SENIOR HIGH SCHOOL

Business Finance
Quarter 3- Module 1
Introduction to Finance
Business Finance – Senior High School
Alternative Delivery Mode
Quarter 3- Module 1: Introduction to Finance
First Edition, 2021

Republic Act 8293, section 176 states that: No copyright shall subsist in any work of
the government of the Philippines. However, prior approval of the government agency or office
wherein the work is created shall be necessary for exploration of such work for profit. Such
agency or office may, among other things, impose as a condition the payment of royalties.

Borrowed materials (i.e. songs, stories, poems, pictures, photos, brand names,
trademarks, etc. are owned by the respective copyright holders. Every effort has been exerted
to locate and seek permission to us these materials from their respective copyright owners.
The publisher and authors do not represent nor claim ownership over them.

Published by Department of Education

Division of Lapu-Lapu City

Development Team of the Module

Writer’s Name : Aisa V. Soroño, MBA
Editors’& Reviewers’ Name: :Rebecca P. Toring, PSDS District 5
:Rowena G. Sagarino, Principal II
Illustrator’s Name: :Aisa V. Soroño, MBA
Layout : :Maria Teresa D. Amion, Librarian II
Plagiarism Detector Software: :PlagiarismDetector.com
Grammarly Software: :CitationMachine.com
Management Team:
Schools Division Superintendent :Wilfreda D. Bongalos, Ph.D., CESO V
Assistant Schools Division Superintendent : Cartesa M. Perico, Ed..D.
Curriculum Implementation Chief :Oliver M. Tuburan, Ed. D.
EPSVR-Mathematics :Cecilia O. Arcenal
EPSVR-LRMDS :Teresita A. Bandolon
ADM Coordinator :Jennifer S. Mirasol

Printed in the Philippines by:

Department of Education – Region VII Central Visayas
Division of Lapu-Lapu City
Office Address: BM Dimataga Road, Poblacion, Lapu-Lapu City
Contact No. (032) 410-4525
Email Address: [email protected]

ii
Introduction

This module was designed and written with you in mind. It is here to help you master
Introduction to Finance. The scope of this module permits it to be used in many
different learning situations. The language used recognizes the diverse vocabulary
level of students. The lessons are arranged to follow the standard sequence of the
course. This module, although self-paced, can even be more effective with the use of
other modalities like collaborative type with other students to apply management
theories and concepts in solving business cases. This can be done in the entire
semester with the guidance of the teacher/facilitator.

The Most Essential Learning Competencies:

● explain the major role of financial management and the different individuals
involved
● distinguish a financial institution from financial instrument and financial market
● explain the flow of funds within an organization –through and from the
enterprise—and the role of the financial manager

The module provides two lessons, namely:

● Lesson 1: Introduction to Finance
● Lesson 2: Role of the Financial Manager

After going through this module, student/s will:

1. Demonstrate an understanding of the definition of finance, the activities of the
financial manager, and financial institutions and markets
2. Be able to define Finance, describe who are responsible for financial
management within an organization, describe the primary activities of the
financial manager, describe how the financial manager helps in achieving the
goal of the organization, describe the role of financial institutions and markets
Pre-Test: Take the test to determine whether you have a solid
background of the topic. Check your answer with the answer key at
the back portion of this module. Identify the answer to the following
question.
True/False
__________1. Primary and secondary markets are markets for short-term and long-
term securities, respectively.
__________2. Financial markets are intermediaries that channel the savings of
individuals, businesses, and government into loans or investments.
__________3. The money market involves trading of securities with maturities of one
year or less while the capital market involves the buying and selling of
securities with maturities of more than one year.
__________4. Holders of equity have claims on both income and assets that are
secondary to the claims of creditors.
__________5. Preferred stock is a special form of stock having a fixed periodic
dividend that must be paid prior to payment of any interest to
outstanding bonds.

