BUSINESS FINANCE

Module 3
SOURCES OF CAPITAL
REFLECT UPON

Compare the two way of amortizing a loan as shown in two amortization tables. As a future
financial manager, which loan is better and why?

The first one is much better because In each year, the interest paid is given by the beginning
balance multiplied by the interest rate. The beginning balance is given by the ending balance from
the previous year. Because the loan amount declines by ₱10,000 each year, it is fully paid in five
years. While the Other way of amortizing loan is to have the borrower makes a single fixed payment
every period. Almost all consumer loans, like car loans and mortgages work this way. That the
interest paid declines each period, because the loan balance is going down. Since the total payment
is fixed, the principal paid must be rising each period.

TEST YOUR UNDERSTANDING

1) Maginhawa Corporation obtained a loan from a bank amounting to ₱2,500,000 at an interest

rate of 18 percent per annum. Income tax rate is 32 percent. Compute for:

= 18% X (1-32%)
a) Percentage cost of borrowed capital = .18 X (.68)
= 0.1224 or 12.24%
= 18% X 2,500,000
b) Interest on principal = ₱ 450,000
= 32% of 450,000
c) Tax benefit amount = ₱ 144,000
= ₱450,000
d) Interest expense net of tax benefit - 144,000
= ₱ 360,000

2) Prepare an amortization schedule for a five-year loan of ₱500,000. The interest rate is 12%
per year and the loan calls for equal annual payments on principal.

PAYMENT PRINCIPAL INTEREST ENDING

YEAR
AMOUNT AMOUNT AMOUNT BALANCE
1 160,000 100,000 60,000 400,000
2 148,000 100,000 48,000 300,000
3 136,000 100,000 36,000 200,000
4 124,000 100,000 24,000 100,000
5 112,000 100,000 12,000 0
Totals 680,000 500,000 180,000

BUSINESS FINANCE
 Module 4
FINANCIAL ANALYSIS
REFLECT UPON

Discuss briefly the significance of liquidity, asset utilization, debt utilization and
profitability ratios. Which financial ratio used in measuring the performance of a business is better
and why?

Liquidity is the ability to convert an asset into cash easily and without losing money against the
market price. The easier it is for an asset to turn into cash, the more liquid it is.  Liquidity is important for
learning how easily a company can pay off its short term liabilities and debts.
Asset Utilization is important to a company because its success is often tied to its ability to manage
and leverage its assets. An optimal asset utilization ratio means the company is being more efficient with
each dollar of assets held.
Debt utilization ratios provide a comprehensive picture of the company's solvency or long-term
financial health. The debt ratio is a financial ratio that indicates the percentage of a company's assets that are
provided via debt. ... The higher the ratio, the greater the risk associated with the firm's operation.
Profitability ratio is used to evaluate the company's ability to generate income as compared to its
expenses and other cost associated with the generation of income during a particular period.
This ratio represents the final result of the company

Total Asset Turnover it is an efficiency ratio that measures how efficiently a company uses its assets
to generate revenue. The higher the turnover ratio, the better the performance of the company.

TEST YOUR UNDERSTANDING

Using the financial statements of Jewel Manufacturing Company for the year 2019, compute
the financial ratios to gauge liquidity, activities, leverage and profitability. Use the same table for
the year 2020.

TYPES OF RATIO FORMULA VALUES IN PESO RATIO

Liquidity Ratio
Current ratio current assets 94,500 2.1: 1
current liabilities 45,000
Quick ratio Quick assets 45,500 1.01: 1
current liabilities 45,000
Activity Ratios FORMULA VALUES IN PESO RATIO
Inventory turnover Sales 200,000 91.25
Inventory 49,000 times
Days of sales in inventory Number of days in a period / 365 13.33
inventory turnover 4 times
Accounts receivable turnover Net sales / 200,000 13 times
Accounts receivable 15,000
Average collection period Number of days in year / 365 28 days
receivable turnover 13
Asset Turnover
Fixed asset turnover Net sales 200,000 3 times
Fixed assets 60,000
Total assets turnover Net sales 200,000 1.15 times
Total assets 60,000
Leverage ratios
Equity to debt ratio Owners’ equity 200,000 .77
Total liabilities 177,500
Debt ratio Total liabilities 79,500 .54
Total assets 95,000
Profitability ratios
Gross profit margin Gross profit 100,000 5%
Sales 200,000
Operating profit margin Earnings before interest & 40,000 .2 or 2%
taxes / sales 200,000
Net profit margin Earnings after taxes / sales 26,000 .13 or
200,000 13%
Return on assets Earnings after taxes / total 26,000 .15 or
assets 174,500 15%
Return on equity Earnings after taxes / total 26,000 .34 or
owners’ equity 79,500 34%