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Teaching Guide for Senior High School
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BUSINESS
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FINANCE
SPECIALIZED SUBJECT
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This Teaching Guide was collaboratively developed and reviewed by educators
from public and private schools, colleges, and universities. We encourage
teachers and other education stakeholders to email their feedback, comments,
and recommendations to the Commission on Higher Education, K to 12
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This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.
Development Team
Team Leader: Arthur S. Cayanan, Ph.D.
Writers: Jerelleen A. Rodriguez, Al-Habbyel B.
This Teaching Guide by the
Yusoph, Rachelleen A. Rodriguez, Diogenes C. Dy
Commission on Higher Education is
Technical Editors: Pamela Anne S. Lloren, Ma. licensed under a Creative
Andrea Antonino-Balce Commons Attribution-
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NonCommercial-ShareAlike 4.0
Copyreader: Patricia Carmela I. Lumanlan
International License. This means
Published by the Commission on Higher Education, 2016
Illustrator: Patricia G. De Vera you are free to:
Chairperson: Patricia B. Licuanan, Ph.D. Share — copy and redistribute the
Commission on Higher Education
material in any medium or format
Adapt — remix, transform, and
K to 12 Transition Program Management Unit
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build upon the material.
Office Address: 4th Floor, Commission on Higher Education, Senior High School Support Team
CHED K to 12 Transition Program Management Unit The licensor, CHED, cannot revoke
C.P. Garcia Ave., Diliman, Quezon City
these freedoms as long as you
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Telefax: (02) 441-0927 / E-mail Address: k12@ched.gov.ph Program Director: Karol Mark R. Yee follow the license terms. However,
under the following terms:
Lead for Senior High School Support:
Attribution — You must give
Gerson M. Abesamis
appropriate credit, provide a link to
Consultants
Stuart Bevins, Ph.D., Sheffield Hallam University Administrative Officers:
as the original.
Ma. Leana Paula B. Bato, Kevin Ross D. Nera,
Allison A. Danao, Ayhen Loisse B. Dalena
Printed in the Philippines by EC-TEC Commercial, No. 32 St.
Louis Compound 7, Baesa, Quezon City, ectec_com@yahoo.com
This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.
Table of Contents
Introduction to Financial Management Part 3 170
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Part 3 19 Part 1 201
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Part 1 37 Basic Long-term Financial Concepts
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Part 3 60 Part 2 240
Part 5
Part 6
Part 7
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87
94
Part 4
Part 5
Introduction to Investment
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268
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Part 8 99 Part 1 285
This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.
Introduction
As the Commission supports DepEd’s implementation of Senior High School (SHS), it upholds the vision
and mission of the K to 12 program, stated in Section 2 of Republic Act 10533, or the Enhanced Basic
Education Act of 2013, that “every graduate of basic education be an empowered individual, through a
program rooted on...the competence to engage in work and be productive, the ability to coexist in
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fruitful harmony with local and global communities, the capability to engage in creative and critical
thinking, and the capacity and willingness to transform others and oneself.”
To accomplish this, the Commission partnered with the Philippine Normal University (PNU), the National
Center for Teacher Education, to develop Teaching Guides for Courses of SHS. Together with PNU, this
Teaching Guide was studied and reviewed by education and pedagogy experts, and was enhanced with
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appropriate methodologies and strategies.
Furthermore, the Commission believes that teachers are the most important partners in attaining this
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goal. Incorporated in this Teaching Guide is a framework that will guide them in creating lessons and
assessment tools, support them in facilitating activities and questions, and assist them towards deeper
content areas and competencies. Thus, the introduction of the SHS for SHS Framework.
teachers will be able to facilitate goes beyond memorization, learners to take ownership of
an understanding of the value teachers should also aim for their learning, they develop
of the lessons, for each learner deep understanding of the independence and self-
to fully engage in the content subject matter where they lead direction, learning about both
on both the cognitive and learners to analyze and the subject matter and
affective levels. synthesize knowledge. themselves.
This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.
This Teaching Guide is mapped and aligned to the DepEd SHS Curriculum, designed to be highly
Parts of the
usable for teachers. It contains classroom activities and pedagogical notes, and is integrated with
Teaching Guide innovative pedagogies. All of these elements are presented in the following parts:
1. Introduction
• Highlight key concepts and identify the essential questions
• Show the big picture
• Connect and/or review prerequisite knowledge
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• Clearly communicate learning competencies and objectives
• Motivate through applications and connections to real-life
2. Motivation
• Give local examples and applications
• Engage in a game or movement activity
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• Provide a hands-on/laboratory activity
• Connect to a real-life problem
3. Instruction/Delivery
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• Give a demonstration/lecture/simulation/hands-on activity
• Show step-by-step solutions to sample problems
• Give applications of the theory
4.
•
•
•
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Connect to a real-life problem if applicable
Practice
Discuss worked-out examples
Provide easy-medium-hard questions
• Give time for hands-on unguided classroom work and discovery
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• Use formative assessment to give feedback
5. Enrichment
• Provide additional examples and applications
• Introduce extensions or generalisations of concepts
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This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.
On DepEd Functional Skills and CHED College Readiness Standards
As Higher Education Institutions (HEIs) welcome the graduates of On the other hand, the Commission declared the College
the Senior High School program, it is of paramount importance to Readiness Standards that consist of the combination of knowledge,
align Functional Skills set by DepEd with the College Readiness skills, and reflective thinking necessary to participate and succeed -
Standards stated by CHED. without remediation - in entry-level undergraduate courses in
The DepEd articulated a set of 21st century skills that should be college.
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embedded in the SHS curriculum across various subjects and tracks. The alignment of both standards, shown below, is also presented in
These skills are desired outcomes that K to 12 graduates should this Teaching Guide - prepares Senior High School graduates to the
possess in order to proceed to either higher education, revised college curriculum which will initially be implemented by AY
employment, entrepreneurship, or middle-level skills development. 2018-2019.
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College Readiness Standards Foundational Skills DepEd Functional Skills
Produce all forms of texts (written, oral, visual, digital) based on:
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1. Solid grounding on Philippine experience and culture;
2. An understanding of the self, community, and nation; Visual and information literacies, media literacy, critical thinking
3. Application of critical and creative thinking and doing processes; and problem solving skills, creativity, initiative and self-direction
4. Competency in formulating ideas/arguments logically, scientifically, and creatively; and
5.
diverse world; ED
Clear appreciation of one’s responsibility as a citizen of a multicultural Philippines and a
Systematically apply knowledge, understanding, theory, and skills for the development of Global awareness, scientific and economic literacy, curiosity,
critical thinking and problem solving skills, risk taking, flexibility
the self, local, and global communities using prior learning, inquiry, and experimentation
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and adaptability, initiative and self-direction
Interact meaningfully in a social setting and contribute to the fulfilment of individual and Media literacy, multicultural literacy, global awareness,
collaboration and interpersonal skills, social and cross-cultural
shared goals, respecting the fundamental humanity of all persons and the diversity of
skills, leadership and responsibility, ethical, moral, and spiritual
groups and communities values
This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.
K to 12 BASIC EDUCATION CURRICULUM
SENIOR HIGH SCHOOL – ACADEMIC TRACK
Grade: 12 Semester: 2nd
Core Subject Title: Business Finance No. of Hours/ Semester: 80 hours/ semester
Prerequisite: Fundamentals of ABM1
Co-requisite: Fundamentals of ABM2
Subject Description: This course deals with the fundamental principles, tools, and techniques of the financial operation involved in the management of business
enterprises. It covers the basic framework and tools for financial analysis and financial planning and control, and introduces basic concepts and principles needed in making
investment and financing decisions. Introduction to investments and personal finance are also covered in the course. Using the dual-learning approach of theory and
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application, each chapter and module engages the learners to explore all stages of the learning process from knowledge, analysis, evaluation, and application to preparation
and development of financial plans and programs suited for a small business.
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1. Introduction to Financial The learners demonstrate an The learners are able to… The learners…
Management understanding of…
1. define Finance 1. explain the major role of
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the definition of finance, the 2. describe who are ABM_BF12-IIIa-1
financial management and
activities of the financial responsible for financial the different individuals
manager, and financial management within an involved
institutions and markets organization
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3. describe the primary 2. distinguish a financial
activities of the financial institution from financial
ABM_BF12-IIIa-2
manager instrument and financial
4. describe how the financial market
manager helps in achieving
the goal of the organization 3. enumerate the varied
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5. describe the role of financial institutions and
ABM_BF12-IIIa-3
financial institutions and their corresponding
markets services
instruments
K to 12 Senior High School Accountancy, Business and Management Strand – Business Finance May 2016 Page 1 of 7
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K to 12 BASIC EDUCATION CURRICULUM
SENIOR HIGH SCHOOL – ACADEMIC TRACK
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analysis, and financial ratios to various financial ratios
test the level of liquidity,
solvency, profitability, and
stability of the business
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2. define the measurement
levels, namely, liquidity,
ABM_BF12-IIIb-7
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solvency, stability, and
profitability
K to 12 Senior High School Accountancy, Business and Management Strand – Business Finance May 2016 Page 2 of 7
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K to 12 BASIC EDUCATION CURRICULUM
SENIOR HIGH SCHOOL – ACADEMIC TRACK
3. Financial Planning Tools and the financial planning process, 1. illustrate the financial
Concepts including budget preparation, planning process
cash management, and working 1. identify the steps in the
capital management 2. prepare budgets such as ABM_BF12-IIIc-d-10
financial planning process
projected collection, sales
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budget, production budget,
income projected statement
of comprehensive income,
projected of financial 2. illustrate the formula and
position, and projected cash format for the preparation
ABM_BF12-IIIc-d-11
flow statement of budgets and projected
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financial statement
3. describe concepts and tools
in working capital
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management
3. explain tools in managing
cash, receivables, and ABM_BF12-IIIc-d-12
inventory
K to 12 Senior High School Accountancy, Business and Management Strand – Business Finance May 2016 Page 3 of 7
This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.
K to 12 BASIC EDUCATION CURRICULUM
SENIOR HIGH SCHOOL – ACADEMIC TRACK
5. Basic Long-term Financial basic concepts of risk and 1. distinguish simple and
Concepts return, and the time value of compound interest
1. calculate future value and
money
present value of money ABM_BF12-IIIg-h-18
2. solve exercises and
problems in computing for
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time value of money with
the aid of present and
2. compute for the effective
future value tables ABM_BF12-IIIg-h-19
annual interest rate
3. prepare loan amortization
tables
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3. compute loan amortization
4. compute for the net present using mathematical
ABM_BF12-IIIg-h-20
value of a project with a concepts and the present
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conventional cash-flow value tables
pattern
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trade-off ABM_BF12-IIIg-h-21
computing for finance and
investment problems
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5. explain the risk-return
ABM_BF12-IIIg-h-22
trade-off
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K to 12 Senior High School Accountancy, Business and Management Strand – Business Finance May 2016 Page 4 of 7
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K to 12 BASIC EDUCATION CURRICULUM
SENIOR HIGH SCHOOL – ACADEMIC TRACK
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and bonds different types of ABM_BF12-IVm-n-23
2. indicate the advantages and investments
disadvantages of each type
of investment
3. explain the risks inherent in
each type of investment
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2. classify investment
according to its type and
ABM_BF12-IVm-n-24
features, and advantages
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and disadvantages
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investment risks in simple
case problems
practices in earning,
spending, saving, and
investing money
K to 12 Senior High School Accountancy, Business and Management Strand – Business Finance May 2016 Page 5 of 7
This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.
K to 12 BASIC EDUCATION CURRICULUM
SENIOR HIGH SCHOOL – ACADEMIC TRACK
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LEGEND SAMPLE
Accountancy, Business and
Track/ Strand Management
Strand
underscore_
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First Entry ABM_BF12
Track/ Strand Subject Business Finance
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Grade Level 12
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-
Roman Numeral
*Zero if no specific quarter
Quarter Quarter III
Lowercase Letter
a
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*Put a hyphen (-) in between letters to indicate Week Week
more than a specific week
-
K to 12 Senior High School Accountancy, Business and Management Strand – Business Finance May 2016 Page 6 of 7
This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.
K to 12 BASIC EDUCATION CURRICULUM
SENIOR HIGH SCHOOL – ACADEMIC TRACK
References:
Bernstein, Leopold. Financial Statement Analysis, 4th Ed. Illinois: Irwin, 2014.
Brealey, Richard A., Myers, Stewart.C. and Marcus, Alan .J. Fundamentals of Corporate Finance , 3rd Edition. New York: Mc-Graw Hill Co., 2014.
Brigham, Eugene F. Fundamentals of Corporate Finance, 8th Ed. Canada: Dryden, 2010
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Cabrera, Elenita B. Management Advisory Services. Manila: Conanan, 2015.
Cecchetti, Stephen G. Money, Banking and Financial Markets, 2nd Edition. 2010
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Cruise, Tom. The Firm. DVD. Directed by Sydney Pollack. USA: Paramount, 1993.
Eakins, Stanley G. The Study Guide. North Carolina: East Carolina University, 2014.
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Gitman, Lawrence J. and Joehnick, Michael D. Fundamentals of Investing, 8 th Edition. Boston: Addison Welsey, 2013.
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http://suppscentral.aw.com
Ilano, Alberto R. Investment Management and The Philippine Stock Market . Manila: FINEX, 2014
Melicher, Ronald W. and Norton,Edgar A. Introduction to Finance, Markets, Investments and Financial Management, 14th Edition. Canada: McGraw-Hill Ryerson Higher
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Education, 2014.
Padilla, Nicanor B. Jr. How to Analyze Financial Statements. Manila: Conanan, 2007.
Pringle, John J. and Harris, Robert Samuel. Essentials of Managerial Finance, 2nd E. Canada: Dryden, 2014.
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Saldana, Cesar G. Principles of Managerial Finance: Philippine Setting. Quezon City: AFA Publications, 2000.
Weston, Fred and Copland, Thomas E. Managerial Finance, 9th Ed., Canada: Dryden, 2012.
White, Gerald I., Sondhi, Ashwinpaul C., and Fried, Dov. The Analysis and Use of Financial Statements, New Jersey: Wiley, 2012.
www.aw-bc.com/gitman
K to 12 Senior High School Accountancy, Business and Management Strand – Business Finance May 2016 Page 7 of 7
This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.
Business'Finance 90 MINS
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40
/Motivation
Performance Standards Instruction Discussion of Shareholder’s Wealth 45
The learners will be able to define finance.
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Enrichment Integration of learning 5
Learning Competency
The learners shall be able to explain the major role of financial management Materials
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Board Notes
and the different individuals involved. (ABM_BF12-IIIa-1)
Resources
Specific Learning Outcomes
The learners will be able to:
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• Have an appreciation of what the overall objective of management should
be.
• Describe the goals of the firm and explain why maximizing the value of the
(1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon
City. Rex Bookstore.
(2) Gitman, L. J. & Zutter C. J. (2012), Principles of Managerial
Finance (13th Ed), USA: Prentice-Hall
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firm is an appropriate goal for a business.
• Identify factors that influence the change in market price.
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DAY 1 SESSION
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• Coverage of second quarter exam
• Date of second quarter exam
3. Ask the learners to introduce themselves by answering the following suggested questions:
• What is your full name?
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• What is your nickname?
• Why did you choose the ABM Strand?
• What are your expectations for this class?
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4. Homework for next session:
5. On a sheet of paper, answer the following questions:
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A. How much is your daily allowance? If not given daily, how much is your average allowance per day?
B. Write down all the items you spend money on. List the description and peso amount spent.
C. Compute for the balance of your allowance by deducting the expenses you listed from your daily allowance.
D. If the answer to Question C is positive, what do you do with the money left? If the answer is negative, where do you get additional
money?
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2. Present Relevant Vocabulary
• Define Finance as follows: Teacher Tips:
- Finance can be defined as the science and art of managing money. (Gitman & Zutter, 2012) Terms Defined:
1. Finance
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2. Budgeting
• Engage the learners by exhausting from them the expenses they wrote down on their homework 3. Investments
and listing all these down on the board with the respective peso amounts. Try to get as many 4. Sources of funds
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answers as possible.