Multiple Choice
1. A ______ is one financial intermediary handling individual savings. It receives
premium payments that are placed in loans or investments to accumulate funds to
cover future benefits.
A. life insurance company C. savings bank
B. commercial bank D. credit union
2. The key participants in financial transactions are individuals, businesses, and
governments. Individuals are net ______ of funds, and
businesses are net ______ of funds.
A. suppliers; users C. users; suppliers
B. purchasers; sellers D. users; providers
3. Which of the following is not a financial institution?
A. A pension fund C. A commercial bank
B. A newspaper publisher D. An insurance company
4. A ______ is set up so that employees of corporations or governments can receive
income after retirement.
A. life insurance company C. savings bank
B. pension fund D. credit union
5. A ______ is a type of financial intermediary that pools savings of individuals and
makes them available to business and government users.
Funds are obtained through the sale of shares.
A. mutual fund C. savings bank
B. savings and loans D. credit union

2
Lesson 1
Introduction to Finance
What comes into your mind when you hear finance? You may not notice
it but it is part of every decision you make every day. It is in the way you
manage your money and think of ways on how to invest it to earn more
money. This lesson will help you in grasping the concept of Finance. Try
to internalize this lesson as much as you can, as this will serve as a
foundation to the succeeding lessons.

Word Search

Find as many words relating to Finance. Write the words down below and give its
definition based on your stock knowledge.

Mini Lesson

Definition of Terms
Finance can be defined as the science and art of managing money. (Gitman & Zutter,
2012) Budgeting is the act of estimating revenue (in the form of your allowance) and
expenses over a period of time (in this case, on a daily basis).
Investment is a monetary asset purchased with the idea that the asset will provide
income in the future or will later be sold at a higher price for a profit.

Finance Terms
https://www.investopedia.com/terms/f/finance.asp

3
Let’s Discuss
To recall previous lessons from Fundamentals of Accountancy, Business
and Management 1, how can one be a shareholder of a corporation? Can
you be an owner of big listed companies like PLDT and JFC?
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________

How and where can you buy stocks?

- Corporations may either be privately owned or publicly owned.
- Privately owned corporations are often owned by family members whose
stocks may not be offered to outsiders unless consent by the family
members is secured.
- Companies which are publicly listed are owned by unrelated investors
and are traded in organized exchanges like the Philippine Stock
Exchange. While there are many stockholders, there is generally a group
of investors or a family which controls each listed company. For
example, in the case of BPI, the biggest stockholder is Ayala Corporation
and in the case of Banco De Oro, it is SM Investment Corporation. Prices
of stocks of listed corporations are driven by several factors such as the
earnings of the companies, the prospects of the industry where these
companies operate, the general market sentiment, and the economic
prospects of the country, among others.
-
Let’s Discuss
Assume that you are the biggest shareholder of a corporation, what are the
objectives you want to achieve as owner of the corporation?
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________

Factors that Influence Market Price

4
Profitability
• Profit is a measure of the financial performance of a company for a
period of time.
• Although it is a major driver for increasing the value of stock, an investor
should not rely on profits alone. As discussed earlier, it is possible that
the company has profits, but its cash flow is negative.

- Examples: Suppose the following Income Statements and Cash Flow Statements of
companies A, B and C were presented to you. Which do you think is a more attractive
company?

• Company A is profitable but generated negative cash flows which

resulted from the uncollected accounts receivable of PHP100,000.
Without adequate cash inflows to meet its obligations, the company will
face liquidity problems, regardless of its level of profits.
• Company B on the other hand has a positive cash flow but is
unprofitable. This is a result of the company’s delay in payment of its
costs. Accordingly, the Company will soon have to pay the remaining
PHP100,000 liability and its cash will no longer be sufficient. Again,
without adequate cash inflows to meet its obligations, the company will
face liquidity problems.
• Company C is profitable and has a positive cash flow. Based on the
information provided, Company C seems to be the best.

Good liquidity and reasonable leverage position.

• Liquidity and leverage refers to the company’s management of the type

and amount of assets and liabilities that it will hold in the course of its
operations.

Dividends.

• Holders of shares receive dividends from a corporation as returns on

their investments in form of cash or other properties. Companies which
have better dividend policies are generally more attractive than
companies who do not pay out dividends.

5
• Note that there may be times that companies do not pay out dividends
because of future expansions. Same with the other factors affecting
share price, dividend policies should go hand in hand with other factors
in determining market price.

Competent management.

• Competent managers may have any of the following attributes: 1)

visionary 2) decisive 3) people-oriented, 4) inspiring, 5) innovative, 6)
respected and 7) experienced/seasoned manager.

Corporate plans that improve the business prospects.

