FINANCE BUSINESS (enterprise/firm) - an organization designed to provide goods or services or both to consumers - predominant to capitalists Aims: S specific M measurable

le A agreed R realistic T time specific Objectives: Survival a short term objective for small business Profit Maximization make the most profit possible Sales Growth make as many sales as possible Forms: Sole Proprietorship - owned by one person - owner may operate on his/her own or hire employees - unlimited liability Partnership - for-profit business owned by two or more people - each partner has unlimited liability Classification: Accdng to Object A. Universal Partnership 1. Of all present property partners contribute all the property 2. Of all profits whatever is contributed, the partner is still the owner B. Particular Partnership object determinate things Accdng to Duration A. Fixed Term specific period or when purpose is accomplished B. Partnership at will no period, term or duration Accdng to Representation to Others A. Real Partnership actually exists among partners B. Partnership by estoppels in reality is not a partnership but considered only in relation to those who Accdng to Liability A. General all partners are liable pro rata and subsidiary B. Limited partners are liable only to the extent of their capital contribution Kinds of Partners: As to Contribution A. Capitalist one who furnishes capital, not exempt from losses B. Industrialist one who furnishes industry or labor, exempt from losses As to Management A. Managing manages actively B. Silent does not participate Other Classifications A. Liquidating liquidates or winds up after dissolution B. Ostensible connection to the firm is public & open

C. Secret connection with the firm is concealed D. Dormant both secret and silent E. Nominal not really a partner but may become liable F. Sub-partner contracts with a partner in the partnership G. Real actually connected with the business Corporation - limited liability business that has a separate legal personality from its members Classification: Public perform functions to govern portions of the state A. Municipal (e.g. barangay, cities, provinces) B. Quasi Corporation formed as private but perform functions admittedly governmental (e.g. SSS, GSIS) Private formed for private ends, aims, benefits or purposes A. Stock have capital stock divided into shares with par values and authorized to distribute 1. Par Value value of shares are fix in articles and certificate of stock 2. No Par Value no fixed value to shares but not less than P5.00 B. Non-stock organized for non-profit purposes, members not stockholders Aggregate incorporators are not less than 5 but not more than 15 Sole associated with clergy (e.g. Pope) *One-Man Corporation one person holds directly or indirectly all the stocks of corporation Ecclesiastical organized for religious purposes (e.g. bishops and priests) Lay organized for purpose other than religious A. Eleemosynary charitable institutions B. Civil organized for profit Domestic organized according to Philippine Laws Foreign organized under any law other than of Philippines De jure formed with all requirement of law De facto defectively formed from a bona fide Quasi-Corporation exists without formal legislative grant A. Estoppels association of persons holding itself out B. Prescription body which though not lawfully organized Close Open stocks are open to public Quasi-Corporation private corporation make profits but at the same time performing public service (e.g. telephone companies) Condominium Corporation private corporation for construction of building Parent or Holding Corporation one is related to another corporation Cooperative - referred to as co-op - limited liability than can organize for-profit or not for-profit Types: Agriculture and Mining production of raw materials Financial include banks, investment & management of capital Information resale of intellectual property (e.g. softwares) Manufacturers products from raw materials

Real State selling, renting and development of properties, homes and buildings Retailers and Distributors middle-men in getting goods Service offer intangible goods or services Transportation deliver goods from location to location Utilities produce public service (e.g. Meralco) FINANCE - is the science of funds management - includes saving and lending money - how money is spent and budgeted General Areas: business finance personal finance public finance *Banks main facilitators of funding through the provision of credit, private equity, mutual funds and hedge funds --------------------FINANCING BUSINESS Internal Sources of Finance Retained Profit Sales Assets Reducing Stocks External Sources of Finance Trade Credit (ST) Personal Savings (ST/LT) Commercial Banks (loans) (ST) *Interest charge from lending money in the form of loans Building Societies (LT) *Mortgage a special type of loan used to buy property Factoring Services (ST) Share Issue (selling new shares) (LT) Sources of Financing Business Debentures (LT Loan) Venture Capital (Issuing Shares) Leasing and Hire Purchase (renting equipment & paying for equipment in installments) Stock *Shares *Stock Certificate legal document that specifies the amount of shares owned by the shareholder *Preferred and Common Stock *Stock Derivatives any financial instrument which has value that is independent on the price of underlying stock Bond (debt security) Features of Bonds: Nominal, principal or face amount amount on which the issuer pays interest Issue Price price at which investors buy the bonds Maturity Date date on which the issuer has to repay the nominal account *Shorter (bills): 1-5 years *Medium (notes): 6-12 years *Long (bonds): greater than 12 years Coupon - interest rate that the issuer pays to the bond holders Optionality a bond may contain embedded option Callability issuer has the right to repay the bond before maturity date *callable bonds

