SENIOR HIGH SCHOOL

First Semester S.Y. 2020-2021

MODULE 11
BUSINESS FINANCE

Name: _______________________________ Date :__________

Grade/Section: ________________________ Week : 11
Track/Strand: _________________________

BASIC LONG-TERM FINANCIAL CONCEPTS

WHAT IS THIS ALL ABOUT?

In evaluating results of operations and project proposals, analyst should consider the fact
that operations from year to year bring in cash returns based made on investments already
made. For project proposals, investments made at present or in the immediate future with
expected cash realized in future periods.

Interest rate denotes percentage earning or yield on investment. Interest rate fluctuates and
affects market prices of securities in the financial market. It is therefore, an important
consideration for decision makers. How attractive interest rate is will show how investors react
to it. The higher interest rate is, the better it will be for investors. However, it is undesirable for
borrowers for they have to pay a higher cost for their borrowings.

WHA T DO YOU EXPECT TO LEARN?

Content Standard:
The learners demonstrate understanding of the:
1. basic concepts of risk and return, and the time value of money.

Performance Standard:
The learners should be able to:
1. identify simple interest; and
2. solve exercises and problems in computing for simple interest;

Objectives:
After the lesson, the learners should be able to:
1. define interest rate;
2. compare and contrast simple interest and compound interest; and
3. solve the problems in computing for simple interest.
PRELIMINARY ACTIVITY

Is it necessary to know how much interest was added to your borrowed capital? Why does
credit transactions exist? And is it beneficial to us nowadays? Expound your answer.

____________________________________________________________________________________
_

____________________________________________________________________________________

____________________________________________________________________________________

____________________________________________________________________________________

____________________________________________________________________________________

____________________________________________________________________________________

____________________________________________________________________________________

______

CONCEPT OF INTEREST RATE

_____________________________________________________________________________________

Interest rate is the cost of using money expressed as a percentage of the principal for a
given period of time which is usually per year. It is generally regarded as the cost of borrowing
or lending out money or the cost of credit. It plays an important role in finance as it affects
various economic factors like demand for money (motives for holding money) and the velocity
of money (the frequency of spending or the rate of turnover of money). People have for holding
on to money or for their demand for money. Since payments for expected expenditures like
purchases of goods, electricity bill, water bill, telephone bill, tuition fee, and others do not
coincide with the receipt of income, people tend to hold on to money to pay for all these
expenses, thus called transaction demand. Others hold on to money in preparation for
unforeseen additional expenses caused by unexpected events like sickness, injury from accident
and/or breakage of property, thus called precautionary demand. For some, they hold on to
money with the intention of “securing profit from knowing better than the market what the
future will bring forth" (Laman and Laman 2007). In other words, it is the intention of using
money when the opportunity to earn more arises. This is called speculative demand.

TIME VALUE OF MONEY

___________________________________________________________________________________
__
Time value of money refers to the expected increase in its peso considering the prevailing
interest rates, passage of time, opportunity of capital and similar factors. Thus, a peso invested
today must be considered greater than P1 to be collected after one year. Assuming that time
value of money is P25%, an investment today of P500 must bring in cash returns of PI 25 in one
year so that its value must be P625 after one year.

In evaluating different alternatives, analysts should emphasize the importance of annual

cash returns rather than simply compute for of return using the net income figure. Annual cash
returns are computed

Annual cash returns:

Net income xx
Add back charges not requiring outlay of
cash such as
Depreciation xx
Amortization of intangibles xx

Annual cash returns xx

FUTURE VALUE
This describes the amount of money one could expect to have in the future, with its
known present value. It includes the total amount of the principal and interest. This is
sometimes called the maturity value of money. Interest is the fee that a borrower or debtor has
to pay the lender or creditor, for assuming the risk of the loan, for current use of a certain sum
of money.

Simple interest expressed as an annual percentage, even if the period the loan is not exactly
a year.