• Example: Company A which is in the business of selling Halo-halo in the

Dapitan area (or any other area) for 5 years. Company A is consistently
earning profits and has a positive cash flow. When asked how Company
A sees itself after 5 more years, Company A answered that it would
continue to sell Halo-halo in Dapitan (or any other area).
• On the other hand, Company B sells Buko Juice in Katipunan area (or
any other area different from Company A’s area) for 5 years. Company
B is consistently earning profits and has a positive cash flow. When
asked how Company B sees itself after 5 more years, Company B
answered that it has generated enough cash to expand its business to
Cubao area (or any other area) to take advantage of the growing
demand of Buko Juice in Cubao.
• Between Company A and Company B, which would be a better
investment? Company B. Since it has more concrete future prospects
allowing investors to hope for better revenues and net income.

External Factors

- These factors influence the general reaction of investors in making an

investment decision.
- Its effect is not only to a specific company but on all companies or a
group of companies under similar circumstances.
- Such factors are a result of the environment a company operates in
rather than the decisions of the company’s management.

Role of Financial Management

• Financial management deals with decisions that are supposed to maximize the value
of shareholders’ wealth. (Cayanan)

- These decisions will ultimately affect the markets perception of the

company and influence the share price.
- The goal of financial management is to maximize the value of shares of
stocks.
- Managers of a corporation are responsible for making the decisions for
the company that would lead towards shareholders’ wealth
maximization.

6
The Corporation Organization Structure

• Shareholders: The shareholders elect the Board of Directors (BOD). Each share
held is equal to one voting right. Since the BOD is elected by the shareholders, their
responsibility is to carry out the objectives of the shareholders otherwise, they would
not have been elected in that position.

• Board of Directors: The board of directors is the highest policy making body in a
corporation. The board’s primary responsibility is to ensure that the corporation is
operating to serve the best interest of the stockholders. The following are among the
responsibilities of the board of directors:

- Setting policies on investments, capital structure and dividend policies.

- Approving company’s strategies, goals, and budgets.
- Appointing and removing members of the top management including the
president.
- Determining top management’s compensation.
- Approving the information and other disclosures reported in the financial
statements (Cayanan, 2015)

• President (Chief Executive Officer): The roles of a president in a corporation may

vary from one company to another. Among the responsibilities of a president are the
following:

- Overseeing the operations of a company and ensuring that the strategies

as approved by the board are implemented as planned.
- Performing all areas of management: planning, organizing, staffing,
directing, and controlling.
- Representing the company in professional, social, and civic activities.

• VP for Marketing: The following are among the responsibilities of VP for Marketing

- Formulating marketing strategies and plans.

- Directing and coordinating company sales.
- Performing market and competitor analysis.

7
- Analyzing and evaluating the effectiveness and cost of marketing
methods applied.
- Conducting or directing research that will allow the company to identify
new marketing opportunities, e.g., variants of the existing
products/services already offered in the market.
- Promoting good relationships with customers and distributors.
(Cayanan, 2015)

• VP for Production: The following are among the responsibilities of VP for

Production:

- Ensuring production meets customer demands.

- Identifying production technology/process that minimizes production
cost and make the company cost competitive.
- Coming up with a production plan that maximizes the utilization of the
company’s production facilities.
- Identifying adequate and cheap raw material suppliers. (Cayanan, 2015)

• VP for Administration: The following are among the responsibilities of VP for

Administration:

- Coordinating the functions of administration, finance, and marketing

departments.
- Assisting other departments in hiring employees.
- Providing assistance in payroll preparation, payment of vendors, and
collection of receivables.
- Determining the location and the maximum amount of office space
needed by the company. Identifying means, processes, or systems that
will minimize the operating costs of the company. (Cayanan, 2015)

The next lesson will delve more on the role of the VP of Finance.

Lesson 2
The Role of a Financial Manager
Reflect on the quotes cited and mention how critical and dynamic
working in the finance field is.

- Unilever: “Finance plays a critical role across every aspect of our

business. We enable the business to turn our ambition and strategy into
sustainable, consistent and superior performance” - Jean-Marc Huët
(Unilever)
- Jollibee: “It’s very exciting because you are not just thinking of today but
what the company will need in the future” - Ysmael V. Baysa (Morales,
2013)

8
- Globe Telecom: “Yesterday’s solutions are never adequate for the
future” - Albert De Larrazabal (Klobucher, 2015)
- SM Corporation: “Now, we don’t go out because we need funds. We go
out because it’s an opportunity.” – Jose T. Sio (Montealegre, 2015)
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________

Mini Lesson

Functions of a Financial Manager

Four Functions of A VP for Finance (CFO):

1. Financing
2. Investing
3. Operating
4. Dividend Policies

FINANCING

Financing decisions 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 (i.e., purchase of inventory, payment of operating
expenses, etc.).