• Give an allowance cap based on the answers given by the learners during the beginning story. This
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will serve as the average daily allowance that the class is able to spend.
• Go back to the list of expenses and ask for the total peso amount of the listed items. If the peso
amount exceeds the daily allowance, ask the learners which items should be dropped off from the
list. Cross out the items dropped but do not erase completely. Continue this until total items
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remaining in the list can be covered by the daily allowance.
- Inform them that budgeting will be further discussed in Lesson 3 – Financial Planning Tools.
• Go back to the activity and focus the learners’ attention on the surplus resulting from their
budgeting. Ask the learners who among them had answered on their homework which resulted in
savings or excess cash. Ask them what they do with the excess money.
- Possible answers:
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• Carry over to the next day
• Return to parents
• Save. Ask how and where? Coin savers, Hidden under their beds, Deposit in banks, Invest in stocks (rare answer)
- Explain that excess money presents an opportunity for investments.
Investments come in many forms that will generate income or appreciate in the future.
- Between hiding their cash under their bed and depositing it in the bank, it would be better to keep their money in bank deposits
because these earn interest.
- Inform the learners that investments will be discussed further in Lesson 6 – Introduction to investments.
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• Go back to the activity that is written in the board. Post the question of what other problems they may face in making financial decisions. Let
them assume that all the expenses listed on the board (including those that were previously crossed out) are incurred during the day. Let
them compute how much more cash they would need to support all those expenses.
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• Ask who among the learners who made their homework encountered the same situation. If none, ask them if ever they are in a situation
where they are short of cash, what would they do? Where will they get extra cash? What other sources of cash do they know?
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- Possible answers:
• Ask from parents
• Borrow from a friend
• Fund raising activities
• Pawnshops
• 5/6
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• Banks
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- Explain that all their answers are sources of funds. When faced with financial difficulties (in this case, the lack of funds to meet the
current expenses) we look for people or institutions that will give us the money we need.
- Inform the learners that they will know more about where to get funds on Lesson 4 – Sources of short term and long term funding.
• Summarize the discussion by pointing out that, for individuals, Finance is concerned with decisions about:
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3. Review of Prerequisite Knowledge
• Tell the learners that once they graduate from school, they will no longer receive their daily allowance. Either they would be employed by a
company, manage their family business, or start up their own business.
• Ask the learners who among them wants to own their own business (get a raise of hands). Ask them what type of business organization is
owned by one person who operates it for his or her own profit (Answer: Sole Proprietorship).
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- Sole Proprietorship - A business owned by one person and operated for his or her own profit.
- Partnership - A business owned by two or more people and operated for profit.
- Corporation – An entity created by law owned by shareholders.
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• Ask the learners if they recall how they can be shareholders of a corporation (Answer: by buying stocks). At this point, ask them if they are
aware of big listed companies like PLDT, Globe, JFC, BPI, Banco Deo Oro, San Miguel Corporation, among others to interest them about the
subject.
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• Ask how and where can they buy stocks?
- Corporations may either be privately owned or publicly owned.
- Privately owned corporations are often owned by family members whose stocks may not be offered to outsiders unless consent by the
family members is secured.
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- Companies which are publicly listed are owned by unrelated investors and are traded in organized exchanges like the Philippine Stock
Exchange. While there are many stockholders, there is generally a group of investors or a family which controls each listed company. For
example, in the case of BPI, the biggest stockholder is Ayala Corporation and in the case of Banco De Oro, it is SM Investment
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Corporation. Prices of stocks of listed corporations are driven by several factors such as the earnings of the companies, the prospects of
the industry where these companies operate, the general market sentiment, and the economic prospects of the country, among others.
the corporation.
- Possible answers: Be profitable, Have a lot of cash
• Ask if they think a profitable company is a successful company. Can success be attributed to profitability only? Recall that the determination of
profit is based on the accrual method. Is it possible that a company can have profits but still does not have enough cash to pay its obligations
(i.e. suppliers, lenders)? What will happen if the company cannot pay its obligations?
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• Ask the learners what they think of a company who has very large amount of cash. (Possible answer:
They may say that this is good because the company will always have enough cash to pay its
obligations.) Tell them that though having a lot of cash has its advantages, it also signals unhealthy
company practices. It may tell them that management has not been putting the company’s resources
into good use. Also, keeping too much cash in the books is like hiding your extra allowance under
their bed. They will be missing out on investment opportunities.
• Reveal that the overall objective of a shareholder should be wealth maximization. What defines a
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shareholder’s wealth? Reveal the answer using the example below.
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INSTRUCTION (45 MINS)
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Teacher Tips:
• Post the question of how do we measure shareholders wealth? Simplify the example. An increase of the share price to PHP2,600
- Assume a learner bought 10 shares of Globe Telecom at PHP2,510 each on September 9, 2010. per share means that people are willing to
This brings his investments to PHP25,100. What happens to the value of his investment if the price buy the shares for that amount. If the
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goes up to PHP2,600 per share or it goes down to PHP2,300 per share?
• Conclude that shareholders’ wealth is measured based on the current market price of the
corporation’s stocks. The market price changes across different periods. Hence, the value of your
learners were to sell their shares at this
point, it will result to a profit of PHP90 per
share or PHP900 on their whole investment.
Hence, the value of their investment
increased from PHP25,100 to PHP26,000.
Therefore, there is an increase in
investment changes in different points on time based on the market value at that time.
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shareholder’s wealth.
• At this point, start discussing the factors which can affect prices. On the other hand, a decrease in the share
price to PHP2,300 per share means that
people are only willing to buy shares for
2. Factors that Influence Market Price PHP2,300. If the learners were to sell their
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• Group the factors into two: Factors that the Management can control and external factors that investment at this point, they will receive
cannot be controlled by management. PHP23,000 which would result to a loss of
PHP2,100. The decrease in value of their
investment leads to a decrease in
shareholder’s wealth.
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Controllable by Management Uncontrollable External Factors
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• coming up with corporate plans that improve Philippine stock market
the business prospects of the company
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• Profit is a measure of the financial performance of a company for a period of time.
• Although it is a major driver for increasing the value of stock, an investor should not rely on profits alone. As discussed earlier, it is possible
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that the company has profits but its cash flow is negative.
- Examples: Suppose the following Income Statements and Cash Flow Statements of companies A, B and C were presented to you. Which
do you think is a more attractive company?
COMPANY A
Income Statement
Sales P 100,000
Cash Flows
Sales
Income Statement
P 100,000
Cash Flows
Profits P 50,000 Net Cash Flow (P 50,000) Profits (P 50,000) Net Cash Flow P 50,000
COMPANY C
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• Liquidity and leverage refers to the company’s management of the type and amount of assets and liabilities that it will hold in the course
of its operations. This will further be discussed in Lesson 2.
- Dividends.
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• Holders of shares receive dividends from a corporation as returns on their investments in form of cash or other properties. Companies
which have better dividend policies are generally more attractive than companies who do not pay out dividends.
• Note that there may be times that companies do not pay out dividends because of future expansions. Same with the other factors
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affecting share price, dividend policies should go hand in hand with other factors in determining market price.
- Competent management.
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• Competent managers may have any of the following attributes: 1) visionary 2) decisive 3) people-oriented, 4) inspiring, 5) innovative, 6)
respected and 7) experienced/seasoned manager.
• External Factors
- These factors influences the general reaction of investors in making an investment decision.
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- Its effect is not only to a specific company but on all companies or a group of companies under
similar circumstances.
- Such factors are a result of the environment a company operates in rather than the decisions of the
company’s management.
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management.
• Financial management deals with decisions that are supposed to maximize the value of
shareholders’ wealth. (Cayanan)
- These decisions will ultimately affect the markets perception of the company and influence the
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share price.
- The goal of financial management is to maximize the value of shares of stocks.
- Managers of a corporation are responsible for making the decisions for the company that
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would lead towards shareholders’ wealth maximization.
• Tell the learners that for the next parts of this course, they will fill in the shoes of a Chief Financial
Officer (CFO) and every problem that they will encounter for this course should be dealt with having
shareholders wealth maximization in mind.
ENRICHMENT (5 MINS)
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Possible answers: Ethics, Corporate Social
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Responsibilities, Employee Relationships.
1. Integration of Learning
• Ask the learners the following:
- Aside from the factors mentioned during class, what other factors can influence the investor’s
perception on the company’s performance which would ultimately affect share price?
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Business'Finance 60 MINS
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25
Organization
Performance Standards Motivation Message from the CFOs 5
The learners will be able to:
• Describe who are responsible for financial management within an
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Instruction Identifying the functions of a Financial 25
organization.
Manager
• Describe the primary activities of the financial manager.
Enrichment Integration of learning
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5
• Describe how the financial manager helps in achieving the goal of the
organization.
Materials Board Notes
Learning Competencies
The learners shall be able to: ED
• Explain the major role of financial management and the different individuals
involved. (ABM_BF12-IIIa-1)
Resources
(1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon
City. Rex Bookstore.
(2) Gitman, L. J. & Zutter C. J. (2012), Principles of Managerial
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• Explain the flow of funds within an organization – through and from the Finance (13th Ed), USA: Prentice-Hall
enterprise—and the role of the financial manager. (ABM_BF12-IIIa-5)
• Understand the key positions in a corporate organization and identify the roles of each.
• Identify the primary activities of the financial manager.
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INTRODUCTION (25 MINS)
1. Discussion of Homework
• Begin by asking at least five learners to share in class the result of their interview with a Chief Teacher Tips:
Financial Officer (CFO) or Vice-President for Finance. The various types of functions are expected
if the person they interviewed is a small
• Write on the board the roles and functions that the students identified from their interview.
business owner who makes decisions on
• Take note of functions that are not roles of a Financial Manager but are roles of other managerial various aspects of the business.
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positions.
• Discuss that these functions are done by people in the company who are holding other managerial
positions. A Financial Manager is part of a management team whose ultimate goal is to maximize
shareholders wealth.
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2. The Corporate organization Structure
• Illustrate the corporate organization structure and inform them that this particular set of people
each play a role in the decision making of the company.
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SHAREHOLDERS
elects
BOARD OF DIRECTORS
appoints
ED OWNERS
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PRESIDENT (CEO)
MANAGERS
• From the diagram presented, emphasize that each line is working for the interest of the person on
the line above them. Since the managers of the company are making decisions for the interest of
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the board of directors and the board of directors does the same for the interest of the shareholders, it follows that the goal of each
individual in a corporate organization should have an objective of shareholders’ wealth maximization.
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ensure that the corporation is operating to serve the best interest of the stockholders. The following are among the responsibilities of the
board of directors:
- Setting policies on investments, capital structure and dividend policies.
- Approving company’s strategies, goals and budgets.
- Appointing and removing members of the top management including the president.
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- Determining top management’s compensation.
- Approving the information and other disclosures reported in the financial statements (Cayanan, 2015)
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• President (Chief Executive Officer): The roles of a president in a corporation may vary from one company to another. Among the
responsibilities of a president are the following:
- Overseeing the operations of a company and ensuring that the strategies as approved by the board are implemented as planned.
- Performing all areas of management: planning, organizing, staffing, directing and controlling.
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- Representing the company in professional, social, and civic activities.
• Tell the learners that although the president carries out the decision making for all functions, it would be difficult for him/her to do this
alone. The president cannot manage the company on his own, especially when the corporation has become too big. To assist him are the
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vice presidents of different functional areas: finance, marketing, production and administration.
• Determine from the list of roles written on the board the functions that pertain to the respective VPs. Add the following functions if needed:
• VP for Marketing: The following are among the responsibilities of VP for Marketing
- Formulating marketing strategies and plans.
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- Providing assistance in payroll preparation, payment of vendors, and collection of receivables.
- Determining the location and the maximum amount of office space needed by the company.Identifying means, processes, or systems
that will minimize the operating costs of the company. (Cayanan, 2015)
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• Finally, focus the learners’ attention to the role of the VP for finance as this is where the rest of the topics for this course will revolve.
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MOTIVATION (5 MINS)
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• Share the following quotes from the Chief Financial Officers (CFOs) of the respective corporations:
- Unilever: “Finance plays a critical role across every aspect of our business. We enable the business to turn our ambition and strategy into
sustainable, consistent and superior performance” - Jean-Marc Huët (Unilever)
- Jollibee: “It’s very exciting because you are not just thinking of today but what the company will need in the future” - Ysmael V. Baysa
(Morales, 2013)
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- Globe Telecom: “Yesterday’s solutions are never adequate for the future” - Albert De Larrazabal (Klobucher, 2015)
- SM Corporation: “Now, we don’t go out because we need funds. We go out because it’s an opportunity.” – Jose T. Sio (Montealegre, 2015)
• Reflect on the quotes cited and mention how critical and dynamic working in the finance field is.
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INSTRUCTION (45 MINS)
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• Recall from the previous session that there are situations when we are faced with lack of funds. Teacher Tips:
Financing decisions include making decisions on how to fund long term investments (such as Financing – to determine the appropriate
capital structure of the company and to
company expansions) and working capital which deals with the day to day operations of the
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raise funds from debt and equity.
company (i.e., purchase of inventory, payment of operating expenses, etc.).
• The role of the VP for Finance of the Financial Manager is to determine the appropriate capital
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structure of the company. Capital structure refers to how much of your total assets is financed by
debt and how much is financed by equity. To illustrate, show/draw the figure below:
100%
Equity
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Liabilities Assets
75%
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50%
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25%
0%
Total Assets Capital Structure
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- In the figure above, the total assets is financed by 60% debt and 40% equity. Accordingly, the
capital structure is 60% debt and 40% equity.
• Ask the learners if they think there is an ideal mix of debt and equity across corporations?
- Answer: No. The mix of debt and equity varies in different corporations depending on
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management’s strategies. It is the responsibility of the Financial Manager to determine which
type of financing (debt or equity) is best for the company.
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• The advantages of debt and equity financing will be discussed in Lesson 5: Sources and Uses of Teacher Tips:
Funds. A. Investing
• Short term investments:
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• Recall that, previously, you discussed investing as where to put your excess cash to make it more
profitable. We expand that definition by including cash held taken from funds as a result of
financing decisions.
1. Plan for expected excess in cash using
Financial Planning tools such as
budgeting and forecasting
2. Choose which type of investment should
it invest in that would secure the best
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profits
• Investments may either be short term or long term.
- Short term investment decisions are needed when the company is in an excess cash position. • Long term investments:
• To plan for this, the Financial Manager should be able to make use of Financial Planning tools Prepare a capital budgeting analysis to
determine if the long term investment will
such as budgeting and forecasting which will be discussed in Lesson 3: Financial Planning
be profitable
Tools and Concepts.
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• Moreover, the company should choose which type of investment it should invest in that would B. Operating - determine how to finance
provide an most optimal risk and return trade off. We will learn more about this on Lesson 6: working capital accounts such as
accounts receivable and inventories
Introduction to investments.
(short term vs. long term)
- Long term investments should be supported by a capital budgeting analysis which is among
the responsibilities of a finance manager.
• Capital budgeting analysis is a tool to assess whether the investment will be profitable in the
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long run and will be further discussed in Lesson 5: Basic Long Term Financial Concepts. This is
a crucial function of management especially if this investment would be financed by debt.
• The lenders should have the confidence that the investments that management will push
through with will be profitable or else they would not lend the company any money.
• Operating decisions deal with the daily operations of the company. The role of the VP for finance Teacher Tips:
There are two types of liquidity risk:
is determining how to finance working capital accounts such as accounts receivable and inventories.
A. Risk that the company will fail to pay its
The company has a choice on whether to finance working capital needs by long term or short term
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short term obligations.
sources. Why does a Financial Manager need to choose which source of financing a company B. Risk that you will not be able to sell
should use? What do they need to consider in making this decision? investments in financial assets
- Short Term sources are those that will be payable in at most 12 months. This includes short-term immediately.
loans with banks and suppliers’ credit. For short-term bank loans, the interest rate is generally
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lower as compared to that of long-term loans. Hence, this would lead to a lower financing cost.
