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Options and Corporate Finance: Basic Concepts

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What is Finance
FINANCE is the study of how individuals, institutions , governments, business entities
acquired, use and manage money and other financial assets.
In short, it is the study of sources and uses of money and other financial assets including its
its management.
Origins of Finance
-finance traces its roots in economics and accounting. Economists use a supply and demand
framework to explain how the prices and quantities of goods and services are determined in
a free market economic system. Accountants provide the record-keeping mechanism for
showing ownership of the financial instruments used in the flow of financial funds among
depositors, investors and borrowers.
4 concepts (pillar) or principles of finance
1
Time value of money - the value of money or a peso today is worth more than a peso at the end of 1 year
2
Risk or Return - higher returns are expected for taking more risk or high yield investments
is equated with high risk while low-yield investments means low risk involved
3
Financial Markets -efficient in pricing securities; as new information is available in the market,
prices quickly change to reflect that information.
4
Reputation matters - individuals and business entities has their own ethical behavior, it is
how they treat other legally, fairly and honestly. They must have the trust and confidence
of their customers, employees , owners as well as the community and society within which
they operate.
Learning Objectives of Finance
-to make informed economic decisions - as the financial system is affected by the laws and
policies created by elected officials , one has to be ready in making economic decisions
as a result of the changes in financial and economic goals
-to make informed personal and business investment decisions - to understant better how
institutions, government units or business entities finance their operations; as an individual
to better manage your financial resources .
Financial System Overview
An effective financial system is a complex mix of goverment and policy makers, a monetary
financial markets and financial institutions that interact to expedite the flow of financial
capital from savings to investment. Effective financial systems is ---
1
when it has several sets of policy makers who pass laws and make decisions relating to
fiscal and monetary policies.
2
when there is a system for creating and transferring money
3
when there are financial institutions that support capital formulation either by channeling
savings into investment in physical assets or fostering direct financial investments by
individuals in financial institutions and businesses.
4
when there is a financial market that facilitate the transfer of financial assets among
individuals, institutions, businesses.

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Unit of account - a medium used for creating and transferring money, medium of exchanging
goods and services; it is called the Peso or PHP. It is a stable monetary unit and is universally
accepted as a medium of exchange.
Financial functions
Monetary system - its role is for creating and transferring money
Financial institutions - accumulate or source out savings and lend or invest these savings thru
its activities like financial intermediation or facilitating direct investments by individuals
Financial Markets - such as securities firms are responsible for marketing and transferring
financial assets or claims
Types of Financial Functions
1
creating money - money is a medium of exchange , its value lies in its purchasing power; a
sufficient amount of money is essential if economic activity is to take place an an efficient rate;
too little money constrains economic growth; too much money often results in increases in
the price of goods and services.
2
transferring money - transfer of funds can be done by way of a check or by electronic
transfer thru ATM or remittances
3
accumulation of savings - done thru accumulation of savings in a depository institution
such as commercial bank, savings bank, rural bank
4
lending and investing - money put into financial intermediaries/institutions are lent to
businesses entities, consumers, institutions and government units.
5
marketing financial assets -new financial instruments are created in the primary stock
market, ex. Shares of stocks of an established business entities in order to raise or source
funding will hire financial intermediary like brokerage firms to handle the shares of stocks
such as IPOs (Initial Public Offering)
6
transferring financial assets - brokerage firms also facilitate the sale of seasoned instruments
and securities into the secondary markets such as organized stock exchanges or over the
counter markets ex.
3 Divisions of Finance
1. Financial institutions
-are organizations or intermediaries that help the financial system operate efficiently and
transfers funds from deposits and investors to individuals, businessess and governments
that seek to spend or invest the funds in physical assets. Examples are banks, insurance
companies and and investment companies.
2. Investments
-pertains to the sale or marketing of securites, analysis of securities and the management
of risk through portfolio diversification
3. Business Finance or Corporate Finance
a. Entrepreneurial finance - is the study of how growth-driven, performance focused, early
stage firms increase financial capital and manage their operations and assets
b. Personal finance - is the study how individuals prepare for financial emergencies, protect
against premature death and the loss of property and accumulate wealth over time.

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What is Finance FINANCE is the study of how individuals, institutions , governments, business entities acquired, use and manage money and other financial assets. In short, it is the study of sources and uses of money and other financial assets including its its management. Origins of Finance -finance traces its roots in economics and accounting. Economists use a supply and demand framework to explain how the prices and quantities of goods and services are determined in a free market economic system. Accountants provide the record-keeping mechanism for showing ownership of the financial instruments used in the flow of financial funds among depositors, investors and borrowers. 4 concepts (pillar) or principles of finance 1 Time value of money - the value of money or a peso today is worth more than a peso at the end of 1 year 2 Risk or Return - higher returns are expected for taking more risk or high yield investments is equated with high risk while low-yield investments means low risk involved 3 Financial Markets -efficient in pricing securities; as new information is available in the market, prices quickly change to reflect that information. 4 Reputation matters - individuals and business entities has their own ethical behavior, it is how they treat other legally, fairly and honestly. They must have the trust and confidence of their customers, employees , owners as well as the community and society within which they operate. Learning Objectives of ...
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