UNIVERSITY OF MAKATI

J. P. Rizal Ext., West Rembo, Makati City

COLLEGE OF BUSINESS AND FINANCIAL SCIENCE
Department of FINANCE MANAGEMENT
Course Title Title
Module
4
No. FINANCIAL MANAGEMENT 2

FINMAN 2 Module Leader PROF. RENNIEL B. HALLERA

Module
none
Contributors
Time Frame:
You are expected to finish all the activities, assignments, and
assessments of this 5th week of the semester.

How to Complete this .

module? 1. Complete the reading assignment
2. View the shared educational video/reading materials about the course.
3. Participate in this week’s discussion (if any)
4. Complete the Module 4 requirement given by the professor
5. Submit other required outputs

Teaching Strategies Use of UMAK-LMS- TBL, Suggested Education video about the subjects ,
Online discussion (GoogleMeet, Zoom, Messenger, Google classroom) Voice-
over PowerPoint, or video-recorded lectures, Online links, and Online quizzes.
INTRODUCTION

INTRODUCTION

The time value of money draws from the idea that rational investors prefer to receive money today rather
than the same amount of money in the future because of money's potential to grow in value over a given
period of time. For example, money deposited into a savings account earns a certain interest rate and
is therefore said to be compounding in value.
LEARNING OUTCOMES

By the end of this module , you should be able to

1. Knowledge: Definition and Importance of Time value money and Financial ratios
2.
3. Skills: Assess the financial statement and use financial rations

4. Attitude: The learner will learn team collaboration in class discussion.

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 Discussion and computation of Time Value of Money and Financial Ratios

The time value of money (TVM) is the concept that money you have now is worth more than
the identical sum in the future due to its potential earning capacity. This core principle of finance
holds that provided money can earn interest, any amount of money is worth more the sooner it
is received. TVM is also sometimes referred to as present discounted value.

 Time value of money is based on the idea that people would rather have money today
than in the future.
 Given that money can earn compound interest, it is more valuable in the present rather
than the future.
 The formula for computing time value of money considers the payment now, the future
value, the interest rate, and the time frame.
 The number of compounding periods during each time frame is an important determinant
in the time value of money formula as well.

Assume you have the option to choose between receiving Php 10,000 now versus Php 10,000
in two years. It's reasonable to assume most people would choose the first option. Despite the
equal value at the time of disbursement, receiving the Php 10,000 today has more value and
CONTENT

utility to the beneficiary than receiving it in the future due to the opportunity costs associated
with the wait. Such opportunity costs could include the potential gain on interest were that
money received today and held in a savings account for two years.

Time Value of Money Formula

Depending on the exact situation in question, the time value of money formula may change
slightly. For example, in the case of annuity or perpetuity payments, the generalized formula
has additional or less factors. But in general, the most fundamental TVM formula takes into
account the following variables:

 FV = Future value of money

 PV = Present value of money
 i = interest rate
 n = number of compounding periods per year
 t = number of years
Based on these variables, the formula for TVM is:

FV = PV x [ 1 + (i / n) ] (n x t)

 Assume a sum of PHP10,000 is invested for one year at 10% interest. The future value
of that money is:

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  FV = PHP10,000 x [1 + (10% / 1)] ^ (1 x 1) = PHP11,000

 The formula can also be rearranged to find the value of the future sum in present day
dollars. For example, the value of PHP5,000 one year from today, compounded at 7%
interest, is:

 PV = PHP5,000 / [1 + (7% / 1)] ^ (1 x 1) = PHP4,673

The time value of money is the idea that, all else being equal, money is more valuable when it
is received closer to the present. The key to understanding the time value of money is the
concept of opportunity cost. To illustrate, consider the fact that, if an investor receives money
today, they can invest that money and earn a positive return. If, on the other hand, they receive
that money one year in the future, they effectively lose the positive return they could have
otherwise earned.

Time value of money is very important because it can help guide investment decisions. For
instance, suppose an investor can choose between two projects: Project A and Project B. Both
projects have identical descriptions except that Project A promises a PHP1 million cash payout
in year 1, whereas Project B offers a PHP1 million cash payout in year 5. If the investor did not
understand the time value of money, they might believe that these two projects are equally
attractive. In fact, however, time of money dictates that Project A is more attractive than Project
B because its PHP1 million payout has a higher present value.

How is the Time Value of Money used in finance?

Time value of money is the central concept underlying discounted cashflow analysis (DCF),
which is one of the most popular and influential methods for valuing investment opportunities.
It is also an integral part of financial planning and risk management activities, such as in the
case of pension fund managers who need to ensure that their account holders will have
adequate funds to finance their retirement. Simply put, it would be hard to find a single
significant area of finance that is not influenced in some way by the time value of money.

APPRAISE THE RISK PROFILE OF THE FIRMS

Financial risk ratios assess a company's capital structure and current risk level in relation to the
company's debt level. These ratios are used by investors when they are considering investing
in a company. Whether a firm can manage its outstanding debt is critical to the company's
financial soundness and operating ability. Debt levels and debt management also significantly
impact a company's profitability, since funds required to service debt reduce the net profit
margin and cannot be invested in growth.

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 Some of the financial ratios that are most commonly used by investors and analysts to assess
a company's financial risk level and overall financial health include the debt-to-capital ratio, the
debt-to-equity ratio, the interest coverage ratio, and the degree of combined leverage.

Debt-to-Capital Ratio
The debt-to-capital ratio is a measure of leverage that provides a basic picture of a company's
financial structure in terms of how it is capitalizing its operations. The debt-to-capital ratio is an
indicator of a firm's financial soundness. This ratio is simply a comparison of a company's total
short-term debt and long-term debt obligations with its total capital provided by both
shareholders' equity and debt financing. Lower debt-to-capital ratios are preferred as they
indicate a higher proportion of equity financing to debt financing.