- Suppliers’ credit are the amounts owed to suppliers for the inventories they delivered or
services they provided. While suppliers’ credit is generally free of interest charges, the
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obligations with them have to be paid on time to maintain good supplier relationship. Such
relationships should be nurtured to ensure timely delivery of inventories.
- Short term sources pose a trade-off between profitability and liquidity risk. Because this source
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matures in a short period, there is a possibility that the company may not be able to obtain
enough cash to pay their obligation (i.e. liquidity risk).
- Long term sources, on the other hand, mature in longer periods. Since this will be paid much
later, the lenders expect more risk and place a higher interest rate which makes the cost of long
term sources higher than short term sources. However, since long term sources have a longer
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time to mature, it gives the company more time to accumulate cash to pay off the obligation in
the future.
- Hence, the choice between short and long term sources depends on the risk and return trade
off that management is willing to take. The learners will learn more about this on Chapter 4:
Sources and uses of funds.
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• Dividend Policies. Recall that cash dividends are paid by corporations to existing shareholders
based on their shareholdings in the company as a return on their investment. Some investors buy
stocks because of the dividends they expect to receive from the company. Non-declaration of
dividends may disappoint these investors. Hence, it is the role of a financial manager to determine
when the company should declare cash dividends.
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- Before a company may be able to declare cash dividends, two conditions must exist:
1. The company must have enough retained earnings (accumulated profits) to support cash
dividend declaration.
2. The company must have cash.
• Ask the learners what they think will affect the decision of management in paying dividends. Teacher Tips:
Dividend Policies - These determine when
Remind them that dividends come from the company’s cash and availability of unrestricted retained
the company should declare cash dividends.
earnings.
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- Answer Key:
• Availability of financially viable long-term investment
• Access to long term sources of funds
• Management’s Target Capital structure
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• Recall that one of the functions of a finance manager is investing and its available cash may be used
to invest in long term investments that would increase the profitability of the company. Some small
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enterprises which are undergoing expansion may have limited access to long term financing (both
long term debt and equity). This results to these small companies reinvesting their earnings into
their business rather than paying them out as dividends.
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• On the other hand, a company which has access to long term sources of funds may be able to
declare dividends even if they are faced with investment opportunities. However these investment
opportunities are generally financed by both debt and equity.
- The management usually appropriates a portion of retained earnings for investment
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undertakings and this may limit the amount of retained earnings available for dividend
declaration.
- Creditors are not willing to finance entirely the cost of a company’s long term investment.
Hence, the need for equity financing (e.g. internally generated funds or issuance of new shares).
- Examples of these companies are publicly listed companies such as PLDT, Globe Telecom, and
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Petron. PLDT and Globe are two of the Philippine listed companies which have generously
distributed cash dividends for the last five years (information as of 2014).
• For companies which have limited access to capital and have target capital structure, they may end
up with a residual dividend policy. This means that when companies are faced with investment
opportunities, internally generated funds will be used first to finance these investments and
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dividends can only be declared if there are excess funds.
ENRICHMENT (5 MINS)
Integration of Learning
• Ask the learners the following:
- Explain why shareholder wealth maximization should be the overriding objective of management.
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- What other positions can you think of that are related to financial management?
Answer: Treasurer, Controller. These are positions under the CFO)
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Business'Finance 90 MINS
PY
30
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Instruments
Enrichment Integration of learning 5
Learning Competencies
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The learners shall be able to: Evaluation Short Quiz on Financial Institutions, Markets, 10
• Distinguish a financial institution from financial instrument and financial
and Instruments
market. (ABM_BF12-IIIa-2)
Materials
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• Enumerate the varied financial institutions and their corresponding services.
(ABM_BF12-IIIa-3)
• Compare and contrast the varied financial instruments. (ABM_BF12-IIIa-4)
• Explain the flow of funds within an organization – through and from the
Resources
Board Notes
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INTRODUCTION/MOTIVATION (30 MINS)
• Pick a random learner (A) and present a scenario that during his/her management of money, some
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cash will remain. Ask him/her what he/she should do with that cash.
- Expected answer: Save or Invest
• Ask your students if they are going to save their money, where would they keep it.
- Expected answers: Banks, Piggy bank, Investments – stocks, mutual funds, insurance
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• Pick another learner (B) and ask B what business he/she would like to try. Now, suppose that he/she
had the business running and is profitable for some time. B then decides to expand his/her business
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but does not have enough cash to pay for the expansion. Ask the students where can B get the
additional funding?
- Expected answers: Ask from parents, ask from friends, banks, lending institutions.
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• Suppose B knew that A had excess money and approached A to lend him/her the capital he/she
needs to expand his/her business for a 20% interest. Since A observed that B’s business has been
profitable, A is willing to lend B the money since he/she is confident that B can repay his loan. A is
now expecting to be 20% richer from his lending to B and B can now expand his operations to gain
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more profit from his business.
• Emphasize that this scenario where the lender and the borrower are present at the right time and at
the right place may not happen all the time. In fact, it seldom happens. What happens if they did
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not meet? A will not be able to find someone to invest his money to and B cannot get funds to start
his expansion. Here is where the Financial System comes in.
Terms Defined:
2. Role playing to introduce the concept of saving and investing
Financial Markets – organized forums in
• Draw two boxes and label with names of learners A and B. Below [A], write “Saver”, and below [B], which the suppliers and users of various
write “users of funds”. types of funds can make transactions
directly
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• Continue discussion as follows: Terms Defined:
- If A knows that B is in need of funds, or if B knows that A is willing to invest funds, A and B may Financial Institutions – intermediaries that
channel the savings of individuals,
agree to make a Private Placement. (Draw the box for Private Placement between A and B and
businesses, and governments into loans or
link the boxes as shown in Figure 1.) investments.
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funds, meet and make transactions. Once A and B have met in the Financial Market, they can now
Public Offering - The sale of either bonds or
agree to make a private placement. (Draw the box for Financial Markets and link this to A and B as
stocks to the general public.
shown in Figure 1.)
Financial Instruments – is a real or a virtual
document representing a legal agreement
- If A and B do not want to make an effort to find a counterparty in the Financial Markets, A and B
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involving some sort-of monetary value
may go to a Financial Institution. A Financial Institution will receive A’s supply of funds and match (Source: Investopedia - Sharper Insight.
it with B’s demand of funds. Unlike the Financial Markets were A and B knows to whom the fund Smarter Investing. | Investopedia. (2016).
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Investopedia. Retrieved 8 May 2016, from
went and from whom the funds came, Financial Institutions serve as an intermediary to the
http://investopedia.com). These can be
suppliers and users of funds. (Draw the box for Financial Institutions and link this to A and B as debt securities like corporate bonds or
shown in Figure 1.) equity like shares of stock.
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- Moreover, Financial institutions actively participate in the financial markets as both suppliers and
users of funds. (Draw the link between Financial Institutions and Financial Markets as shown in
Figure 1.)
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• Mention that the resulting diagram illustrates the Financial System.
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Financial System
Financial
Institutions
[Learner A] [Learner B]
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Savers/Suppliers Private Placement Users/Demanders
of Funds of Funds
Financial Markets
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Flow of funds Flow of securities/notes/bonds/debt instruments
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Figure 1: The Financial System
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• Post the question of how transactions between suppliers and users of funds take place. How would they prove that there was a transaction
so that the demander will be able to repay the supplier on time and at the right amount?
- Answers:
- Verbal agreement
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- Written agreement
• Discuss that due to the increased need for security for the performance of obligations arising from these transactions and due to the
growing size of the financial system, the transfers of funds from one party to another are made through Financial Instruments.
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• Note that on the diagram presented, the solid lines represent the flow of cash/funds, while the broken lines represent the flow of financial
instruments which represent obligations to transfer cash or other assets in the future.
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INSTRUCTION (45 MINS)
Tell the learners that you will further discuss the composition of the Financial System and that you will identify the types of Financial Markets,
Financial Institutions and Financial Instruments.
1. Financial Instruments
• When a financial instrument is issued, it gives rise to a financial asset on one hand and a financial liability or equity instrument on the other.
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• Recall from ABM the following definitions:
- A Financial Asset is any asset that is:
• Cash
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• An equity instrument of another entity
• A contractual right to receive cash or another financial asset from another entity.
• A contractual right to exchange instruments with another entity under conditions that are potentially favorable. (IAS 32.11)
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• Examples: Notes Receivable, Loans Receivable, Investment in Stocks, Investment in Bonds
- A Financial Liability is any liability that is a contractual obligation:
• To deliver cash or other financial instrument to another entity.
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• To exchange financial instruments with another entity under conditions that are potentially unfavorable. (IAS 32)
• Examples: Notes Payable, Loans Payable, Bonds Payable
- An Equity Instrument is any contract that evidences a residual interest in the assets of an entity after deducting all liabilities. (IAS 32)
• Examples: Ordinary Share Capital, Preference Share Capital
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• Ask the learners who are the holders of Financial Assets.
- Answer: Suppliers of Funds
• Ask who the makers of Financial Liabilities and Equity instruments are.
- Answer: Users of Funds
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• Continue discussing that when companies are in need of funding, they either sell debt securities (or bonds) or issue equity instruments. The
proceeds from the sale of the debt securities and issuance of bonds will be used to finance the company’s plans. On the other hand, investors
buy debt securities of equity instruments in hopes of receiving returns through interest, dividend income or appreciation in the financial
asset’s price.
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• Identify common examples of Debt and Equity Instruments.
- Debt Instruments generally have fixed returns due to fixed interest rates. Examples of debt
instruments are as follows:
• Treasury Bonds and Treasury Bills are issued by the Philippine government. These bonds and bills
have usually low interest rates and have very low risk of default since the government assures that
these will be paid.
• Corporate Bonds are issued by publicly listed companies. These bonds usually have higher interest
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rates than Treasury bonds. However, these bonds are not risk free. If the company which issued the
bonds goes bankrupt, the holder of the bonds will no longer receive any return from their
investment and even their principal investment can be wiped out.
- Equity Instruments generally have varied returns based on the performance of the issuing company.
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Returns from equity instruments come from either dividends or stock price appreciation. The
following are types of equity instruments:
• Preferred Stock has priority over a common stock in terms of claims over the assets of a company.
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This means that if a company were to be liquidated and its assets have to be distributed, no asset
will be distributed to common stockholders unless all the claims of the preferred stockholders have
been given. Moreover, preferred stockholders have also priority over common stockholders in cash
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dividend declaration. Dividends to preferred stockholders are usually in a fixed rate. No cash
dividends will be given to common stockholders unless all the dividends due to preferred
stockholders are paid first. (Cayanan, 2015)
• Holders of Common Stock on the other hand are the real owners of the company. If the company’s
growth is spurring, the common stockholders will benefit on the growth. Moreover, during a
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profitable period for which a company may decide to declare higher dividends, preferred stock will
receive a fixed dividend rate while common stockholders receive all the excess.
• Ask the learners which of the financial instruments presented they find most appealing.
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• Inform them that they will learn more about the advantages and disadvantages of debt and equity
instruments in Lesson 4: Sources and Uses of Funds and Lesson 5: Introduction to Investments.
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have previously been purchased. The sale of previously owned securities takes place in secondary which preowned securities (those that are
markets. not new issues) are traded.
• The Philippine Stock Exchange (PSE) is both a primary and secondary market. Money market - A financial relationship
created between suppliers and users of
- Money Markets vs. Capital Markets
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short-term funds.
• Money markets are a venue wherein securities with short-term maturities (1 year or less) are sold.
Capital market - A market that enables
They are created because some individuals, businesses, governments, and financial institutions
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suppliers and users of long-term funds to
have temporarily idle funds that they wish to invest in a relatively safe, interest-bearing asset. At the make transactions.
same time, other individuals, businesses, governments, and financial institutions find themselves in
need of seasonal or temporary financing.
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• On the other hand, securities with longer-term maturities are sold in Capital markets. The key
capital market securities are bonds (long-term debt) and both common stock and preferred stock
(equity, or ownership).
3. Financial Institutions
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• Recall the definition of Financial institutions from the earlier discussion.
funds to provide commercial loans to firms and personal loans to individuals, and purchase debt
securities issued by firms or government agencies.
- Insurance Companies - Individuals purchase insurance (life, property and casualty, and health)
protection with insurance premiums. The insurance companies pool these payments and invest the
proceeds in various securities until the funds are needed to pay off claims by policyholders.
Because they often own large blocks of a firm’s stocks or bonds, they frequently attempt to
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influence the management of the firm to improve the firm’s performance, and ultimately, the performance of the securities they own.
- Mutual Funds - Mutual funds are owned by investment companies which enable small investors to enjoy the benefits of investing in a
diversified portfolio of securities purchased on their behalf by professional investment managers. When mutual funds use money from
investors to invest in newly issued debt or equity securities, they finance new investment by firms. Conversely, when they invest in debt or
equity securities already held by investors, they are transferring ownership of the securities among investors.
- Pension Funds - Financial institutions that receive payments from employees and invest the proceeds on their behalf.
- Other financial institutions include pension funds like Government Service Insurance System (GSIS) and Social Security System (SSS), unit
investment trust fund (UITF), investment banks, and credit unions, among others.
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Figure 2: How Financial Institutions Provide Financing for Firms (Gitman & Zutter, 2012)
• The figure above illustrates how the key financial institutions serve as intermediaries for suppliers and users of funds.
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• Ask the learners which type of financial institution do they think is most critical for firms?
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ENRICHMENT (5 MINS)
Integration of Learning
• Question for reflection: How would you relate the role of financial managers, role of financial markets
and role of investors?
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Financial managers make financing The financial markets provide a Investors provide the funds that are
decisions that require funding from forum in which firms can issue to be used by financial managers to
investors in the financial markets. securities to obtain the funds that finance corporate growth.
they need and in which investors can
purchase securities to invest their
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funds.
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EVALUATION (10 MINS)
Quiz:
Part 1: True/False
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1. To achieve the goal of profit maximization for each alternative being considered, the financial
manager would select the one that is expected to result in the highest monetary return. Teacher Tips
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2. Dividend payments change directly with changes in earnings per share. You may use suggested format or take
3. The wealth of corporate owners is measured by the share price of the stock. questions from the test banks found at the
4. Financial markets are intermediaries that channel the savings of individuals, businesses, and end of this file.
government into loans or investments.
Answer Key:
5. The money market involves trading of securities with maturities of one year or less while the capital
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market involves the buying and selling of securities with maturities of more than one year. Part 1: T, F, T, F, T
Part 2: B, D, A, C, B
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Part 2: Multiple Choice
1. The ______ is created by a financial relationship between suppliers and users of short-term funds.
A. financial market
B. money market
C. stock market
D. capital market
2. Firms that require funds from external sources can obtain them from _____.
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A. financial markets.
B. private placement.
C. financial institutions.
D. All of the above.
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3. The major securities traded in the capital markets are ____.
A. stocks and bonds.
C
B. bonds and commercial paper.
C. commercial paper and Treasury bills.
D. Treasury bills and certificates of deposit.
A. minimizing risk.
B. maximizing profit.
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4. The primary goal of the financial manager is _____.
C. maximizing wealth.
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D. minimizing return.
5. A financial manager must choose between four alternative Assets: 1, 2, 3, and 4. Each asset costs $35,000 and is expected to provide
earnings over a three-year period as described below.
D
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Appendix
Test Bank - Goal of the Firm (Gitman & Zutter, 2012) Answer Key
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True/False
True/False 1. T
2. F
1. High cash flow is generally associated with a higher share price whereas higher risk tends to result
3. T
C
in a lower share price. 4. F
2. When considering each financial decision alternative or possible action in terms of its impact on the 5. T
share price of the firm's stock, financial managers should accept only those actions that are 6. T
expected to increase the firm's profitability. 7. T
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3. To achieve the goal of profit maximization for each alternative being considered, the financial
manager would select the one that is expected to result in the highest monetary return.