• The role of the VP for Finance of the Financial Manager is to determine the
appropriate capital structure of the company. Capital structure refers to how much of
your total assets is financed by debt and how much is financed by equity. To illustrate,
show/draw the figure below:

9
• Recall that Assets = Liabilities + Owner’s Equity.

- To be able to acquire assets, our funds must have come somewhere. If

it was bought using cash from our pockets, it is financed by equity.
- On the other hand, if we used money from our borrowings, the asset
bought is financed by debt.
- In the figure above, the total assets are financed by 60% debt and 40%
equity. Accordingly, the capital structure is 60% debt and 40% equity.

INVESTING

• Investments may either be short term or long term.

- Short term investment decisions are needed when the company is

in an excess cash position.

• To plan for this, the Financial Manager should be able to make use of
Financial Planning tools such as budgeting and forecasting which will be
discussed in Lesson 3: Financial Planning Tools and Concepts.
• Moreover, the company should choose which type of investment it
should invest in that would provide a most optimal risk and return trade
off.

- Long term investments should be supported by a capital budgeting

analysis which is among the responsibilities of a finance manager.

• Capital budgeting analysis is a tool to assess whether the investment will

be profitable in the long run. This is a crucial function of management
especially if this investment would be financed by debt.
• The lenders should have the confidence that the investments that
management will push through with will be profitable or else they would
not lend the company any money.

OPERATING

• Operating decisions deal with the daily operations of the company. The role of the
VP for finance is determining how to finance working capital accounts such as
accounts receivable and inventories. The company has a choice on whether to finance
working capital needs by long term or short-term sources.

- Short Term sources are those that will be payable in at most 12 months.
This includes short-term loans with banks and suppliers’ credit. For
short-term bank loans, the interest rate is generally lower as compared
to that of long-term loans. Hence, this would lead to a lower financing
cost.
- Suppliers’ credit are the amounts owed to suppliers for the inventories
they delivered or services they provided. While suppliers’ credit is
generally free of interest charges, the obligations with them have to be
paid on time to maintain good supplier relationship. Such relationships
should be nurtured to ensure timely delivery of inventories.

10
- Short term sources pose a trade-off between profitability and liquidity
risk. Because this source matures in a short period, there is a possibility
that the company may not be able to obtain enough cash to pay their
obligation (i.e. liquidity risk).
- Long term sources, on the other hand, mature in longer periods. Since
this will be paid much later, the lenders expect more risk and place a
higher interest rate which makes the cost of long-term sources higher
than short term sources. However, since long term sources have a
longer time to mature, it gives the company more time to accumulate
cash to pay off the obligation in the future.
- Hence, the choice between short- and long-term sources depends on
the risk and return trade off that management is willing to take.

DIVIDEND POLICIES

• Dividend Policies. Recall that cash dividends are paid by corporations to existing
shareholders based on their shareholdings in the company as a return on their
investment. Some investors buy stocks because of the dividends they expect to
receive from the company. Non-declaration of dividends may disappoint these
investors. Hence, it is the role of a financial manager to determine when the company
should declare cash dividends.

- Before a company may be able to declare cash dividends, two conditions must exist:

1. The company must have enough retained earnings (accumulated profits) to

support cash dividend declaration.
2. The company must have cash

• Recall that one of the functions of a finance manager is investing and its available
cash may be used to invest in long term investments that would increase the
profitability of the company. Some small enterprises which are undergoing expansion
may have limited access to long term financing (both long term debt and equity). This
results to these small companies reinvesting their earnings into their business rather
than paying them out as dividends.

• On the other hand, a company which has access to long term sources of funds may
be able to declare dividends even if they are faced with investment opportunities.
However, these investment opportunities are generally financed by both debt and
equity.

- The management usually appropriates a portion of retained earnings for

investment undertakings and this may limit the amount of retained
earnings available for dividend declaration.
- Creditors are not willing to finance entirely the cost of a company’s long-
term investment. Hence, the need for equity financing (e.g. internally
generated funds or issuance of new shares).
- Examples of these companies are publicly listed companies such as
PLDT, Globe Telecom, and Petron. PLDT and Globe are two of the
Philippine listed companies which have generously distributed cash
dividends for the last five years (information as of 2014).