The debt-to-equity ratio (D/E) is a key financial ratio that provides a more direct comparison of
debt financing to equity financing. This ratio is also an indicator of a company's ability to meet
outstanding debt obligations. Again, a lower ratio value is preferred as this indicates the
company is financing operations through its own resources rather than taking on debt.
Companies with stronger equity positions are typically better equipped to weather temporary
downturns in revenue or unexpected needs for additional capital investment. Higher D/E ratios
may negatively impact a company's ability to secure additional financing when needed.

Interest Coverage Ratio

The interest coverage ratio is a basic measure of a company's ability to handle its short-term
financing costs. The ratio value reveals the number of times that a company can make the
required annual interest payments on its outstanding debt with its current earnings before taxes
and interest. A relatively lower coverage ratio indicates a greater debt service burden on the
company and a correspondingly higher risk of default or financial insolvency.

A lower ratio value means a lesser amount of earnings available to make financing payments,
and it also means the company is less able to handle any increase in interest rates. Generally,
an interest coverage ratio of 1.5 or lower is considered indicative of potential financial problems
related to debt service. However, an excessively high ratio can indicate the company is failing
to take advantage of its available financial leverage.

To understand and value a company, investors examine its financial position by studying its
financial statements and calculating certain ratios. Fortunately, it is not as difficult as it sounds
to perform a financial analysis of a company. The process is often a part of any program
evaluation review technique (PERT), a project management tool that provides a graphical
representation of a project's timeline.

If you borrow money from a bank, you have to list the value of all of your significant assets, as
well as all of your significant liabilities. Your bank uses this information to assess the strength
of your financial position; it looks at the quality of the assets, such as your car and your house,
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 and places a conservative valuation upon them. The bank also ensures that all liabilities, such
as mortgage and credit card debt, are appropriately disclosed and fully valued. The total value
of all assets less the total value of all liabilities gives your net worth or equity.

Current Assets and Liabilities

On the balance sheet, assets and liabilities are broken into current and non-current items.
Current assets or current liabilities are those with an expected life of fewer than 12 months. For
example, suppose that the inventories that The Outlet reported as of Dec. 31, 2018, are
expected to be sold within the following year, at which point the level of inventory will fall, and
the amount of cash will rise.

Like most other retailers, The Outlet's inventory represents a significant proportion of its current
assets, and so should be carefully examined. Since inventory requires a real investment of
precious capital, companies will try to minimize the value of a stock for a given level of sales, or
maximize the level of sales for a given level of inventory. So, if The Outlet sees a 20% fall in
inventory value together with a 23% jump in sales over the prior year, this is a sign they are
managing their inventory relatively well. This reduction makes a positive contribution to the
company's operating cash flows.

The Current Ratio

The current ratio which is total current assets divided by total current liabilities is commonly
used by analysts to assess the ability of a company to meet its short-term obligations. An
acceptable current ratio varies across industries, but should not be so low that it suggests
impending insolvency, or so high that it indicates an unnecessary build-up in cash, receivables,
or inventory. Like any form of ratio analysis, the evaluation of a company's current ratio should
take place in relation to the past.

Financial Position: Book Value

If we subtract total liabilities from assets, we are left with shareholder equity. Essentially, this is
the book value, or accounting value, of the shareholders' stake in the company. It is principally
made up of the capital contributed by shareholders over time and profits earned and retained
by the company, including that portion of any profit not paid to shareholders as a dividend.

Market-to-Book Multiple
By comparing the company's market value to its book value, investors can, in part, determine
whether a stock is under- or over-priced. The market-to-book multiple, while it does have
shortcomings, remains a crucial tool for value investors. Extensive academic evidence shows
that companies with low market-to-book stocks perform better than those with high multiples.
This makes sense since a low market-to-book multiple shows that the company has a strong
financial position in relation to its price tag.

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 Determining what can be defined as a high or low market-to-book ratio also depends on
comparisons. To get a sense of whether The Outlet's book-to-market multiple is high or low, it
should be compared to the multiples of other publicly listed retailers.

A company's financial position tells investors about its general well-being. A financial analysis
of a company's financial statements—along with the footnotes in the annual report—is essential
for any serious investor seeking to understand and value a company properly.
ASSIGNMENT

1.Reaction Paper/ Explain about the importance of Financial Ratios in the perspective of investors and
the business owner, (discuss/compare)
ASSESSMENT

Recitation or Class Participation thru online via Zoom or any instructed by the school
Lecture Analysis
Reaction paper thru Google classroom

Rule: In a self-paced and self-contained online classroom, Rubric is required to guide students how to
perform the task assessments.

Lesson Analysis of reading materials

Critical Analysis ( reaction paper about the reading materials provided) 80%
RUBRICS

Writing Skills (Grammar/Sentence Construction) 20%

With Online discussion/ Face to face class

Note
In the event of online discussion- Presentation skills 30%
Summary (Quizzes and Activities) 20%
Critical Analysis ( Reaction paper about the reading materials provided) 40%
Writing Skills (Grammar /Sentence construction) 10%

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 https://www.investopedia.com/terms/t/timevalueofmoney.asp

https://www.investopedia.com/terms/d/debtequityratio.asp
REFERENCES

https://www.youtube.com/watch?v=m3azU7gYHc0

https://www.youtube.com/watch?v=D-NpYc8HFL0

https://www.youtube.com/watch?v=dO3zL1Z6iwk

https://www.youtube.com/watch?v=MTq7HuvoGck

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