4. Dividend payments change directly with changes in earnings per share.
5. The wealth of corporate owners is measured by the share price of the stock.
8. F
9. F
Multiple Choice
1. C
2. B
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6. Risk and the magnitude and timing of cash flows are the key determinants of share price, which 3. C
represents the wealth of the owners in the firm. 4. D
7. _When considering each financial decision alternative or possible action in terms of its impact on 5. C
the share price of the firm's stock, financial managers should accept only those actions that are 6. A
7. C
expected to maximize shareholder value.
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8. B
8. An increase in firm risk tends to result in a higher share price since the stockholder must be 9. B
compensated for the greater risk. 10. B
11. A
9. Stockholders expect to earn higher rates of return on investments of lower risk and lower rates of
12. D
return on investments of higher risk. 13. B
14. A
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Multiple Choice
1. The primary goal of the financial manager is
A. minimizing risk.
B. maximizing profit.
C. maximizing wealth.
D. minimizing return.
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A. earnings per share and cash dividends.
B. increase in share price and cash dividends.
C. increase in share price and earnings per share.
D. profit and earnings per share.
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3. The wealth of the owners of a corporation is represented by
A. profits.
C
B. earnings per share.
C. share value.
D. cash flow.
6. Profit maximization as a goal is not ideal because it does NOT directly consider
A. risk and cash flow.
B. cash flow and stock price.
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C. risk and EPS.
D. EPS and stock price.
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8. Profit maximization fails because it ignores all EXCEPT
A. the timing of returns.
B. earnings per share.
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C. cash flows available to stockholders.
D. risk.
C
9. The key variables in the owner wealth maximization process are
A. earnings per share and risk.
B. cash flows and risk.
C. earnings per share and share price.
D. profits and risk.
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10. Cash flow and risk are the key determinants in share price. Increased cash flow results in ________, other things remaining the same.
A. a lower share price
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B. a higher share price
C. an unchanged share price
D. an undetermined share price
11. Cash flow and risk are the key determinants in share price. Increased risk, other things remaining the same, results in
D
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12. Financial managers evaluating decision alternatives or potential actions must consider
A. only risk.
B. only return.
C. both risk and return.
D. risk, return, and the impact on share price.
13. A financial manager must choose between four alternative Assets: 1, 2, 3, and 4. Each asset costs $35,000 and is expected to provide
earnings over a three-year period as described below.
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Based on the profit maximization goal, the financial manager would choose
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1 $ 21,000 $ 15,000 $ 6,000
C
3 $ 3,000 $ 20,000 $ 19,000
A. Asset 1.
B.
C.
D.
Asset 2.
Asset 3.
Asset 4.
ED
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14. A financial manager must choose between three alternative investments. Each asset is expected to provide earnings over a three-year
period as described below. Based on the wealth maximization goal, the financial manager would
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A. choose Asset 1.
B. choose Asset 2.
C. choose Asset 3.
D. be indifferent between Asset 1 and Asset 2.
Test Bank - Financial Markets, Financial Institutions, Financial Instruments (Gitman & Zutter, 2012)
Answer Key
True/False True/False
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1. F
1. Primary and secondary markets are markets for short-term and long-term securities, respectively. 2. F
2. Financial markets are intermediaries that channel the savings of individuals, businesses, and 3. T
government into loans or investments. 4. T
3. The money market involves trading of securities with maturities of one year or less while the capital 5. F
6. F
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market involves the buying and selling of securities with maturities of more than one year.
7. F
4. Holders of equity have claims on both income and assets that are secondary to the claims of 8. T
creditors. 9. F
C
5. Preferred stock is a special form of stock having a fixed periodic dividend that must be paid prior to
Multiple Choice
payment of any interest to outstanding bonds.
1. A
6. Commercial banks obtain most of their funds from borrowing in the capital markets. 2. A
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7. Credit unions are the largest type of financial intermediary handling individual savings.
8. A mutual fund is a type of financial intermediary that obtains funds through the sale of shares and
uses the proceeds to acquire bonds and stocks issued by various business and governmental units.
9. IPO stands for Interest and Principal Obligation.
3. B
4. B
5. A
6. C
7. A
8. D
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Multiple Choice 9. D
10. B
1. A ______ is one financial intermediary handling individual savings. It receives premium payments 11. D
that are placed in loans or investments to accumulate funds to cover future benefits. 12. A
A. life insurance company 13. A
B. commercial bank
D
C. savings bank
D. credit union
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2. The key participants in financial transactions are individuals, businesses, and governments. Individuals are net ______ of funds, and
businesses are net ______ of funds.
A. suppliers; users
B. purchasers; sellers
C. users; suppliers
D. users; providers
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A. A pension fund
B. A newspaper publisher
C. A commercial bank
D. An insurance company
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4. A ______ is set up so that employees of corporations or governments can receive income after retirement.
A. life insurance company
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B. pension fund
C. savings bank
D. credit union
B. a stock exchange.
C. a public offering.
D. a private placement.
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7. Which of the following is not a service provided by financial institutions?
A. Buying the businesses of customers
B. Investing customers’ savings in stocks and bonds
C. Paying savers’ interest on deposited funds
D. Lending money to customers
8. Government usually
A. borrows funds directly from financial institutions.
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B. maintains permanent deposits with financial institutions.
C. is a net supplier of funds.
D. is a net demander of funds.
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9. By definition, the money market involves the buying and selling of
A. funds that mature in more than one year.
B. flows of funds.
C
C. stocks and bonds.
D. short-term funds.
A. financial market
B. money market
C. stock market
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10. The ______ is created by a financial relationship between suppliers and users of short-term funds.
D. capital market
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11. Firms that require funds from external sources can obtain them from
A. financial markets.
B. private placement.
C. financial institutions.
D
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12. The major securities traded in the capital markets are
A. stocks and bonds.
B. bonds and commercial paper.
C. commercial paper and Treasury bills.
D. Treasury bills and certificates of deposit.
13. Long-term debt instruments used by both government and business are known as
A. bonds.
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B. equities.
C. stocks.
D. bills.
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C
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D
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Business'Finance 180 MINS
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10
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financial statements as well as the methods or tools of analysis of financial Instruction/ Discussion 90
statements, including horizontal analysis, vertical analysis, and financial ratios Delivery
to test the level of liquidity, solvency, profitability, and stability of the business. Practice
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Board work/exercises and presentation 30
Resources
calculators, laptops
Learning Competencies (1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon
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The learners shall be able to prepare financial statements (ABM_BF12-III-6) City. Rex Bookstore.
(2) Valencia and Roxas. Basic Accounting.
Specific Learning Outcomes (3) Copies of sample financial statements
At the end of this lesson, the learners will be able to identify and explain the
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INTRODUCTION/REVIEW (10 MINS)
Communicate learning objectives
• Introduce the following learning objectives using any of the suggested protocols (verbatim, own
words, read-aloud):
- I will be able to identify and explain the basic steps in the accounting process (accounting cycle).
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MOTIVATION (20 MINS)
Match the letter with the definition that corresponds to the following terms: Teacher Tips
(Modified from Basic Accounting, Valencia & Roxas) Answer Key
1. i
1. Accounting A. Exchanges of goods or services between/among two or more entities 2. h
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3. d
System or some other event having an economic impact on a business
4. a
2. Debit enterprise. 5. o
3. Credit B. An accounting record used to list a particular type of frequently 6. q
C
4. Transactions recurring transaction. 7. p
8. g
5. Double-Entry C. A record used to classify and summarize the effects of transactions.
9. b
Accounting D. An entry on the right side of an account. 10. j
6. Journal Entry
7. Journals
8. Accounting
Process (or cycle)
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E. A record used as the basis for analyzing and recording transactions.
Examples include invoices, check stubs, and receipts.
F. A collection of accounts maintained by a business.
G. Procedures used for analyzing, recording, classifying, and
11. c
12. f
13. k
14. n
15. l
9. Special Journals summarizing the information to be presented in accounting reports.
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10. General Journal H. An entry on the left side of an account.
11. Account I. Procedures and methods used, including data processing equipment,
12. Ledger to collect and report accounting data.
13. Posting J. An accounting record used to record all business activities for which a
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INSTRUCTION/DELIVERY (90 MINS)
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Discuss the following:
Accounting is the systematic and comprehensive recording of financial transactions pertaining to a business. (Investopedia - Sharper Insight.
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Smarter Investing. | Investopedia. (2016). Investopedia. Retrieved 8 May 2016, from http://investopedia.com)
• This means that the whole assets of the company comes from the liability, or debt of the company, and from the capital of the owner of the
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business, and the income it generated from the business operations. This reflects the double-entry bookkeeping, and shown in the balance
sheet.
• Double entry bookkeeping tells us that if we add something from the one side, which is asset, we must add the same amount to the other
side to keep them in balance.
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• For example, if we were to increase cash (an asset) we might have to increase note payable (a liability account) so that the basic accounting
equation remains in balance.
ASSETS = LIABILITIES + OWNER’S EQUITY
P 500.00 P 500.00
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• In double-entry bookkeeping, there is the concept of debit (dr) and credit (cr). Debit is the left, and credit is the right.
• There is also a concept of normal balances. A normal balance, either a debit normal balance or a credit normal balance, is the side where a
specific account increases.
• In the accounting equation, asset is on the left side, while liabilities and equity is on the right side. Therefore, asset has a debit normal
balance, meaning that cash as an asset is debited to increase, while credited to decrease.
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• On the other hand, liabilities and owners’ equity have a credit normal balance. This means that a liability account is credited to increase, while
debited to decrease. The accounting equation provides the foundation for what eventually becomes the balance sheet.
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2. T-Account Analysis
In double-entry bookkeeping, the terms debit and credit are used to identify which side of the ledger account an entry is to be made. Debits
are on the left side of the ledger and Credits are on the right side of the ledger. It does not matter what type of account is involved.
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CASH ACCOUNTS PAYABLE
Php 500.00
ED Php 500.00
• The debit to cash increases the Cash Account by PHP500 while the credit to Accounts Payable increases this liability account by the same
PHP500.
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• In the above example, we analyzed the accounting equation in terms of assets, liabilities, and owners’ equity. These are called Real or
Permanent Accounts. These accounts remain open and active for the life of the enterprise.
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• In contrast, there are accounts that reflect activities for a specific accounting period. These are called Nominal or Temporary Accounts. After
the end of the specific period and the start of a new period, the balance of the nominal accounts are zero.
• Using the accounting equation, we can now expand the analysis that will include both real and nominal accounts. All nominal accounts will be
then closed to a Retained Earnings account at the end of the period, which is an owner’s equity account.
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Illustrative Example:
Calvo Delivery Service is owned and operated by Noel Calvo. The following selected transactions were completed by Calvo Delivery Service
during February:
A. Received cash from owner as additional investment, P35,000.
B. Paid creditors on account, P1,800.
C. Billed customers for delivery services on account, P11,250.
D. Received cash from customers on account, P6,740.
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ASSETS = LIABILITIES + OWNER’S EQUITY
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A PHP35,000 PHP35,000
B PHP1,800 PHP1,800
C
C PHP11,250 PHP11,250
D PHP6,740 PHP6,740
3. Nominal Accounts
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There are two major categories of nominal accounts: Expense and Revenue accounts.
• Expense Accounts
- A resource, when not yet used up for the current period, is considered an Asset and will provide benefits at a future time.
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- On the other hand, a resource that has been used for the current period is called an Expense. At the end of each accounting period,
expenses are closed out to the Retained Earnings Account which decreases the Owners’ Equity. Since expenses decrease the owners’ equity,
those expense accounts carry a normal debit balance.
• Revenue Accounts
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- Revenue Accounts reflect the accumulation of potential additions to retained earnings during the current accounting period.
- At the end of the accounting period accumulation of revenues during the period are closed to the Retained Earnings Account which
increases Owners’ Equity.
- Therefore revenue accounts carry a normal credit balance meaning the same balance as the Retained Earnings Account.
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Illustrative Example:
J. F. Outz, M.D., has been a practicing cardiologist for three years. During April 2009, Outz completed the following transactions in her practice
of cardiology:
Mar 1 Provide medical services to clients for cash P35,000.
Mar 2 Paid rent for the month, P3,000.
Paid advertising expense, P1,800.
Mar 6 Purchased office equipment on account, P12,300.
Mar 15 Paid creditor on account, P1,200.
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Mar 27 Paid cash for repairs to office equipment, P500.
Mar 30 Paid telephone bill for the month, P180.
Mar 31 Paid electricity bill for the month, P315.
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ASSETS = LIABILITIES + OWNER’S EQUITY
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RECEIVABLE EQUIPMENT PAYABLE REVENUE
1 PHP35,000 PHP35,000
2 PHP3,000 PHP3,000
6
PHP1,800
PHP12,300
ED PHP12,300
PHP1,800
15 PHP1,200 PHP1,200
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27 PHP500 PHP500
30 PHP180 PHP180
31 PHP315 PHP315
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If journalized:
March 1 Debit Cash for PHP35,000; Credit Service Revenue for PHP35,000
6 Debit Office Equipment for PHP12,300; Credit Accounts Payable for PHP12,300
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15 Debit Accounts Payable for PHP1,200; Credit Cash for PHP1,200
30 Debit Utilities Expense (or telephone) for PHP180; Credit Cash for PHP180
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31 Debit Utilities Expense (or energy) for PHP315; credit Cash for PHP315
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4. The Accounting Cycle
• Because accounting is all about getting data and putting them into the accounting equation, the end products are financial statements such
as a balance sheet and income statements, the process of accounting follows a cycle called the Accounting Cycle.
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• It starts with the identification of whether a transaction is accountable or can be quantified, and ends with a post-closing trial balance.
The Process:
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• For repetitive transactions or high volume transactions (e.g. one thousand sales transactions in one day), Special Journals are made. These
special journals include sales journal, purchases journal, cash receipts journal, and cash disbursements journal.
The Source Document is the file or document (i.e. official receipt, purchase order, contract) that will provide a basis or reason for a journal entry.
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For example, an official receipt issued by the business will tell you that a sale transaction occurred and will be reflected by the journal entry.
Illustrative Example:
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• M. Jaya resigned from Company X. No journal entry.
• C. Danto purchased PHP500 cash worth of supplies to Ace Hardware. Debit Supplies PHP500, Credit Cash PHP500.
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• A transaction is first recorded in a journal. Periodically, the journal entries are transferred to the accounts in the ledger.
• The process of transferring the debits and credits from the journal entries to the accounts is called Posting.
• Ledgers provide chronological details as to how transactions affect individual accounts. There are two types of ledgers: the General Ledger
and Subsidiary Ledger. The general ledger is a summary of the different Subsidiary Ledgers and can serve as a control account.
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• For example, a general ledger for accounts receivable summarizes the balances found in the different subsidiary ledgers for different
customers.
Illustrative Example:
J. Gaya, a CPA, is an independent auditor with only two clients. The Accounts Receivable ledger account has a balance of PHP100,000. His two
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clients are A. Rania, and X. Campos. The subsidiary ledger of A. Rania has a balance of PHP25,000. X. Campos’s ledger balance is PHP75,000.
The sum of subsidiary ledgers must total the general ledger or else there must be an investigation to identify the source of discrepancies.
ACCOUNTS RECEIVABLE
DATE
A. RANIA X. CAMPOS
DATE DATE
December 31, 2015 Bal. Php 25,000 December 31, 2015 Bal. Php 75,000
Posting in the subsidiary ledgers can be done anytime and the balances are summarized at the end of an accounting period. Posting in the
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general ledger is done at the end of an accounting period.
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• Double-entry accounting requires that debits must always equal credits. The trial balance verifies this equality.
• The steps in preparing a trial balance are as follows:
1. List the name of the company, the title of the trial balance, and the date the trial balance is prepared.
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2. List the accounts from the ledger and enter their debit or credit balance in the Debit or Credit column of the trial balance.
3. Total the Debit and Credit columns of the trial balance.
4. Verify that the total of the Debit column equals the total of the Credit column.
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Step 5: Make adjustments. Journalize adjusting entries.
• At the end of the accounting period, many of the account balances in the ledger can be reported in the financial statements without change.