11
• For companies which have limited access to capital and have target capital structure,
they may end up with a residual dividend policy. This means that when companies are
faced with investment opportunities, internally generated funds will be used first to
finance these investments and dividends can only be declared if there are excess
funds.

FINANCIAL SYSTEM

1. 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.

- A 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 32.11)
• 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.

• To exchange financial instruments with another entity under conditions
that are potentially unfavorable. (IAS 32)
• Examples: Notes Payable, Loans Payable, Bonds Payable

12
- 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. On the other hand,
investors buy debt securities of equity instruments in hopes of receiving returns
through interest, dividend income or appreciation in the financial asset’s price.

- Debt Instruments generally have fixed returns due to fixed interest rates. Examples
of debt instruments are as follows:

• Treasury Bonds and Treasury Bills are issued 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. Moreover, preferred
stockholders also have priority over common stockholders in cash dividend
declaration. 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, 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.

2. Financial Markets

- Primary vs. Secondary Markets

• To raise money, users of funds will go to a primary market to issue new

securities (either debt or equity) through a public offering or a private
placement.

13
• The sale of new securities to the general public is referred to as a public
offering and the first offering of stock is called an initial public offering.
The sale of new securities to one investor or a group of investors
(institutional investors) is referred to as a private placement.
• However, suppliers of funds or the holders of the securities may decide
to sell the securities that have previously been purchased. The sale of
previously owned securities takes place in secondary markets.
• The Philippine Stock Exchange (PSE) is both a primary and secondary
market.

- Money Markets vs. Capital Markets

• Money markets are a venue wherein securities with short-term maturities

(1 year or less) are sold. They are created because some individuals,
businesses, governments, and financial institutions have temporarily idle
funds that they wish to invest in a relatively safe, interest-bearing asset.
At the same time, other individuals, businesses, governments, and
financial institutions find themselves in need of seasonal or temporary
financing.
• On the other hand, securities with longer-term maturities are sold in
Capital markets. The key capital market securities are bonds (long-term
debt) and both common stock and preferred stock (equity, or ownership).

3. Financial Institutions

Examples of financial institutions:

- Commercial Banks - Individuals deposit funds at commercial banks,

which use the deposited funds to provide commercial loans to firms and
personal loans to individuals, and purchase debt securities issued by
firms or government agencies.
- Insurance Companies - Individuals purchase insurance (life, property
and casualty, and health) protection with insurance premiums. The
insurance companies pool these payments and invest the proceeds in
various securities until the funds are needed to pay off claims by
policyholders. Because they often own large blocks of a firm’s stocks or
bonds, they frequently attempt to influence the management of the firm
to improve the firm’s performance, and ultimately, the performance of
the securities they own.
- Mutual Funds - Mutual funds are owned by investment companies
which enable small investors to enjoy the benefits of investing in a
diversified portfolio of securities purchased on their behalf by
professional investment managers. When mutual funds use money from
investors to invest in newly issued debt or equity securities, they finance
new investment by firms. Conversely, when they invest in debt or equity
securities already held by investors, they are transferring ownership of
the securities among investors.
- Pension Funds - Financial institutions that receive payments from
employees and invest the proceeds on their behalf.

14
- Other financial institutions include pension funds like Government
Service Insurance System (GSIS) and Social Security System (SSS),
unit investment trust fund (UITF), investment banks, and credit unions,
among others.

How Financial Institutions Provide Financing for Firms (Gitman & Zutter, 2012)

Independent Assessment.

Part 1: True/False
______ 1. To achieve the goal of profit maximization for each alternative being
considered, the financial
manager would select the one that is expected to result in the highest monetary
return.
______ 2. Dividend payments change directly with changes in earnings per share.
______ 3. The wealth of corporate owners is measured by the share price of the
stock.
______ 4. Financial markets are intermediaries that channel the savings of
individuals, businesses, and government into loans or investments.
______ 5. The money market involves trading of securities with maturities of one
year or less while the capital market involves the buying and selling of securities with
maturities of more than one year.

15
Part 2: Multiple Choice Encircle the letter of the correct answer.
1. The ______ is created by a financial relationship between suppliers and users of
short-term funds.
A. financial market C. stock market
B. money market D. capital market

2. Firms that require funds from external sources can obtain them from _____.
A. financial markets. C. financial institutions
B. private placement. D. All the above.
3. 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.
4. The primary goal of the financial manager is _____.
A. minimizing risk. C. maximizing wealth
B. maximizing profit D. minimizing return.
5. A financial manager must choose between four alternative Assets: 1, 2, 3, and 4.
Each asset costs $35,000 and is expected to provide earnings over a three-year
period as described below.

