BM2213

TASK PERFORMANCE

IN

FINANCIAL MANAGEMENT

(PRELIM PERIOD)

BSA 402/AT 401

MEMBERS CONTRIBUTION

1. CALALIN, ROVELYN Question 6A

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Financial Market and Institutions

Assume that you recently graduated with a degree in finance and have just reported

working as an Investment adviser at the brokerage firm of Mac & Co. Your first

assignment is to explain the nature of the Philippine financial markets to Pedro Juan,

a professional basketball player. He recently came to the Philippines from the United

States. Juan is a highly ranked basketball player who expects to invest substantial

amounts of money through Mac & Co. He would like to understand in general terms

what will happen to his money. Your boss has developed the following questions that

you must use to explain the Philippine financial system to Juan.

1. Discuss the three (3) primary ways in which capital is transferred between savers

and borrowers.

Direct transfers, indirect transfers through investment bankers, and

indirect transfers through a financial intermediary are the three main methods that

capital is transmitted between savers and borrowers.

Direct transfers of money and securities take place when a business or

government sells its securities directly to the savers. Then, the business will deliver

the securities to the savers, who, in return, will give the firm the money it needs. On

the other hand, indirect transfers may go through investment bankers or a financial

intermediary. They can go through an investment bank like Goldman Sachs, which

underwrites the issue. An underwriter serves as the middleman and facilitates the

issuance of securities. The company sells its bonds or stocks to the investment

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bank, which will also sell these same securities to savers. In addition, this is a

primary market transaction because new securities are involved and the

corporation receives the proceeds of the sale. Lastly, indirect transfers happen

through a financial intermediary, such as a bank or mutual fund. The middleman

buys its own assets from depositors in exchange for money. The intermediary then

spends this cash on buying and holding securities from firms, and the investors

hold the intermediary's securities.

2. Why are financial markets essential for economic growth?

Financial markets really play a huge role in our economic growth. Without

financial markets, there would be no transactions on our economy's goods and

services. We all know that financial markets can provide more profit for our

business. In financial markets, we can have transactions with different people and

companies, specifically with our stocks, bonds, derivatives, etc.

3. Suppose Apple decided to issue additional common stock, and Juan purchased

100 shares of this stock from Mac & Co., the underwriter. Would this transaction

be a primary or a secondary market transaction?

This type of transaction is a secondary transaction. Juan purchased the

stocks from Mac & Co., but they already bought the stock from Apple. Secondary

markets are where buyers go to the investors who bought the stocks from the

issuing company. Therefore, Juan went directly to the investor to buy the stocks.

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4. Would it make a difference if Juan purchased previously outstanding Apple

stock in the dealer market? Explain.

No, since Juan bought the Apple stock from the dealer, it will be a

secondary market because the stock that he bought from the dealer is not a new

common stock of Apple.

5. What does it mean for a market to be efficient? Explain why some stock prices

may be more efficient than others.

There is a lot of liquidity and transparency in an efficient market.

There are many participants, open information, and few obstacles to trading. An

efficient market is also aided by well-established, stable political structures and

reasonable regulation that is not overly burdensome. Even in a market with great

efficiency, some stock prices could be more efficient than others. This generally

happens with businesses that see greater trade activity, which typically results in

greater price discovery. On the other hand, sparsely traded stocks could not show

the same precision in price-making due to the reduced trading frequency.

6. After your consultation with Pedro Juan, he wants to discuss these two (2) possible

stock purchases:

a. While in the waiting room of your office, he overheard an analyst on a financial

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TV network say that a particular medical research company just received Food

and Drug Administration (FDA) approval for one of its products. Based on this

“hot” information, Pedro Juan wants to buy many shares of that company’s

stock. Assuming the stock market is highly efficient, what advice would you

give him?

I would advise him to continue his plan to buy many shares of that

company's stock since the market is highly efficient, which means that the price

is close to intrinsic value and the stock is in equilibrium, which also means that

Pedro can purchase a stock and expect something good in return, or get

reasonable prices. From a financial standpoint, market efficiency is good.

Unless the market is inefficient, it would lead to a poor allocation of capital and

economic stagnation.

According to the most recent FDA clearance, the market price of

this item is, according to the most effective version of EMH, there are no gains

because stock represents all information that is available to the public, and no

gains can be made on this stock. Its pricing already includes information.

b. He has read several newspaper articles about a huge initial public offering

(IPO) being carried out by a leading technology company. He wants to

purchase as many shares in the IPO as possible and would even be willing to

buy the shares in the open market immediately after the issue. What advice do

you have for him?

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It is very risky to make an investment in something that you

don't have that much information on. He should have more information about it

before investing so he can understand the risks that he can possibly encounter

by investing. There is no assurance that investing in an IPO is safe and secure.

Moreover, the shares are in demand, so the prices could be a little higher, and

when investing, we want to make sure that the value of the shares will grow

even more in the future. Investing all your money in one place is not that good

because it means all or nothing. If your investment does not pay off, you will

lose all the money you invested.

The best thing he could do is do some research and study

IPOs well, so he will not make any mistakes when investing. There will always

be risks, but what you need to do to prepare is to be ready and have sufficient

knowledge about the risks that could possibly happen. First public offerings

(IPOs) are not always well received. In spite of finding a It is usually impossible

to buy shares in the initial offering, a common issue. These sales are

frequently oversubscribed, meaning that there is greater demand than there

are available shares at the offering price.

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Rubric for Grading:

CRITERIA PERFORMANCE POIN

INDICATORS TS

Content Provided pieces of evidence, supporting details, and factual 2

scenarios

Grammar Used correct grammar, punctuation, spelling, and capitalization 1

Organization of Expressed the points in a clear and logical arrangement of ideas in 2

ideas the paragraph

TOTAL 5

Reference

Brigham, E. F. & Houston, J. F. (2017). Fundamentals of financial management (concise) (9th

ed.). Boston, MA: Cengage Learning.

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