• For example, the balances of the cash and land accounts are normally the amount reported on the balance sheet. However, some accounts in
the ledger require updating.
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• This updating is required for the following reasons:
1. Some expenses are not recorded daily. For example, the daily use of supplies would require many entries with small amounts. Also,
managers usually do not need to know the amount of supplies on hand on a day-to-day basis.
2. Some revenues and expenses are earned as time passes rather than as separate transactions. For example, rent received in advance
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(unearned rent) expires and becomes revenue with the passage of time. Likewise, prepaid insurance expires and becomes an expense
with the passage of time.
3. Some revenues and expenses may be unrecorded. For example, a company may have provided services to customers that are has not
billed or recorded at the end of the accounting period. Likewise, a company may not pay its employees until the next accounting period
even though the employees have earned their wages in the current period.
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• The analysis and updating of accounts at the end of the period before the financial statements are prepared is called the Adjusting Process.
The journal entries that bring the accounts up to date at the end of the accounting period are called Adjusting Entries.
• The following are normally adjusted at the end of a period:
- Accruals. These include unpaid salaries for the accounting period, unpaid interest expense, or unpaid utility expenses.
- Prepayments. If a company has prepaid expenses such as prepaid rent or prepaid insurance then the correct balances for these accounts
have to be established at the end of each accounting period to reflect their correct balances.
- Depreciation and amortization expenses. Depreciation expenses are recognized at the end of each accounting period through
adjusting entries. If there are intangible assets such as franchise, the allocation of their costs which is called amortization expense, is also
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recognized at the end of each accounting period through adjusting entries.
- Allowance for uncollectible accounts. Bad debt expense from accounts receivable is also recognized through adjusting entries.
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An adjusted trial balance is prepared after taking into consideration the effects of the adjusting entries. Again, this is to ensure that the total
debit balances equal the credit balances after posting and journalizing adjusting entries made.
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Step 7: Prepare the financial statements.
From the adjusted trial balance, the financial statements can then be prepared. These are the statement of financial position, statement of profit
or loss, and the statement of cash flows.
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Step 9: Make a Post-Closing Trial Balance.
A Post-Closing Trial Balance shows the accounts that are permanent or real. These are the accounts that can be seen in your balance sheet.
The post-closing trial balance is prepared to test if the debit balances equal the credit balances after closing entries are considered.
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a. Income Statement
• These are also known as the Profit/Loss Statement, Statement of Comprehensive Income, or Statement of Income.
• This is a summary of the revenue and expenses of a business entity for a specific period of time, such as a month or a year.
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C
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Figure 1: Sample Income Statement
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Source: Warren, Duchac, Fess. Accounting.
•
•It is prepared after the income statement because the net income or net loss for the period must be reported in this statement.
•Similarly, it is prepared before the balance sheet since the amount of owner’s equity at the end of the period must be reported on the
balance sheet.
• Because of this, the statement of owner’s equity is often viewed as the connecting link between the income statement and balance sheet.
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Figure 2: Sample Statement of Owner’s Equity
Source: Warren, Duchac, Fess. Accounting
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c. Balance Sheet
• Formerly known as the Statement of Financial Position.
• This provides information regarding the liquidity position and capital structure of a company as of a given date.
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• It must be noted that the information found in this report are only true as of a given date.
• It shows a list of the assets, liabilities, and owner’s equity of a business entity as of a specific date, usually at the close of the last day of a
month or a year.
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Figure 4: Sample Statement of Cash Flows
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Accounts Payable 39,000 Answer Key Balance Sheet
ABC, Incorporated
Accrued Expenses 8,000
December 31, 2014
Accumulated Depreciation 51,000
Cash 23,000
Additional Paid-In Capital 86,000
Gross accounts receivable 40,000
Allowance for Doubtful Accounts 2,000
Allowance for doubtful accounts (2,000)
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Cash 23,000 Net accounts receivable 38,000
Common Stock (PHP0.20 par) 45,000 Inventories 54,000
Current Portion of L.T. Debt 6,000 Current assets 115,000
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Gross Accounts Receivable 40,000 Gross fixed assets 486,000
Gross Fixed Assets 486,000 Accumulated depreciation (51,000)
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Inventories 54,000 Net fixed assets 435,000
Long-Term Debt 210,000 Total assets 550,000
Net Accounts Receivable
Retained Earnings
38,000
435,000
138,000
ED Short-term bank loan (notes payable)
Accounts payable
Accrued expenses
18,000
39,000
8,000
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Short-Term Bank Loan (Notes 18,000
Current portion of L.T. Debt 6,000
Payable)
Current liabilities 71,000
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Ending inventory 248,000 Cost of goods sold 2,433,000
Gross Sales 3,210,000 Gross profit 729,000
Interest expense 64,000 Operating expenses (excluding depreciation) 417,000
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Lease payments 52,000 Depreciation 78,000
Management salaries 240,000 Operating profit 234,000
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Materials purchases 2,425,000 Interest expense 64,000
R&D expenditures 35,000 Earnings before taxes 170,000
Repairs and maintenance costs
Taxes
22,000
48,000
51,000
ED Taxes
Net income
51,000
119,000
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EVALUATION (30 MINS)
1. Indicate whether the following items would appear on the income statement (IS), or balance sheet Teacher Tip:
(BS). Answer Key
A. ________ Office Supplies 1. a. BS
B. ________ Accounts Payable b. BS
c. BS
C. ________ Computer Equipment d. IS
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D. ________ Commission Fees Earned e. IS
E. ________ Salaries Expense f. BS
F. ________ B. So, Capital g. BS
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2. Using the following accounts from the retail store, A-Mart Incorporated’s income statement for the 2. a. PHP 400
year ending in December 31, 2013, answer the questions below. Note that all figures are in millions. b. 150
c. 115
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Cost of goods sold PHP600
Lease payments 30
Advertising
Taxes
35
40
ED
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Management salaries 100
Depreciation 60
D
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3. Using the following accounts from the A-Mart, Incorporated’s balance sheet for the year ending Teacher Tip:
December 31, 2013, answer the questions below. Use cash as a plug figure. Note that all figures are Answer Key
in millions. 3. a. PHP 410
b. 210
c. 1,410
Current portion of L.T. Debt PHP 60 d. 810
e. 600
Leasehold improvements 300
Accrued expenses 40
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Accumulated depreciation 200
Accounts payable 90
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Inventories 190
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Common stock (PHP1.00 par) 400
Retained earnings
600
200
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Cash ???
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A. A-Mart’s current assets are PHP___________________.
B. A-Mart’s current liabilities are PHP___________________.
C. A-Mart’s total assets are PHP___________________.
D
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Business Finance 120MINS
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15
/Review
review financial ratios, focusing on
liquidity and efficiency ratios. Introduce
Content Standards the case study.
The learners demonstrate an understanding of the process of preparing Case
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Ask learners to analyze and discuss the case 45
financial statements as well as the methods or tools of analysis of financial Analysis
in groups.
statements, including horizontal analysis, vertical analysis, and financial ratios
Presentation Ask assigned groups to present their case 30
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to test the level of liquidity, solvency, profitability, and stability of the business.
analysis to the whole class.
Enrichment Discuss important points of the case and 30
Performance Standards
and
The learners will be able to solve exercises and problems that require financial provides commentaries to the groups’
Materials
analysis
• Calculators
• Laptops
• Projectors
Learning Competencies
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• Textbook
The learners shall be able to:
Resources
• Define the measurement levels namely, liquidity, solvency, stability, and
(1) Several copies of case to distribute to learner-groups
profitability (ABM_BF12-IIIb-7)
• Compute, analyze, and interpret financial ratios such as current ratio, Review
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Provide copies of the financial statement of the subject company to the learners a day before the class. Ask them to compute for liquidity and
efficiency ratios.
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INTRODUCTION/REVIEW (15 MINS)
1. Review profitability and leverage ratios. Ask learners what profitability and leverage mean. Write the names of the different types of ratios
and their formulas on the board.
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2. Explain that business cases are used to discuss certain issues and problems of a specific company. Learners will take the point-of-view of
owners/managers in analyzing the case.
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3. Discuss the mechanics of the case discussion:
• The class will be divided in groups of 4 to 6 learners.
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• Learners will discuss and analyze the business case among their groups. They will then need to summarize their analysis in an essay/paper.
The paper will have the following outline: Case Background/Story, Analysis (including computations), and Recommendation. The paper can
be one to two pages of yellow sheet or bond paper. They must do this within 45 minutes.
• Two groups will be asked to present. Presenting groups do not need to submit an essay/paper. Instead, they need to prepare their
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presentation with materials like manila paper, transparencies, or PowerPoint. Groups can volunteer or the teacher can also assign who will
present. Assignments should be finalized before learners start their case analysis.
• Presentation time is 10 minutes for each group. After the presentation, there will be a 5-minute Q&A session.
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CASE ANALYSIS (60 MINS)
1. Allow the learners to break into groups. From time to time, update them with the remaining time to do the analysis and their essay/
presentation.
2. Make sure to remind them that they will take on the shoes of the owner/manager in solving the case.
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Below is the business case. You may look for or make another business case as long as it highlights the same topics.
Zapatoes, Inc
Anthony Cruz owns Zapatoes, Inc., a home-grown Filipino shoe company. His company has experienced
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tremendous growth since it has started its operations in 2009. With a growing demand for his products, Anthony
Cruz is considering expanding his operations by opening his first production facility. Currently, he pays another
company to manufacture the shoes he designs. He is contemplating to produce the shoes Zapatoes, Inc. facility,
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with the hope of lowering the cost of production.
The company needs PHP10 million to finance this expansion and is at a tight cash position. Anthony Cruz is now
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wondering where to get the funds needed – invite an investor or personally borrow from a bank?
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Statement of Financial Position
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Accounts Payable 2,000,000.00 1,800,000.00 1,000,000.00
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Long-term debt 2,000,000.00 2,000,000.00 2,000,000.00
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Capital Stock 200,000.00 200,000.00 200,000.00
Total Equity
11,380,000.00
4,410,000.00
8,610,000.00
3,170,000.00
6,170,000.00
Anthony is wondering whether owning his own manufacturing facility can really improve its profitability. Currently,
he is producing his shoes at PHP475 pesos per pair. He expects that he can lower production costs to as much as
PHP300 per pair if he will manufacture it himself. However, opening a new production facility will increase operating
expenses (including depreciation) by 30%. Currently, most of his operating expenses are marketing and distribution
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costs.
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business afterwards. Alex does not demand any specific return.
• Short-term loan for 1 year for PHP10 million at 6% per annum from Shortime Bank.
• Long-term loan for 5 years for PHP10 million at 10% per annum from Longly Bank.
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Anthony is very confident that his sales volume will still grow for the next 5 years. However, his confidence is tainted
by his uncertainties over the impact of opening a new production facility. What must he do?
2. After each presentation, ask the presenting group some questions or clarifications. You can also challenge the computations/
recommendations of the learners. You may also provide general comments of the presentation flow and aesthetics. Ask other groups to also
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provide comments and questions to the presentations. This should take 5 minutes.
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ENRICHMENT AND SUMMARY (15 MINUTES) Teacher Tip:
Guide Questions:
1. Write on the board the main points raised by the presenting groups. 1. What is the Zapatoes Inc’s capital
structure? What is the effect of an
additional debt? Additional equity?
2. Provide your own analysis. 2. Assess the profitability of Zapatoes Inc’s.
What is the effect of issuing debt to its
profitability? Effect of equity?
• Start by pinpointing the main issues relevant to the case. 3. What factors are considered in deciding
PY
whether to take long-term or short-term
• Provide the correct figures for the profitability and leverage ratios.
financing?
• Discuss how you arrive at your decision. Highlight important recommendations/changes that must be 4. What financing should Anthony Cruz
done to the operations of Zapatoes, Inc. take?
O
C
ED
EP
D
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Business Finance 120MINS
PY
20
/Review
statement and introduce the four types
of financial ratios.
Content Standards Motivation Discuss stories about households borrowing 10
The learners demonstrate an understanding of the process of preparing
O
from a sari-sari store.
financial statements as well as the methods or tools of analysis of financial
Instruction/ Define liquidity ratios and solve sample 30
statements, including horizontal analysis, vertical analysis, and financial ratios Delivery
problems.
C
to test the level of liquidity, solvency, profitability, and stability of the business.
Practice Board work/exercises and presentation 20
Performance Standards Enrichment Analyze and interpret liquidity ratios for 20
The learners will be able to solve exercises and problems that require financial
Materials
various companies from different industries.
Additional exercises
calculators, laptops
20
Learning Competencies
EP
The learners shall be able to:
Resources
• Define the measurement levels, namely, liquidity, solvency, stability, and
(1) Copies of sample financial statements
profitability. (ABM_BF12-IIIb-7)
• Compute, analyze, and interpret financial ratios such as current ratio, working
D
capital, gross profit ratio, net profit ratio, receivable turnover, inventory turnover, debt-to- equity ratio, and the like. (ABM_BF12-IIIb-9)
PY
• Define liquidity
• Solve for liquidity ratios (current and quick)
• Analyze, interpret, and compare the liquidity ratios of sample Philippine companies
O
2. Review
• Ask learners what the contents are of the financial statements.
C
• Ask them how the contents of the financial statements are classified.
• Ask them what they remember about current and non-current classifications for assets and liabilities.
• Emphasize what accounts are considered current assets and liabilities.
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INSTRUCTION/DELIVERY (30 MINS)
PY
• Ask them what the uses of financial ratios are. Say that for this session we will just focus on liquidity. Teacher Tip:
Emphasize the accounts needed in solving
the ratios. Note that accounts receivable
2. Define liquidity. can have a non-current portion. Make sure it
is removed from the current portion in
O
• Liquidity refers to the company’s ability to satisfy its short-term obligations as they come due. Refer
computing the liquidity ratios. Marketable
back to the household example to emphasize the meaning of liquidity. securities are short-term investments. Add
that for receivables to be considered
C
3. Define the types of liquidity ratios and write the formulas on the board. Current ratio and quick current, they should be collected within a
year. Cite that property developers can be
ratio. examples of companies which can have
accounts receivable-trade beyond one year.
Current Ratio =
ED Current Assets
Current Liabilities
4. Show a sample financial statement and ask the learners to compute for the ratios:
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Answer Key:
Current ratio: 2.64
Quick ratio: 1.60
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Sample Company Statement of Financial Position as of December 31, 2014
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Inventories P 130,000.00 Long-term debt P 2,700,000.00
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Buildings P 1,600,000.00 Retained earnings P 1,575,000.00
C
Total Assets P 4,900,000.00 Total liabilities and equity P 4,900,000.00
This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.
ENRICHMENT (20 MINUTES) Teacher Tip:
A high current ratio is not necessarily good.
1. Summarize and recap the relationship of the accounts in computing the ratios. Although a high current ratio would mean
that there is a higher probability that the
company can meet its short-term
2. Ask the learners to discuss what they think the ratios mean and their applications may be. Some obligations, its assets may not be earning as
reflection questions: much and the company may have given up
long-term investment opportunities.
• What is a good current ratio? 1? 2? 0.5?
PY
• Can a current ratio be lower than the quick ratio? High receivable balances increase liquidity
• Is a high current ratio always good? Is a low current ratio always bad? ratios however, the collectability of these
receivables might not be assured. Quality of
• What factors affect company’s decisions in managing current ratio?
receivables should also be considered in
• If company A has current ratio of 1.3 while company B has a current ratio of 2.3, which is a better analyzing liquidity. This can be explained in
O
company? the discussion of efficiency ratios where the
average collection period is computed.
3. Show the statement of financial position of three companies: Jollibee, Petron, and Globe. You may
C
project the financial statements using LCD projector or overhead projector or provide printed
copies. These financial statements can be used for the succeeding topics. You may also select other
companies as examples. Just make sure to simplify and condense the financial reports before
presenting them to class.
ED
Here are the condensed financial statements of the three companies as of December 31, 2014 Teacher Tip:
Learners might give various answers to this
EP
question.