Based on the profit maximization goal, the financial manager would choose _____.
A. Asset 1. C. Asset 3.
B. Asset 2 D. Asset 4.

Making Generalization
1. Is a profitable company a successful company?
______________________________________________________________
______________________________________________________________
______________________________________________________________
______
2. Can success be attributed to profitability only? Why or why not?
______________________________________________________________
______________________________________________________________
______________________________________________________________
______

16
3. Is it possible that a company can have profits but still does not have enough
cash to pay its obligations (i.e. suppliers, lenders)?
______________________________________________________________
______________________________________________________________
______________________________________________________________

4. A company has a very large amount of cash. Is it a bad or a good indicator?

Why or why not?
______________________________________________________________
______________________________________________________________
______________________________________________________________

Additional Activity 1
Fill up the table below.

Role of Financial Role of Financial Markets Role of Investors

Managers

Additional Activity 2
Fill up the table with at least three examples of each type of financial
institution.

Commercial Insurance Mutual Funds Pension Other

Bank Companies Funds Financial
Institutions

17
Which type of financial institution do you think is most critical for firms? Why?
______________________________________________________________
______________________________________________________________
______________________________________________________________
______

Application. Surf the Internet: Ethical Issue

Research on some of the corporate scandals including the following:

1. Enron Scandal
2. WorldCom Scandal
3. Arthur Andersen Scandal
4. Lehman Brothers Scandal
5. Tyco Scandal
Pick one and make a short paper on the following:
a. Company Profile
b. How the Scandal happened
c. Amount of Money involved
d. People who were involved and what happened to them
e. Individuals who were affected
(For those who does not have Internet connection to research on the corporate
scandals listed above, you may cite any accounting scandal which may have
happened in your locality or any community you know. Thoroughly explain the
accounting scandal with all the available information that you have.)

Post Test
True/False
_______________1. High cash flow is generally associated with a higher share price
whereas higher risk tends to result in a lower share price.
_______________2. When considering each financial decision alternative or
possible action in terms of its impact on the share price of the
firm's stock, financial managers should accept only those
actions that are expected to increase the firm's profitability.
_______________3. To achieve the goal of profit maximization for each alternative
being considered, the financial manager would select the one
that is expected to result in the highest monetary return.
_______________4. Dividend payments change directly with changes in earnings
per share.
_______________5. The wealth of corporate owners is measured by the share price
of the stock.
_______________6. Risk and the magnitude and timing of cash flows are the key
determinants of share price, which represents the wealth of the
owners in the firm.

18
_______________7. When considering each financial decision alternative or
possible action in terms of its impact on the share price of the
firm's stock, financial managers should accept only those
actions that are expected to maximize shareholder value.
_______________8. An increase in firm risk tends to result in a higher share price
since the stockholder must be compensated for the greater risk.
_______________9. Stockholders expect to earn higher rates of return on
investments of lower risk and lower rates of return on
investments of higher risk.
Multiple Choice
1. The primary goal of the financial manager is
A. minimizing risk. C. maximizing wealth.
B. maximizing profit. D. minimizing return.
2. Corporate owner's receive realizable return through
A. earnings per share and cash dividends.
B. increase in share price and cash dividends.
C. increase in share price and earnings per share.
D. profit and earnings per share.
3. The wealth of the owners of a corporation is represented by
A. profits. C. share value.
B. earnings per share. D. cash flow.
4. Wealth maximization as the goal of the firm implies enhancing the wealth of
A. the Board of Directors. C. the federal government.
B. the firm's employees. D. the firm's stockholders.
5. The goal of profit maximization would result in priority for
A. cash flows available to stockholders.
B. risk of the investment.
C. earnings per share.
D. timing of the returns.
6. Profit maximization as a goal is not ideal because it does NOT directly consider
A. risk and cash flow. C. risk and EPS.
B. cash flow and stock price. D. EPS and stock price.
7. Profit maximization as the goal of the firm is not ideal because
A. profits are only accounting measures.
B. cash flows are more representative of financial strength.
C. profit maximization does not consider risk.
D. profits today are less desirable than profits earned in future years.
8. Profit maximization fails because it ignores all EXCEPT
A. the timing of returns. C. cash flows available to stockholders.
B. earnings per share. D. risk.
9. The key variables in the owner wealth maximization process are
A. earnings per share and risk. C. earnings per share and share price.
B. cash flows and risk. D. profits and risk.

