Business Finance Notes

❖ Financing
➢ It is the process of providing funding for a particular
need.

2 Major Categories
➔ Debt Financing
◆ The act of borrowing money from lenders and not giving
up ownership.

➔ Equity Financing
◆ It is the method of raising capital by selling a part of
the company in the form of stocks to investors in exchange
for ownership interests in the company.

❖ Financial Needs
➢ The need for financing may be for long-term,
medium-term, or short-term because financial requirements
vary from one organization to another.
Short-Term Requirements
➔ current assets.
➔ they arise for a short period not exceeding the accounting
period or one year

Medium-Term Requirements
➔ refer to those funds which are required for a period.
➔ exceeding one year but not exceeding 5 years.

Long-Term Requirements
➔ refer to requirements of funds which are for a period exceeding
5-10 years.
➔ Non-current assets
➔ used for financing the setting up of businesses and for
expansion of existing businesses. All investments in plant,
machinery, land, buildings, are considered as long term financial
needs.
Sources of Funds based on the Basis Period
Sources of SHORT-TERM funds
❏ Supplier’s Credit
❏ Advances from Stockholders
❏ Credit Cooperatives
❏ Lending Companies
❏ Bank
❏ Informal Lending Sources

The factors are considered in

selecting the source of short-term
financing:
➔ Cost of Interest
➔ Availability of Short-Term funds
➔ Risk
➔ Flexibility
➔ Restrictions
Sources of LONG-TERM funds
❏ Equity Investors
❏ Bank
❏ Lending Companies
❏ Internally-Generated Funds
❏ Bonds

Interest
➔ It is the cost of borrowing money.
➔ It is earned or incurred for the use of the principal
amount over the relevant period.

FORMULA:
I=PxRxT
5C’s
★ Collateral
★ Capacity
★ Condition
★ Character
★ Capital

Simple Interest
➔ paid or received over a certain period is a fixed
percentage of the principal amount that was borrowed
or lent.
➔ is calculated on the principal, or original, amount
of a loan.
Compound Interest
➔ It is merely earning interest on interest.
➔ It means that the basis for the computation
interest for a certain period is not only the original
principal but also interest earned in the previous
period assuming all cash flows would be paid or
received in a lump sum upon maturity.

Present Value
➔ is the concept that states an amount of money today is
worth more than that same amount in the future.

Formula:
PV = FV / ( 1 + R ) ^ T
Future Value
➔ is the value of a current asset at a future date based on an
assumed rate of growth.

Formula:
FV = PV x ( 1 + R ) ^ T

Effective Annual Rate

➔ This allows this comparison because it is the

actual interest paid or earned.

Formula:
(EAR) = ( ( 1 +R / M ) ^ M -1 ) x 100%
Compounding frequency:
❏ If the investment pays annually, then m=1.
❏ If the investment pays bi-annually, then m=2.

❏ If the investment pays quarterly, then m=4.

❏ If the investment pays monthly, then m=12.

❏ If the investment pays weekly, then m=52.

❏ If the investment pays daily, then m=365.

Note Round-off TWO (2) decimal places.