D
64
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JFC Petron Globe
Jollibee Foods Corporation (JFC) – JFC
ASSETS has a relatively high current and quick ratio.
This is driven by its high cash and receivable
Current assets balances. With its mass market operations
and expansion plans, high liquidity ratios
Cash 7,619 90.602 16,757
make sense. It can also be attributed to
Receivables 7,621 17,927 23,543 relatively low levels of current liabilities. This
can be explained later on when efficiency
Inventories 5,972 53,180 3,186 ratios are computed and when operating
cycle and cash conversion cycles are
Other current assets 2,810 57,320 3,256 computed. These cycles will also show later
PY
on why JFC’s operating cash flows are high
24,022 219,029 46,742 and which allows the company to pay its
maturing obligations on time.
Non-current Assets
Petron Corporation - As an established
Property, plant and equipment 13,364 153,650 117,299
O
company operating in a stable oil industry,
Financial Investments 3,410 1,613 451 Petron’s liquidity ratios can be acceptable.
What made Petron’s liquidity ratios low is
Other non-current assets 13,323 17,032 15,015 the PHP133 billion short-term debt. If this is
C
taken out, Petron’s liquidity ratios will be
30,097 172,295 132,765 much higher. But this is a decision made by
the management of the company. Later in
TOTAL ASSETS 54,119 391,324 179,507 the course when working capital financing
LIABILITIES
Current Liabilities
Accounts Payable
ED 2,455 29,496 12,458
policies are discussed, this is an indicator
that the company has adopted a more
aggressive working capital financing policy.
Other Liabilities 2,522 8,776 5,473 Before you end this section, summarize the
importance of liquidity ratios, how they are
6,950 75,045 64,619 computed and the issues behind them such
65
as high liquidity ratios are not necessarily
TOTAL LIABILITIES 26,041
This Teaching Guide is a donation by277,634 124,969
CHED to DepEd. It is for reference purposes only. good.
JFC Petron Globe
EQUITY
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TOTAL LIABILITIES AND EQUITY 54,119 391,324 179,507
O
Cost of Sales/Service (73,728) (463,100) (10,661)
C
Operating Expenses (10,806) (11,830) (59,506)
Other Income
Other Expenses
(126)
6,759
1,736
(5,528)
3,813
1,255
(14,940)
19,383
EP
Income Tax (1,271) (804) (6,011)
4. Ask the learners to compute the ratios of the sample companies and ask them to compare the three companies using the ratios computed.
66
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5. Ask the learners the possible reason why the sample companies have different ratios. What could have possibly caused these differences?
What are the implications?
6. Summarize the discussion for today. Focus on how to interpret the liquidity ratios.
PY
1. Provide a written true-or-false or multiple-choice quiz similar to the Practice exercises above.
O
• What other factors would a bank or supplier look into in deciding whether to lend short-term credit? (Reflection question as pre-cursor for
next topics)
C
ED
EP
D
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Business Finance 120MINS
PY
15
/Review
review the concept of ‘profit’ and
Content Standards
computation.
The learners demonstrate an understanding of the process of preparing
Motivation 20
financial statements as well as the methods or tools of analysis of financial Ask learners to give real-life business
O
statements, including horizontal analysis, vertical analysis, and financial ratios examples.
to test the level of liquidity, solvency, profitability, and stability of the business. Instruction/ Define profitability ratios and solve sample 25
Delivery
problems.
C
Performance Standards Practice Board work/exercises and presentation 10
The learners will be able to solve exercises and problems that require financial
Enrichment Analyze and interpret profitability ratios for 30
statement preparation, analysis, and interpretation using horizontal and vertical
analyses, and various financial ratios.
Learning Competencies
The learners shall be able to:
ED Evaluation
Materials
various companies from different industries.
Additional exercises
calculators, laptops
20
Resources
EP
• Define the measurement levels, namely, liquidity, solvency, stability, and (1) Copies of sample financial statements
profitability. (ABM_BF12-IIIb-7)
• Compute, analyze, and interpret financial ratios such as current ratio, working
capital, gross profit ratio, net profit ratio, receivable turnover, inventory turnover, debt-to-equity ratio, and the like. (ABM_BF12-IIIb-9)
D
PY
profit margin, net profit margin).
• Analyze, interpret, and compare the profitability ratios of sample companies.
2. Review
O
• Ask learners what they understand with the concept of ‘profit’.
• Review how the gross profit margin, operating profit margin, net profit or net income is computed.
C
Write down the formulas. (Refer to the sample financial statements in the Instruction/Delivery part.)
Teacher Tip:
MOTIVATION (20 MINS)
ED
1. Ask learners to give examples of businesses which they think are very profitable and examples of
businesses that they think are not profitable. Answers can range from specific company names to
Before proceeding to this part, make sure
that the learners still remember the concept
of profit or net income.
69
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INSTRUCTION/DELIVERY (20 MINS)
1. Define profitability.
• Profitability refers to the company’s ability to generate earnings. It is one of the most important
goals of businesses.
2. Define the profitability ratios and write the formulas in the board. Teacher Tip:
PY
• These are the return on equity, return on assets, gross profit margin, operating profit margin, net In discussing the formula of the ratios, make
profit margin. sure learners know how the components are
computed or where they are taken. For
example, emphasize that stockholder’s
• Return on equity measures the amount of net income earned in relation to stockholders’ equity. equity should include all of its components
O
• ROE (return on equity) = Net income ÷ Stockholders’ equity including retained earnings.
C
• ROA (return on asset) = Operating income ÷ Total assets equity and average total assets be used in
the computation. The idea is that since net
income is earned over the year, average
• Gross profit margin shows how many pesos of gross profit is earned for every peso of sale. It provides
equity and asset balances should be used. A
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Answer Key:
PRACTICE (10 MINUTES) Return on equity = 16.98% =
352,240/2,075,000
Return on assets = 7.19% =
Show a sample financial statement and ask learners to compute for the financial ratios. Ask them to 352,240/4,900,000
present in front of the class. Gross profit margin = 35% =
700,000/2,000,000
Operating profit margin = 25.05%
Sample Company Statement of Financial Position as of December 31, 2014 = 501,000/2,000,000
Net profit margin = 17.61% =
PY
ASSETS LIABILITIES AND STOCKHOLDERS’ EQUITY 352,240/2,000,000
Cash P 120,000.00 Accounts Payable P 70,000.00 The ROE of 16.98% means that for every
PHP1 of stockholders’ equity, PHP0.1698 or
Marketable Securities P 35,000.00 Short-term notes P 55,000.00 16.98 centavos was earned in 2014. To be
more meaningful, this rate of return is
O
Accounts Receivable P 45,000.00 Current Liabilities P 125,000.00
compared with the returns on alternative
Inventories P 130,000.00 Long-term debt P 2,700,000.00 investments such as the returns on time
deposits and other fixed income
C
Current Assets P 330,000.00 Total Liabilities P 2,825,000.00 instruments. For example, if the interest on
time deposits is only 2%, then the 16.98%
Equipment P 2,970,000.00 Common stock P 500,000.00 ROE seems better. However, before a
conclusion is made that the 16.98% ROE is
Buildings P 1,600,000.00 Retained earnings P 1,575,000.00
Fixed Assets
Total Assets
P 4,570,000.00
P 4,900,000.00
ED Stockholders’ equity
P 4,900,000.00
better than the time deposit rate of 2%, the
risks associated with this company earning
16.98% has to be assessed. Generally, the
2% time deposit rate is guaranteed while
the 16.98% ROE is not. In 2014, ROE of
Sample Company was high, but what if in
EP
the future, it will earn a negative ROE. Is
this possible for a company? Yes! No
manager in his/or sound mind will
guarantee a specific rate of return,
especially when that rate is relatively high.
Why? Because in business, there are always
D
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Sample Company Statement of Financial Performance for the Year Ended December 31, 2014
PY
Operating Profit P 501,000.00
O
Net Income before Tax P 503,200.00
C
Net Income after Tax P 352,240.00
Here is an extract of the statements of financial position of the three companies as of December 31, 2014. (Please refer to the previous teaching
guide on liquidity ratios for the detailed statement.)
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JFC Petron Globe
Here is the condensed statement of financial performance of the three companies for the year ended December 31, 2014.
PY
JFC Petron Globe
O
Cost of Sales/Service (73,728) (463,100) (10,661)
C
Gross Margin 16,943 19,435 92,574
Other Income
Other Expenses
(126)
6,759
ED
1,736
(5,528)
3,813
1,255
(14,940)
19,383
EP
Income Tax (1,271) (804) (6,011)
73
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3. Ask learners to compute the ratios of the sample companies and ask them to compare the three
companies using the ratios computed.
PY
Gross profit margin 18.69% 4.03% 89.67%
O
4. Ask the learners the possible reasons why the sample companies have different ratios. What could
have possibly caused these differences? What are the implications?
C
Teacher Tip:
5. Summarize the discussion for today. Focus on how to interpret the profitability ratios. Ask whether the high net income would
mean high net cash inflows to the business.
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EVALUATION (20 MINUTES)
• Provide a written true-or-false or multiple-choice quiz about solving and interpreting profitability
ratios.
PY
2.C
B. Gross profit margin is always greater than net profit margin
C. Gross profit margin is can be less than or greater than net profit margin
2. A business has a decreasing gross profit however, gross margin percentage is constant. What could
O
be the possible reason?
A. Sales is increasing, but cost of sales is decreasing
C
B. Sales and cost of sales increase by the same percentage
C. Sales and cost of sales decrease by the same percentage
ED
• Include an essay question asking why it is important to use profitability ratios.
EP
D
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Business Finance 120MINS
PY
20
/Review
review the concepts behind the relevant
Content Standards accounts on the income statement and
The learners demonstrate an understanding of the process of preparing financial balance sheet
statements as well as the methods or tools of analysis of financial statements, Motivation
O
Discuss the granting of credit by sari-sari 20
including horizontal analysis, vertical analysis, and financial ratios to test the level
stores
of liquidity, solvency, profitability, and stability of the business.
Instruction/ Define efficiency ratios and solve sample 20
C
Performance Standards Delivery
problems
The learners will be able to solve exercises and problems that require financial Practice Board work/exercises and presentation 20
statement preparation, analysis, and interpretation using horizontal and vertical
Enrichment Analyze and interpret efficiency ratios for
analyses, and various financial ratios.
Learning Competencies
The learners shall be able to:
ED
• Define the measurement levels, namely, liquidity, solvency, stability, and
Evaluation
Materials
various companies from different industries.
20
• Calculators
EP
profitability. (ABM_BF12-IIIb-7) • Laptops
• Compute, analyze, and interpret financial ratios such as current ratio, working • Projectors
capital, gross profit ratio, net profit ratio, receivable turnover, inventory turnover, • Handouts
debt-to-equity ratio, and the like. (ABM_BF12-IIIb-9)
Resources
(1) Copies of sample financial statements
D
PY
period, average age of AR, or days sales outstanding, inventory turnover, average age of Ending Inventory
inventory or days in inventory, accounts payable turnover, average age of payables, average Add: Cost of Goods Sold
Less: Beginning Inventory
payment period, or days in accounts payable total asset turnover, operating cycle, and cash
conversion cycle) Purchases
O
• Analyze, interpret, and compare the efficiency ratios of sample Philippine companies.
C
2. Review
• Review the differences between an income statement and a balance sheet and what relevant
accounts (accounts receivable, inventory, sales, cost of goods sold, purchases, accounts payable)
mean.
ED
• Emphasize that income statement represents a period of time or the movement through that period
while the balance sheet represents amounts as a point of time.
EP
MOTIVATION (20 MINS) Teacher Tip:
The following table summarizes the possible
effects of changes in credit terms (tenor).
1. Ask the learners if they have tried buying from sari-sari stores on credit. How many days were given
to them as the “credit period” or the period within which they needed to pay? Do they strictly Short Long
follow this credit period? When do they actually pay? Credit Credit
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Period Period
2. This time, ask them about the consequences of paying much later than the credit period on the
operations of the sari-sari stores with respect to their obligations. Will it create problems for the Effect on sales Decrease Increase
sari-sari store if, for example, it has a due obligation tomorrow but none of its customers have paid
Effect on AR Decrease Increase
their obligations yet?
3. Now ask them if a shorter credit period, by itself, is always better than a longer credit period or Effect on Bad Decrease Increase
Debt Expense*
77
* the risk of customer not paying is less
This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only. when given a short credit period.
does the length depend on other factors.
4. Write their answers on the board.
PY
• Efficiency refers to a company’s ability to be efficient in its operations. Specifically, it refers to the formula.
speed with which various current accounts are converted into sales, and ultimately, cash.
• You may refer back to the sari-sari store example to illustrate the meaning of efficiency (in that Assume all sales are on credit.
example, the credit period is the target speed with which the store goals to collect their receivables).
For purchases, if there is no beginning
O
inventory given, it is sufficient to use cost of
2. Define the efficiency ratios and write the formulas in the board. goods sold as a substitute number, if there
is no other information given. Even if both
• Accounts receivable turnover beginning and ending inventories are made
C
• Average collection period, otherwise known as average age of AR, days’ receivable or days sales available, some analysts still just use the
outstanding cost of goods sold in computing accounts
payable turnover ratio to facilitate the
• Inventory turnover
computation. Consistency must be
• Average age of inventory or days’ inventory
• Accounts payable turnover
ED
• Average age of payables, average payment period, or days’ payable
• Total asset turnover
observed in the application of the formula.
78
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For the number of days in a year, 365 or 360
maybe used. Again, consistency must be
Cost of goods sold
Inventory turnover = observed. There are occasions when
Inventory quarterly data instead of annual are used,
hence, use 90 in the formulas for computing
average collection period, average age of
365 inventory, and average payment period.
Average age of inventory =
Inventory Turnover
For our purpose, we will consistently be
using 365 days.
PY
Purchases Cash conversion cycle is also known as net
Accounts payable turnover = trade cycle.
Inventory
O
365
Average payment period =
Accounts Payable Turnover
C
Operating Cycle = Average Collection Period + Average Age of Inventory
ED
Cash Conversion Cycle = Average collection period + Average age of inventory - Average age of payables
OR
EP
3. Show a sample financial statement and ask learners to compute the ratios:
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Answer Key:
Sample Company Statement of Financial Position as of December 31, 2014 (provide that the beginning inventory is
P 247,000):
ASSETS LIABILITIES AND STOCKHOLDERS’ EQUITY • Accounts recievable turnover: 44.4x
• Average collection period: 8.2 days
Cash P 120,000.00 Accounts Payable P 70,000.00 • Inventory turnover: 10x
• Average age of inventory: 36.5 days
Marketable Securities P 35,000.00 Short-term notes P 55,000.00
• Accounts payable turnover: 18.57x
Accounts Receivable P 45,000.00 Current Liabilities P 125,000.00 • Average payment period: 19.65 days
• Total asset turnover: 0.41x
PY
Inventories P 130,000.00 Long-term debt P 2,700,000.00 • Operating cycle: 44.7 days
• Cash conversion cycle: 25.05 days
Current Assets P 330,000.00 Total Liabilities P 2,825,000.00
O
Buildings P 1,600,000.00 Retained earnings P 1,575,000.00
C
Total Assets P 4,900,000.00 Total liabilities and equity P 4,900,000.00
Sample Company Statement of Financial Performance for the Year Ended December 31, 2014
Sales Revenue
Cost of Sales/Service
Gross Margin
P 2,000,000.00
P (1,300,000.00)
P 700,000.00
ED
EP
Operating Expenes P (199,000.00)
80
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PRACTICE (20 MINUTES) Teacher Tip:
By this time, the learners should’ve
Provide exercises. Here are sample questions with varying difficulty: mastered the computation of efficiency
ratios and the different names of each ratio.
(Easy)
Answer Key:
• Total asset is PHP750,000. Sales is PHP1,500,000. What is the total asset turnover?
