Principles of Finance

Notes on Slides
The Financial System
Mr. Russky Olivares, MBA

Fund acquisition

 sourcing of funds

 firms typically want to determine the best combination of internal and

external sources of funds.

 Example of internal source of funds:

Retained Earnings: percentage of net earnings not paid out as dividends,
but retained by the company to be reinvested in its core business or to pay
debt.

 Example of external source of funds: debt or equity

Fund allocation

 proper usage of funds

Corporate Finance

 On the short term, involves management of Working Capital

o Computed as Current Assets – Current Liabilities

o Measures a company’s liquidity position on the short-term

o Answers the question “Does the company have enough cash to pay off
financial obligations which are due within the year?”

What is PPE?

It stands for Plant, Property and Equipment. Normally, a long-term issue for
corporate finance.

What is IPO?

First sale of stock by a private company to the public. Media will normally say, “the
company is GOING PUBLIC.” Because practically speaking, the firm was previously
considered as private in terms of its’ share holdings and fund sourcing.

Financial intermediaries

 serves as a middle-man in finding and brining together lenders and

borrowers of funds

Benefits of Financial Intermediary

 Principles of Finance
Notes on Slides
The Financial System
Mr. Russky Olivares, MBA
1) Reduction in transaction and information costs

Financial Intermediaries have the ability to pool together the funds they receive
from households for example thru savings accounts. Companies do not need to exert
extra effort in advertising that they need funds. They do not need to convince
multiple parties that they are a sound borrower. They just have to convince the
financial intermediaries.

2) Ability to evaluate and monitor the borrower

Financial intermediaries possess the infrastructure to evaluate the credit rating of a

borrower and monitor as well the financial status of the borrower. This will
minimize the risk of lenders of money. Tracking the financial status of a company
can also be a very tedious and time-consuming activity if will be done solely by the
lender.

3) Ability to render long term loans along with enhanced liquidity.

For direct financing, lenders would want to lend money on short-term basis.
However, borrowers would prefer paying for longer terms. Financial intermediaries
can resolve this dilemma. They can offer long-term loans and they can allow
depositors (who are the lenders of funds) to withdraw anytime they want to. They
have the reserve funds to finance this.

Integration

 Combining the resources of an organization business units

Backward Integration

 involves the purchase of suppliers.

Forward integration

 involves the purchase or control of distributors