝟏𝟎, 𝟎𝟎𝟎
 The investor earned 10% interest, but lost
10% due to the decrease in value of the
bonds of 10%, making the net yield to the
investor equal to zero (0%).
The return on a bond will not always equal
the interest rate of the bond. Even for a bond
whose current yield is an accurate measure of
the yield to maturity, the return can differ
substantially from the interest rate especially
if there are large fluctuations in the price of
the bond that produce substantial capital
gains or losses. Key findings which are
generally true of all bonds according to
Mishkin (2003) are modified as follows:
 The only bond which return equals the initial
yield to maturity is one which time to maturity is
the same as the holding period meaning, the
investor holds the bond to maturity.
 A rise in interest rate is associated with a fall in
bond prices, resulting in capital losses on bonds
which terms to maturity are longer than the
holding period, meaning, the investor holds the
bond and sells the same prior to maturity.
 The more distant a bond’s maturity, the greater
the size of the percentage price change
associated with an interest rate change.
 The more distant a bond’s maturity, the
lower the rate of return that occurs as a
result of the increase in the interest rate.
 Even though a bond has a substantial
initial interest rate, its return can turn out
to be negative if the interest rate rises.
When interest rate rises, market values of
financial assets generally fail.
Finance deals with funds, and
funds denote money. The
earnings on money lent and the
cost of money borrowed are
expressed as a percentage of the
principal amount of money lent
or borrowed called Interest Rate.
 Interestrates play a major role in finance.
Since finance is a major concern of
monetary policy, we have also seen that
the BSP uses interest rate as the primary
instrument of monetary control.
Remember that the official interest rate is
the reverse repo rate (RRP) or the
overnight borrowing rate, which is the
borrowing rate on the reverse
requirements for banks set by the BSP.
Important roles in the economy:
1) Ensure that current savings will flow into
investment to promote economic
growth.
2) Ration the available supply of credit to
provide loanable funds to those
investment projects with the highest
expected returns.
3) Bring into balance the supply of money
with the public’s demand for money.
Important roles in the economy:
4) Act as an important government tool through
its influence on the volume of the savings and
investment. If the economy is growing too slowly
and unemployment is rising, the government can
use its policy tools to lower interest rates in order
to stimulate borrowing and investment which will
eventually encourage productions and create
employment. On the other hand, an overheated
economy experiencing rapid inflation calls for a
government policy of higher interest rates to slow
both borrowing and spending.
Assume that there is one
fundamental interest rate
operating in the economy and we
will call this rate the “pure or risk-
free interest rate”, which is, in fact,
a component of all interest.