• Total asset turnover = 1.5M/750K = 2
• Accounts receivable turnover is 4. What is the average collection period assuming annual data are
PY
• Average collection period: 365/4 = 91.25
used? What is the average collection period assuming quarterly data are used? • Average collection period = 43.8 days,
• Sales for the year amount to PHP100,000. Accounts receivable amount to PHP12,000. What is the Accounts receivable turnover = 8.3x
average collection period assuming annual data are used? What is the average collection period • Inventory turnover = 13.1x, Average age
of inventory = 27.8 days
assuming quarterly data are used?
• Accounts payable turnover = 3.25x,
O
Average payment period = 112.3 days
(Average/Difficult) • Accounts payable turnover = 2.6x,
Average age of payables = 140.4 days
A. The quick ratio is 1.7 while the current ratio is 2.5. The current liabilities amount to PHP5,000. Cost
C
• Total asset turnover = 2.5x
of goods sold is PHP52,500. What is the inventory turnover? Average age of inventory? • Operating cycle = 71.6 days, Cash
conversion cycle = (40.7) days
B. Beginning inventory is PHP2,000 while ending inventory is PHP5,000. Cost of goods sold is double
the ending inventory and accounts payable is PHP4,000. What is accounts payable turnover?
Average payment period?
ED
C. Ending inventory is PHP13,000 while accounts payable is PHP2,500. Purchases were half the ending
inventory. What is accounts payable turnover? Average age of payables?
D. Current assets amount to PHP30,000 while noncurrent assets are PHP50,000. Sales amount to
EP
PHP200,000. What is the total asset turnover?
E. Based on your answers from letters c, d, and e, what is the operating cycle of the company? Cash
conversion cycle?
D
81
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ENRICHMENT (20 MINUTES)
1. Summarize and recap the relationship of the accounts in computing the ratios.
Teacher Tip:
2. Ask learners to discuss what they think the ratios mean and its applications. Some reflection
A company’s average collection period
questions you may use: (Check the teacher tips to the right for answers/discussions)
should be compared with the credit terms it
• Are high turnover ratios good or bad? (Possible answer: It really depends on the operations of the grants its customers. If the average
PY
company. High inventory turnover ratios are less costly for the company but it can also create more collection period is higher than the credit
period, it may indicate a problem with the
risks for the company. For example, very high inventory turnover ratios could mean that there are
credit department (granting credit to non-
inventory stock-outs or lost sales since a very low turnover is maintained. On the other hand, A creditworthy people or companies) or with
company will want to have a low payable turnover ratios.) the collection department (inefficient or lack
O
• If company A has accounts receivable turnover of 3.5 while company B has an accounts receivable of means of collection) or both.
turnover of 8.1, which is a better company? Explain why. (Generally, a company with higher receivable
turnover, assuming all other factors are same, is at a better position compared to a company with a
C
lower receivable turnover)
Teacher Tip:
• What factors affect inventory turnover ratio? (Possible answers: projected sales, industry Inventory turnover is more meaningful when
developments, nature of industry, management decisions, stock out costs) compared with that of the industry norms.
ED
• What factors affect accounts payable turnover ratio? (Possible answers: credit terms of suppliers,
relationship to suppliers, availability of supplies in the market)
• Does a shorter or a longer operating cycle indicate the efficiency of a business? What about for the
cash conversion cycle? (See teacher tips for discussion)
High industry turnovers are common (and
expected) for fastfood restaurants but not
for real estate firms. Fastfood restaurants
sell stocks very quickly and keep just the
right amount of inventories to prevent
spoilage, storage, and handling costs. But it
EP
is common for real estate firms to take a
3. Show the statement of financial position and statement of financial performance of three
couple of years before selling units.
companies: Jollibee, Petron, and Globe. You may project the financial statements using LCD
projector or overhead projector or provide printed copies. These financial statements can be used
for the succeeding topics. You may also select other companies as examples. Just make sure to
D
simplify and condense the financial reports before presenting them to class.
The condensed financial statements of the three companies as of December 31, 2014 were already Teacher Tip:
provided in the previous modules. Average payment period makes sense to be
analyzed in relation to the credit terms
extended by a company’s suppliers. If a
4. Ask learners to compute the following ratios of the sample companies: company manages to pay beyond the credit
82 period available (in finance, this is called
“stretching the payables”) without
This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.
damaging its credit rating, then this
A. Average collection period indicates good payables management by
the company because they are able to take
B. Average age of inventory advantage of (almost) free financing. (The
C. Average payment period cost of financing for accounts payable can
actually be computed using the amount of
D. Operating cycle percent discount granted to the firm and
E. Cash conversion cycle the credit period, which shall be discussed
in later topics.)
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which management has efficiently used the
firm’s assets to generate sales. Generally,
JFC Petron Globe the higher the ratio, the more efficiently its
assets have been used. In other words, a
Average collection period 30.68 13.56 83.24 higher ratio is a strong positive indicator of
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a firm’s operations. However, note that, due
Average age of inventory 29.57 41.91 109.08 to depreciation of fixed assets, older
companies in an industry may appear to be
Average payment period 12.15 23.25 426.52 much more efficient in terms of generating
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sales using its assets. Because of this, a
Operating cycle 60.24 55.48 192.32 higher-than-average total assets turnover
might indicate that the company is already
Cash conversion cycle 48.09 32.23 (234.21) in its mature stage (due to high sales
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inventory, and payables management. In
addition to the discussion in the previous
paragraph, a cash conversion cycle that is
higher than the industry norm might
indicate that a company pays for its
payables too fast (and does not take
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advantage of the financing extended to it)
while a cash conversion cycle that is lower
than the average might be an indication of
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poor payables management (the company’s
credit rating might significantly deteriorate
by not paying its payables within the period
given). For the cash conversion cycle, it may
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expected with Petron’s products, it has a
longer average age of inventory versus
Jollibee. On average, the suppliers in the
fuel and oil industry provide longer credit
terms versus the food industry as evidenced
by Petron’s longer average payment period
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(versus JFC).
.
Globe Corporation - The high average
C
collection period is hard to explain at 83
days. This might be driven by postpaid
subscribers.
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EVALUATION (20 MINUTES)
1. Provide a written true-or-false or multiple-choice quiz similar to the Practice exercises above.
2. Include an essay question in the quiz. Possible questions would be:
• When compared with last year, a company’s inventory turnover increased. What positive situation might this reflect?
Possible answer: Sales has increased or the company has maintained low levels of inventory due to better inventory management and sales
forecasting.
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• What is the incentive of management in computing efficiency ratios?
Possible answer: To monitor performance and do remedial actions if actual performance falls below plans.
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C
ED
EP
D
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Business Finance 120MINS
PY
20
/Review
review the concepts behind the relevant
Content Standards accounts on the income statement and
The learners demonstrate an understanding of the process of preparing balance sheet
financial statements as well as the methods or tools of analysis of financial Motivation
O
Discuss the use of borrowings as capital in 10
statements, including horizontal analysis, vertical analysis, and financial ratios
starting a business
to test the level of liquidity, solvency, profitability, and stability of the business.
Instruction/ Define leverage ratios and solve sample 30
C
Delivery
problems
Performance Standards
Practice Board work/exercises and presentation 20
The learners will be able to solve exercises and problems that require financial
statement preparation, analysis, and interpretation using horizontal and vertical Enrichment Analyze and interpret leverage ratios for
analyses, and various financial ratios.
Learning Competencies
The learners shall be able to:
ED Evaluation
Materials
various companies from different industries.
20
• Calculators
EP
• Define the measurement levels, namely, liquidity, solvency, stability, and • Laptops
profitability. (ABM_BF12-IIIb-7) • Projectors
• Compute, analyze, and interpret financial ratios such as current ratio, working • Handouts
capital, gross profit ratio, net profit ratio, receivable turnover, inventory Resources
turnover, debt-to-equity ratio, and the like. (ABM_BF12-IIIb-9) (1) Copies of sample financial statements
D
PY
• Analyze, interpret, and compare the leverage ratios of sample companies
2. Review
• Review the difference between an income statement and a balance sheet and what relevant accounts
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(liabilities, assets, equity, interest expense, earnings before interest and taxes) mean.
• Emphasize that income statement represents a period of time or the movement through that period
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while the balance sheet represents amounts as of a point in time.
3. Ask them how paying interest affects the earnings of the company.
D
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INSTRUCTION/DELIVERY (30 MINS)
Teacher Tip:
Before reaching this point, make sure the
1. Define financial leverage. class understands what debt and preferred
• Financial leverage refers to the company’s use of debt. It defines the company’s capital structure stocks are.
which indicates how much of the total assets are financed by debt and equity.
2. Illustrate how financial leverage works. The teacher may provide a scenario/case where an
PY
entrepreneur is deciding how to finance a business venture, specifically what capital structure
should be chosen. With this, you can demonstrate that with increased debt comes greater risk as
well as higher potential return. An example is provided before:
• Pam has a small restaurant business with current equity of PHP60,000. With the increasing demand,
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she is planning to expand her restaurant space. After much analysis she determined that an initial
investment of PHP50,000 in fixed assets is necessary. These funds can be obtained in either of two
ways. The first is the no-debt plan, under which she would ask a relative to become an investor
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(owner) by investing the full PHP50,000. The other alternative, the debt plan, involves borrowing
PHP50,000 from the nearby rural bank at 10% annual interest.
• Pam expects PHP 30,000 in annual sales, PHP18,000 in operating expenses, and a 30% tax rate. The
PHP100,000)
ED
no-debt plan results in after-tax profits of PHP8,400, which is an 8.4% return on equity (new equity of
• The debt plan results in PHP4,400 of after-tax profits or 8.8% return on equity (equity still at
PHP50,000). The debt plan provides Pam with a higher rate of return, but the risk of this plan is also
greater, because the annual PHP5,000 of interest must be paid whether Pam’s business is profitable
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or not.”
• Provide sensitivity analysis, focus on Earnings before Income Tax [EBIT]
• You may summarize the results of the two alternatives in the board.
3. Define the types of leverage ratios and write the formulas on the board.
D
• Debt ratio – This ratio measures the proportion of total assets finance by total liabilities or money
provided by creditors (not by the business owners).
• Debt-to-equity ratio – A variation of debt ratio, shows the proportion of debt to equity.
• The teacher may review the accounting equation (Assets = Liabilities + Equities) in showing how the
first two ratios relate.
• Interest coverage ratio – This ratio shows the company’s ability to pay its fixed interest charges in
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relation to its operating income or earnings before interest and taxes.
Total Liabilities
Debt Ratio =
Total Assets
Total Liabilities
Debt-to-Equity Ratio =
Total Equity
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Earnings before interest and taxes (EBIT)
Interest coverage ratio * =
Interest Expense
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* Another name of interest coverage ratio is Times Interest Earned.
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4. Show a sample financial statement and ask learners to compute for the ratios.
Answer Key:
Sample Company Statement of Financial Position as of December 31, 2014
ASSETS
Cash
Marketable Securities
P 120,000.00
P 35,000.00
ED LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts Payable
Short-term notes
P 70,000.00
P 55,000.00
Debt ratio = 57.65%
Debt-to-equity ratio = 1.3614
Interest coverage ratio = 180.7143
EP
Accounts Receivable P 45,000.00 Current Liabilities P 125,000.00
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Sample Company Statement of Financial Performance for the Year Ended December 31, 2014
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Performance is
Operating Profit P 501,000.00
composed solely of
Other Income P 5,000.00 interest expense. Hence,
Other Expenses P (2,800.00) interest expense for the
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period ended December
Net Income before Tax P 503,200.00 31, 2014 is Php 2,800.
Income Tax P (150,960.00)
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Net Income after Tax P 352,240.00
Teacher Tip:
ED
5. Discuss what factors influence capital structure, hence, also affecting leverage ratios. You may refer
to Cayanan, et.al. for more discussions. The following are just some of the factors that can influence
management’s decision in setting its capital structure.
• Nature of Business
Nature of Business – If the business is risk
then it has to be financed conservatively
hence, lower debt ratio.
State of Business Development – A newly
formed business may have difficulty
borrowing from banks. Banks usually look
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• Stage of Business Development for the historical financial performance of
borrowers.
• Macroeconomic conditions
Macroeconomic conditions – If the overall
• Prospects of the industry economy is good then management can be
more aggressive on taking in risk through
• Taxes
increased debt financing.
D
1. (Easy) Total assets is 100,000. Total debt is 50,000. What is the debt-to-equity ratio?
Answer Key:
1. 100% or 1
2. (Average/Difficult) If the pro forma balance sheet shows that total asset increase by PHP400,000
PY
2. c - debt must increase by P171,428.
while retaining a debt-equity ratio of .75 then:
A. debt must increase by PHP300,000.
B. equity must increase by the full PHPH400,000.
C. debt must increase by PHP171,428.
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D. equity must increase by PHP100,000.
C
ENRICHMENT (20 MINUTES) Answer Key: (Change % to times)
ED
1. Summarize and recap the relationship of the accounts in computing the ratios.
2. Ask learners to discuss what they think the ratios mean and its applications. Some reflection
questions:
Debt Ratio
Debt-to-
JFC
16%
8%
Petron
17%
58%
Globe
33%
108%
Equity Ratio
EP
• What is a good capital structure?
Interest 45.32 1.69 8.56
• Are low debt ratios always favorable?
coverage
ratio
3. Show the statement of financial position and statement of financial performance of three
D
companies: Jollibee, Petron, and Globe. You may project the financial statements using LCD
Recall:
projector or overhead projector or provide printed copies. These financial statements can be used
for the succeeding topics. You may also select other companies as examples. Just make sure to JFC Petron Globe
simplify and condense the financial reports before presenting them to class.
Return on 19.55% 2.65% 24.52%
• The condensed financial statements of the three companies as of December 31, 2014 were already equity
provided in the previous modules.
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• Note: Included in the 2014 Income Statement of the three companies are Interest Expenses:
JFC 152.50
Petron 5,528.00
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Globe 2,565.00
4. Ask the learners to compute the ratios of the sample companies and ask them to compare the three companies using the ratios computed.
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Recall other relevant ratios like return on equity in highlighting how leverage magnifies risk and return in companies.
5. Ask the learners the possible reason why the sample companies have debt ratios.
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Answers will mostly focus on the selected companies’ nature of business, management style/preference, stability of cash flows.
ED
6. Summarize the discussion for today. Focus on how to analyze and interpret the efficiency ratios.
1. Provide a written true-or-false or multiple-choice quiz similar to the Practice exercises above.
2. Include an essay question in the quiz. Possible questions would be:
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• In starting a business, is it okay to start with having debt during the early stages?
• What dictates the company’s choice of leverage structure?
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Business Finance 120MINS
PY
15
/Review
review financial ratios, focusing on
Content Standards liquidity and efficiency ratios. Introduce
The learners demonstrate an understanding of the process of preparing the case study.
financial statements as well as the methods or tools of analysis of financial Case
O
Ask learners to analyze and discuss the case 45
statements, including horizontal analysis, vertical analysis, and financial ratios Analysis
in groups.
to test the level of liquidity, solvency, profitability, and stability of the business.
Presentation Ask assigned groups to present their case 30
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analysis to the whole class.
Performance Standards
Enrichment Discuss important points of the case and 30
The learners will be able to solve exercises and problems that require financial
and
statement preparation, analysis, and interpretation using horizontal and vertical provide commentaries to the groups’
analyses, and various financial ratios.
Learning Competencies
The learners shall be able to:
ED Summary
Materials
analysis.
• Calculators
• Laptops
• Projectors
EP
• Define the measurement levels, namely, liquidity, solvency, stability, and • Textbook
profitability. (ABM_BF12-IIIb-7) Resources
• Compute, analyze, and interpret financial ratios such as current ratio, working (1) Several copies of case to distributed to learner-groups
capital, gross profit ratio, net profit ratio, receivable turnover, inventory
turnover, debt-to-equity ratio, and the like. (ABM_BF12-IIIb-9)
D
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PRE-WORK
Provide copies of the financial statement of the subject company to the learners a day before the class. Ask them to compute for liquidity and
efficiency ratios.
INTRODUCTION/REVIEW (15MINS)
PY
1. Review profitability and leverage ratios. Ask learners what liquidity and efficiency mean. Write the names of the different types of ratios and
their formulas on the board.