19
10. Cash flow and risk are the key determinants in share price. Increased cash flow
results in ________, other things remaining the same.
A. a lower share price C. an unchanged share price
B. a higher share price D. an undetermined share price
11. Cash flow and risk are the key determinants in share price. Increased risk, other
things remaining the same, results in
A. a lower share price. C. an unchanged share price.
B. a higher share price. D. an undetermined share price.
12. Financial managers evaluating decision alternatives or potential actions must
consider
A. only risk. C. both risk and return.
B. only return. D. risk, return, and the impact on share price.
13. A financial manager must choose between four alternative Assets: 1, 2, 3, and 4.
Each asset costs $35,000 and is expected to provide earnings over a three-year
period as described below.
Based on the profit maximization goal, the financial manager would choose

A. Asset 1. C. Asset 3.
B. Asset 2. D. Asset 4.
14. A financial manager must choose between three alternative investments. Each
asset is expected to provide earnings over a three-year period as described
below. Based on the wealth maximization goal, the financial manager would

A. choose Asset 1. C. choose Asset 3.

B. choose Asset 2. D. be indifferent between Asset 1 and Asset 2.

20
Answer Key:
Business Finance Independent Assessment
Pre-test:
Part 1: T, F, T, F, T
Part 2: B, D, A, C, B
True/False
1. F
2. F
3. T
4. T
5. F Post Test
Multiple Choice True/False
1. A 1. T
2. A 2. F
3. B 3. T
4. B 4. F
5. A 5. T
6. T
7. T
8. F
Activity 9. F
Multiple Choice
1. C
2. B
3. C
4. D
5. C
6. A
7. C
8. B
9. B
10. B
11. A
12. D
13. B
14. A

21
References:
(1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City. Rex Bookstore.
(2) Gitman, L. J. & Zutter C. J. (2012), Principles of Managerial Finance (13th Ed), USA: Prentice-Hall
https://znnhs.zdnorte.net/wp-content/uploads/2020/10/TLE7_IA_Q1_W2_EIM.pdf
https://znnhs.zdnorte.net/wp-content/uploads/2020/10/TLE9_Q1_W2_CSS.pdf
https://www.coursehero.com/file/p7l4oaes8/This-evaluates-the-learners-level-of-mastery-in-achieving-the-learning/
https://www.coursehero.com/file/p7l4oaes8/This-evaluates-the-learners-level-of-mastery-in-achieving-the-learning/
https://www.coursehero.com/file/p2p7lgut/This-is-a-task-which-aims-to-evaluate-your-level-of-mastery-in-achieving-the/
https://www.studocu.com/ph/document/saint-louis-university-philippines/bs-accountancy/lecture-notes/12g-abm-
module-1-journals/7451267/view
https://www.coursehero.com/file/p2i28jjk/Money-Markets-vs-Capital-Markets-Money-markets-are-a-venue-wherein-
securities/
https://19january2017snapshot.epa.gov/climate-impacts/international-climate-impacts_.html
https://www.coursehero.com/file/p311jja2/Why-does-a-Financial-Manager-need-to-choose-which-source-of-financing-a-
company/
https://www.coursehero.com/file/p34e14e2/On-the-other-hand-if-we-used-money-from-our-borrowings-the-asset-
bought-is/
https://essays.pw/essay/an-equity-instrument-is-any-contract-that-evidences-a-residual-interest-accounting-essay-4084
https://www.coursehero.com/file/p13vcnk/An-equity-instrument-is-any-contract-that-evidences-a-residual-interest-in-
the/
https://www.coursehero.com/file/p20oblm0/ii-Equity-instruments-An-equity-instrument-is-any-contract-that-evidences-
a/
https://www.coursehero.com/file/p2i28jjk/Money-Markets-vs-Capital-Markets-Money-markets-are-a-venue-wherein-
securities/
https://www.coursehero.com/file/p1g80fbm/Moreover-during-a-profitable-period-for-which-a-company-may-decide-to-
declare/
https://www.coursehero.com/file/p34e14e2/On-the-other-hand-if-we-used-money-from-our-borrowings-the-asset-
bought-is/

22