Putability holder has the right to force issuer to repay the bond before maturity date Call and Put dates dates on which callable and putable bonds can be redeemed early --------------------CAPITAL BUDGETING EVALUATION METHODS Most Common Evaluation Techniques: Payback Period - time required to recover the amount of initial investment Net Present Value (NPV) - excess of the present values of all cash inflows Internal Rate of Return (IRR) - rate of interest that equates initial investment with present value of future cash inflows Profitability Index (Benefit / Cost Ratio) - ratio of the total present value of future cash inflows to the initial investment Portfolio Theory - collection or group of asset investment held by an investor Portfolio Return - expected return on a portfolio Efficient Portfolio - tries to maximize return for a given level of risk Capital Asset Pricing Model (CAPM) to determine a theoretically appropriate required risk of return of an asset Beta - an index of the degree of movement of an assets return Beta Coefficient - relative measure of non-diversifiable risk - Beta > 1.0 more volatile - Beta < 1.0 less volatile Total Risk - combination of a securitys non-diversifiable and diversifiable risk Diversifiable Risk - unsystematic risk Non-Diversifiable Risk - systematic risk Market Return - return on the market portfolio of all traded securities Risk-free Assets - required return on a risk free assets Security Market Line (SML) - depiction of CAPM as a graph that reflects the required return in the market place --------------------RISK AND RETURN Risk chance of financial loss, uncertainty with the returns on a particular investment or business Kinds of Risks: Business Risk - firm will be unable to cover its operating costs Financial Risk - firm will be unable to cover its financial obligation Interest Rate Risk - changes in interest rates will adversely affect the value of an investment Liquidity Risk - investment cannot be easily liquidated at a reasonable price

 Market Risk - value of an investment will decline because of the market factors Event Risk - totally unexpected event will have a significant effect on the value of the firm Exchange Rate Risk - fluctuations in the currency exchange rate Purchasing Power Risk - changing price levels caused by inflation or deflation Tax Risk - unfavorable changes in tax laws Total Risk - combination of securitys non-diversifiable and diversifiable risk Diversifiable Risk - unsystematic risk Non-diversifiable Risk - systematic risk *Risk-indifferent no change in return *Risk averse an increased return *Risk-seeking decreased return *Range measure of an assets risk *Probability given outcome will occur *Probability Distribution model that relates probabilities to the associated outcome *Continuous Probability Distribution showing all possible outcomes *Standard Deviation of a Distribution of Asset Returns most common statistical indicator of an assets risk Enterprise Risk Management (ERM) - defined as understanding the key risks facing the entire organization a. Identifying the risk b. Assessing the risk c. Quantifying the risk d. Treating the risk e. Monitoring the risk Types of Risk: Financial Risks (pricing, asset) Strategic Risks (competition, social trend) Hazard Risks (property damage, natural catastrophe) Operational Risks (reputation, customer satisfaction) Return change in value plus any cash distributions over a defined time period --------------------SIMPLE INTEREST AND DISCOUNT Interest an income derived from an invested capital or as payment for the use of money Simple Interest Formula

Present Value

Present Value of a Future Sum Annuity a series of equal peso payments for a specified number of years Ordinary Annuity series of equal peso payments for a specified number of years received at the end of each year, most common Annuity Due series of equal pesos payments for a specified number of years received at the beginning of each year Nominal Annual Rate calculated rate that is quoted to the borrower by the lender Present Value Interest Factor always less than 1.0 Discount

----------------PHILIPPINE FINANCING SYSTEM Basic Building Blocks of Financial System Individual Business Government Finance a derivation of the economy that addresses the issue relayed to obtaining and managing money, resources or capital by a person or company; how resources are obtained, the way they spend or consume, the way they invest, lost or draw value Branches of Finance A. Personal Finance - individuals or family obtain budget, save and spend monetary resources B. Corporate or Business Finance - deals with financial decisions that corporations make and the tools analysis C. Public Finance - concerned with paying for collective or government activities D. Project Finance - financing of long-term infrastructure and industrial project E. Trade or International Finance - science that describes the management of money, banking, credit, investments and assets for international trade transactions F. Real Estate Finance - acquisition and transfer of real property and its improvement Stages of the Economy 1. Traditional Society 2. Transitional Stage 3. Take Off 4. Drive to Maturity 5. High Mass Consumption Money and Banking

Ordinary Simple Interest

Exact Simple Interest

Money any token or other objects that function as a medium of exchange that is socially and legally accepted in payment for goods and services and settlement of debts Functions of Money Medium of Exchange Unit of account / Standard of Value Store of Value Standard of Deferred Payment Attribute of Good Money General Acceptability Durability Portability Divisibility Stability of Money Value Cognizability Homogeneity or Uniformity Malliability Kinds of Money Accdng to materials used: Commodity Money Paper Money Bank Money Accdng to character of the issuer: Treasury Money Central Bank Money Commercial Bank Money Accdng to popularity: Paper Money Flat Money Subsidiary Coins Accdng to face value: Standard Money * Commodity Money * Convertible Paper Money * Inconvertible Money *Electronic Money Kinds of Monetary Standard Gold Standard - backed up by gold coins and gold bullions Silver Standard - silver coin standard, silver bullion standard & silver exchange standard Bimetallic Standard - both gold and silver in coinage Fiat Standard - face value of money is higher than the value of materials used for coinage Philippine Monetary Standard Gold Exchange Standard Dollar Exchange Standard Managed Currency Standard *Quantity Theory emphasizing the positive relationship of overall prices or the nominal value of expenditures to the quantity of money *Transaction Theory more money people have, the more they will spend

* Income Theory - money by people in an economy is equivalent to the cost of production for the same period * Cash Balance Theory - money value is equivalent to the cash balance of the people during the same period