Where: I = PRT
Where: I = Interest demand
P = Principal (amount)
R = Rate of interest (expressed as an annual percentage rate)
T = Time of the loan (expressed as component of a year)

Example: If Ms. April borrowed P50,000 at 8% interest for 1 year, the simple interest would be:
I = PRT
I = P50,000 x 8% x 1
= P4,000

But if Ms. April will be paying it for six months, time component has to changed to 6/12
or 6 months of a 12-month year. The simple interest payment the loan will be P2,000 or half the
amount in the first example. Maturity is (MV @ P + 1).
Where: I = PRT
= P50,000 x 8% x 6/12
= P2,000

In most cases, creditors charge compound interest. This is an interest posted to the account
or charged to the loan at regular intervals. Time period of the loan remains one year, however
during the year the interest calculated will be posted to the account quarterly, or four times
during the year. From the basic formula:
Where: I = PRT
= P50,000 x 8% x 1/4
= P1,000

Interest is then added to the principal, which means that at the end of the second quarter, P
has increases from P50,000 to P51,000.
where: I = P51,000 x 8% x 1/4
= P1,020

Third quarter:
I = P52,020 x 8% x 1/4
= PI,040.40

Fourth quarter:
I = P53,060.40 x 8% x 1/4
= 1,061.20

Maturity value = P = 1
= P50,000 + 1000 + 1020 + 1040.40 + 1061.20 = P54,121.60

Compound interest is the interest resulting from the periodic addition of simple interest to
the principal.

Another approach in computing for the compound interest is the use of Compound
Interest Chart or Table of Future Value at the End of t periods in the Appendix. The appendix
will show the "n" column, referring to the compounding periods. To calculate "n", multiply the
time period of the loan (T) by the number of compounding periods per year. In the example
given, n = 1 year x 4 quarters = 4, the interest rate must also be adjusted to its period
equivalent, such as I = 8% ÷ 4 quarters = 2%. Therefore.

MV = P x TV (n,i)
= P50,000 x 1.08243 (refer to Table of Future Value at the end of t periods
= P54,121.50

Daily compound interest chart is also available at the Appendix. Lefthand column

indicates the length of the loan in terms from days to years. The top row provides the annual
interest rate. At the intersection of the row and column is the factor value, which when
multiplied by the principal will be the maturity value of the loan. The chart does not require
adjustment of time (T) component to reflect the compounding period, and also the annual
interest rates Supposing, the P50,000 loan carries 8% interest compounded daily:

MV = P x TV (T,R)
= P50,000 x 1.08328
= P54,164

From the foregoing, the maturity value of loan can be summarized as follows:

Simple interest: P 54,000

Compounded quarterly: P 54,121.50
Compounded daily: P 54,164

ASSESSMENT

I. IDENTIFICATION
 Write your answers in the space provided before the number.

_______________1. A decrease in unit selling price has downward effects on both contribution
margin percentage and break-even point.

_______________2. Relevant range refers to the series of volumes or range activity used in
financial planning.

_______________3. An increase in operating ratio implies a decrease in rate of return on sales.

_______________4. Annual dividend requirements should be based on annual cash inflow from
operations.
_______________5. Transactions that increase current assets and current liabilities by the same
amount improve a positive current ratio.
_______________6. Obtaining a short-term loan does not affect a current ratio of 1:1.
_______________7. An increa.se in fixed costs and expenses reduces contribution margin per
unit.

II. IDENTIFICATION

_______________1. Cost of borrowing or lending money

_______________2. Demand for money to pay for current expenditures

_______________3. Demand for money for unforeseen additional expenses caused by

unexpected events

_______________4. Demand for money with the intention of using it when an opportunity to
earn more arises

_______________5. Interest on interest

III. PROBLEM SOLVING

Compute based on what is asked:
1. P = 10,000 3. P = ?
R = 5% R = 10%
T = 2 years T = 6 months
I=? I = 1,000

2. P = 150,000 4. P = 5,800
R = 2% R=?
T = 5 years T = 1 year
I=? I = 1,200

5. If Jay borrowed P180,000 at 7% interest for 5 years, simple interest would be?

Answer Sheet
FEEDBACK
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_________________________________________________________

REFERENCE

Dr. Flores, M. (2016). Business Finance for Senior High School. Unlimited Books & Publishing
Inc., Room 215 ICP Bldg., Cabildo ST., Intramuros, Manila. Pages 161-164.

Norma Dy Lopes-Mariano, Ph.D. Elements of Finance (2014 edition). Rex Book Store, Inc., 856
Nicanor Reyes, Sr. St., Manila, pages 237-245.