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2. Explain that business cases are used to discuss certain issues and problems of a specific company. Learners will take the point-of-view of
owners/managers in analyzing the case.
C
3. Discuss the mechanics of the case discussion:
• The class will be divided in groups of 4 to 6 learners.
ED
• Learners will discuss and analyze the business case among their groups. They will then need to summarize their analysis in an essay/paper.
The paper will have the following outline: Case Background/Story, Analysis (including computations), and Recommendation. The paper can
be one to two pages of yellow sheet or bond paper. They must do this within 45 minutes.
• Two groups will be asked to present. Presenting groups do not need to submit an essay/paper. Instead, they need to prepare their
presentation with materials like manila paper, transparencies, or PowerPoint. Groups can volunteer or the teacher can also assign who will
EP
Presentation time is 10 minutes for each group. After the presentation, there will be a 5-minute Q&A session.
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CASE ANALYSIS (60 MINS)
1. Allow the learners to break into groups. From time to time, update them with the remaining time to do the analysis and their essay/
presentation.
2. Make sure to remind them that they will take on the shoes of the owner/manager in solving the case.
PY
3. Below is the business case. You may look for or make another business case as long as it highlights the same topics.
Chloe’s Closet
Chloe Mendez owns a clothing company, Chloe’s Closet. She has a team of tailors who work for 8 hours every day
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from Monday to Saturday. Demand for her business is strong but there seems to be something preventing her from
meeting the demands of her customers.
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Chloe sells to both big department stores and small boutique stores under the brand Chloe’s Closet. Some brands
also ask her to manufacture their own designs. Business for Chloe has been good since it started last 2014. In fact,
despite the tough competition from cheaper manufacturers abroad, she still manages to grow her customer base.
ED
On December 4, 2015 Chloe received a billing statement from a raw material supplier for an amount of
PHP400,000 which will be due in 5 days. She is also scheduled to pay her employees’ monthly salary of PHP70,000
the following day. Upon checking her bank account, she only has a PHP67,000 balance. She knew she had
exceeded her sales target last October and November so she is wondering why she only has this amount of cash in
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her bank account. Was her money stolen? Being a CPA, she checked the bank statement and her financial records
and found no mistakes.
Here is the latest financial statement of Chloe’s Closet as of November 30, 2015:
D
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Statement of Financial Position
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Machinery 800,000.00 850,000.00
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Accounts Payable 400,000.00 500,000.00
C
Total Liabilities 400,000.00 500,000.00
Accumulated Profit
Total Equity
1,800,000.00
2,200,000.00
ED 1,320,000.00
1,520,000.00
2,020,000.00
EP
Statement of Financial Position
1. Time each presentation. Ask groups to stop presenting after 10 minutes. Be strict with the time.
PY
2. After each presentation, ask the presenting group some questions or clarifications. You can also
challenge the computations/recommendations of the learners. You may also provide general
comments of the presentation flow and aesthetics. Ask other groups to also provide comments and
questions to the presentations. This should take 5 minutes.
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C
ENRICHMENT AND SUMMARY (15 MINUTES) Teacher Tip:
Guide Questions for the Case:
1. Write on the board the main points raised by the presenting groups. 1. Did learners check the efficiency of AR
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Business Finance 180MINS
PY
10
/Review
statement and introduce the four types
of financial ratios.
Content Standards Motivation Discuss stories about households borrowing 20
The learners demonstrate an understanding of the process of preparing
O
from a sari-sari store.
financial statements as well as the methods or tools of analysis of financial
Instruction/ Define liquidity ratios and solve sample 60
statements, including horizontal analysis, vertical analysis, and financial ratios Delivery
problems.
C
to test the level of liquidity, solvency, profitability, and stability of the business.
Practice Board work/exercises and presentation 15
Performance Standards
Enrichment Analyze and interpret liquidity ratios for 45
The learners will be able to solve exercises and problems that require financial
Materials
various companies from different industries.
Additional exercises 30
At the end of the unit lesson, the learners will be able to:
• Explain why managers analyze financial statements.
• Perform horizontal and vertical analysis of balance sheets and income statements.
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INTRODUCTION/REVIEW (10 MINS)
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statements.
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• Ask learners what the contents are of the financial statements.
C
MOTIVATION (20 MINS)
•
•
•
Is ABC, Inc. profitable?
ED
Show the following Financial Statements of ABC, Inc. and ask the learners the following questions:
Is the company’s financial performance improving based on the two year data presented?
Is the company heavily financed by debt or equity?
Teacher Tip:
The purpose of this activity is to expose the
learners to the financial statements and for
them to come up with useful conclusions on
the company’s financial results and status.
The learners are assumed to be already
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familiar with different financial statements.
Elicit as many opinions as possible.
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ABC, INC.
Condensed Balance Sheets
December 31
(In millions)
PY
Plant Assets 2,952.8 2,526.9
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Liabilities and Stockholders’ Equity
C
Long-term liabilities 7,289.5 1,506.2
Stockholders’ equity
Common stock
Retained earnings
ED 195.3
1,013.3
205.8
1,065.7
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ABC, INC.
Condensed Income Statement
For the Years Ended December 31
(In millions)
2014 2015
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Cost of goods sold 4,128.5 3,327.0
O
Nonrecurring charges 33.3 86.5
C
Interest Expense 351.5 137.5
Other income
322.1
867.7
280.0
• Ask the learners to compute the percentage share of each Balance Sheet account vis a vis total assets.
• Ask the learners to compute the percentage share of each Income Statement vis a vis Net Sales.
D
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INSTRUCTION/DELIVERY (60 MINS)
After discussing the answers of the learners, introduce financial statement analysis with emphasis on
common size and horizontal analyses. Discuss the following to the learners.
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their decisions, financial statement analysis tools can be used.
• These are financial ratios, common size financial statements, and trend or horizontal analyses.
• For the purposes of this course, four major categories of financial ratios will be covered: liquidity
ratios, efficiency or turnover ratios, profitability ratios, and leverage ratios.
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• To be more specific, financial statement analysis is undertaken to serve the following purposes
(objectives):
• To assess the current profitability and operational efficiency of the firm as a whole as well as
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its different departments so as to judge the financial health of the firm.
• To ascertain the relative importance of different components of the financial position of the
firm.
•
position of the firm.
ED
• To identify the reasons for change in the profitability/financial position of the firm.
• To judge the ability of the firm to repay its debt and assess the liquidity and solvency
For this module inform the learners that focus will be on common size or vertical analysis and trend
or horizontal analysis.
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2. Vertical Analysis or common size analysis.
Teacher Tip:
• This is a technique for evaluating the data of financial statements that express each item within a Remind the learners that the activity they
financial statement in terms of a percent of a base amount. did before was actually common size
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• For the Statement of Financial Position or Balance Sheet, all accounts are presented as a percentage analysis.
of total assets.
• For the statement of Profit or Loss or Income Statement, all accounts are presented as a percentage
of net sales.
• In using this type of analysis, attention must be focused on items with significant changes from one
period to another. Depending on the nature of the business, it is possible that even a slight change in
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the percentage may warrant the attention of top management.
• For example, a reduction of 0.5% in the gross profit margin of a consumer based company with
annual sales of PHP 200 billion translate to a PHP 1 billion in gross profit.
3. Horizontal Analysis
• This allows the learners to see the trend for the different accounts in the Financial Statements.
• This is also known as trend analysis.
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• To establish the trend, percentage changes of accounts from one period to another have to be made.
To compute:
Amount of change = Current year amount – Base (earlier) year amount
Percent of change = Amount of change/Base (earlier) year amount
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Some of the more important accounts to monitor when doing trend analysis are the following:
• Sales
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• Operating profits
• Total assets
• Interest bearing liabilities
• Interest expense
PY
Total liabilities and stockholders’
equity P 200,000 P 210,000 P (10,000) (4.8%)
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Horizontal Analysis of an Income Statement:
AC CORPORATION
C
Condensed Balance Sheets
For the Years Ended December 31
Increase or (Decrease)
Net sales
2014
P 600,000
ED 2015
P 500,000
Amount
During 2011
P 100,000
Percentage
20.0%
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Cost of goods sold 483,000 420,000 63,000 15.0%%
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Vertical Analysis of a Balance Sheet:
AC CORPORATION
Condensed Balance Sheet
December 31, 2012
Amount Percent
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Assets
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Intangibles 27,000 13.5%
C
Liabilities and Stockholders’ Equity
Long-term liabilities
Stockholders’ equity
15,000
200,000
71.5%
7.5%
100.0%
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D
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Vertical Analysis of an Income Statement:
AC CORPORATION
Condensed Income Statements
For the Years Ended December 31
2012 2011
PY
Net sales P 600,000 100.0% P 500,000 100.0%
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Operating expenses 57,200 9.5% 44,000 8.8%%
C
PRACTICE (15 MINUTES)
Horizontal Analysis:
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Increase or (Decrease)
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Vertical Analysis:
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Total Assets P 3,000,000 100.0% P 2,500,000 100.0%
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1. Group the learners for a group work. Ask them to compute the Horizontal and Vertical Analyses of Teacher Tip:
Refer to the answers of the learners above
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ABC Inc’s financial statement shown above in the motivation section.
in the Motivation section. Ask them to make
2. After the groups have computed the Horizontal and Vertical Analyses, ask them the same question opinions and a conclusion about the
about their opinions about the company’s profitability, the ability pay debt obligations, and how company after they have used the
well it is manage financially. horizontal and vertical analyses tools. Make
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Below are the computed Horizontal and Vertical Analyses:
ABC, INC.
Condensed Balance Sheets
December 31
(In millions)
Increase (Decrease)
during 2015
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Assets 2014 2015 Amount Percent
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Other Assets 5,513.8 742.0 4,771.8 643.1
C
Liabilities and Stockholders’ Equity
Long-term liabilities
Total libailities
Stockholders’ equity
ED
7,289.5
9,497.1
1,506.2
3,988.5
5,783.3
5,508.6
384.0
112.2
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Common stock 195.3 205.8 (10.5) (5.1)
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ABC, INC.
Condensed Balance Sheets
December 31
(In millions)
Increase (Decrease)
during 2015
PY
Net sales PHP 8,853.3 PHP 6,954.7 PHP 1,898.6 27.3%
O
Selling & Admin. 3,523.6 2,551.4 972.2 38.1
C
Income from operations 1,167.9 989.8 178.1 18.0
Other income
(expense), net
867.7
(27.7)
(63.6)
(179.9)
(7.3)
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Income tax expense 322.1 280.0 42.1 15.0
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ABC, INC.
Condensed Balance Sheets
December 31
(In millions)
2015 2014
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Assets Amount Percent Amount Percent
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Other Assets 5,513.8 53.2% 742.0 15.2
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Liabilities and Stockholders’
Equity
Long-term Liabilities
Total Liabilities
Stockholders’ equity
ED
7,289.5
9,497.1
70.3%
91.6%
1,506.2
3,988.5
30.8%
81.6%
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Common stock 195.3 1.9% 205.8 4.2%
Total liabilities and stockholders’ PHP 10,368.6 100.0% PHP 4,886.0 100.0%
equity
2015 2014
PY
Net sales PHP 8,853.3 100.0% PHP 6,954.7 100.0%
O
Selling & admin. 3,523.6 39.8% 2,551.4 36.7%
C
Income operations 1,167.9 13.2% 989.8 14.2%
Other income
(expense), net
804.1
(0.1)
9.1%
15.4
867.7 12.4%
0.2
Below are the Statement of Financial Position and Statement of Result of Operation of JFC for the Years 2012 to 2014. Perform a Horizontal and
Vertical analyses on both statements.
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2014 2013 2012
ASSETS
Current Assets
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24,012.0 18,384.0 15,623.0
Non-current Assets
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Financial Investments 3,410.0 3,353.0 3,139.0
C
Other non-current assets 13,324.0 12,517.0 11,947.0
LIABILITIES
Current Liabilities
Accounts Payable
ED
6,576.0 6,007.0 4,714.0
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Income Tax Payable 182.0 155.0 79.0
Non-current Liabilities
EQUITY
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Other Equity Accounts (84) (347) -471
O
Sales Revenue 90,671.0 80,283.0 71,059.0
C
Cost of Sales/Service (73,728.0) (65,285.0) (58,435.0)
Operating Expenses
Other Income
Operating Profit
ED
(10,806.0)
6,137.0
748.0
(9,067.0)
5,931.0
431.0
(8,279.0)
4,345.0
567.0
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Other Expenses (126.0) (116.0) (51.0)
Answer Key:
Vertical Analysis:
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2014 2013 2012
ASSETS
Current Assets
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Other current assets 5.45% 3.90% 3.42%
Non-current Assets
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Property, plant, and equipment 24.69% 25.58% 26.48%
C
Other non-current assets 24.62% 27.20% 28.60%
TOTAL ASSETS
LIABILITIES
Current Liabilities
100.0%
ED 100.0% 100.0%
Non-current Liabilities
EQUITY
PY
Other Equity Accounts -0.16% -0.75% -1.13%
O
Sales Revenue 100.0% 100.0% 100.0%
C
Cost of Sales/Service 81.31% 81.32% 82.23%
Operating Expenses
Other Income
Operating Profit ED
11.92%
6.77%
0.82%
11.29%
7.39%
0.54%
11.65%
6.11%
0.80%
Horizontal Analysis:
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2014 2013
ASSETS
Current Assets
PY
Other current assets 1,159.00 64.64% 363.00 25.38%
Non-current Assets
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Property, plant, and equipment 1,591.00 13.52% 713.00 6.45%
C
Other non-current assets 807.00 6.45% 570.00 4.77%
TOTAL ASSETS
LIABILITIES
Current Liabilities
ED
8,092.00 17.58% 4,258.00 10.19%
EP
Accounts Payable 569.00 9.47%% 1,293.00 27.43%
Non-current Liabilities
EQUITY
PY
Retained Earnings 3,629.00 19.08% 1,146.00 6.41%
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TOTAL LIABILITIES AND EQUITY 8,092.00 17.58% 4,259.00 10.20%
C
Sales Revenue 10,388.00 12.94% 9,224.00 12.98%
Operating Expenses
Gross Margin
Operating Profit
ED
1,945.00
-1,739.00
206.00
12.97%
19.18%
3.47%
2,374.00
-788.00
1,586.00
18.81%
9.52%
36.50%
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Business'Finance 110 MINS
PY
Content Standards 20
/Review
The learners demonstrate an understanding of the financial planning process,
including budget preparation, cash management, and working capital Motivation Formulation of an Event Plan 50
management.
O
Instruction/ Steps of Financial Planning 30
Performance Standards Delivery
The learners will be able to illustrate the financial planning process. Enrichment Integration of Learning
C
10
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INTRODUCTION (20 MINS)
• Reveal that their answers are the long-term goals that they plan to achieve in the future. Tell the
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learners that in the activity you did, you have demonstrated that planning plays an important role in
everyday life as the learners already have in mind a set of plans for the next five years. Tell them that
even those who said they are not yet sure what they want five years from now will probably still have
an idea of what kind of life they want. They are still in the process of planning.
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• Proceed to defining planning as suggested below:
- Planning is an important aspect of the firm’s operations because it provides road maps for
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guiding, coordinating, and controlling the firm’s actions to achieve its objectives (Gitman & Zutter,
2012).
- Management planning is about setting the goals of the organization and identifying ways on how
to achieve them (Borja& Cayanan, 2015).
ED
• Continue by focusing on one example given by the learners. Suppose some of the students answered
that in five years, they will be owners of a successful business. How will they be able to attain this
goal? If they want to be able to be an owner of a successful business, they should first be able to set
Teacher Tips
Alternative Example:
• Long term goal: Graduate from a
up one, or buy into one which would require capital. Hence, they must be able to raise the necessary university
EP
• Short term goal: Pass the college entrance
funds. This new milestone is their short term goal.
exam
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• Long-term financial plans
- These are a set of goals that lay out the overall direction of the company.
- A long-term financial plan is an integrated strategy that takes into account various departments such as sales, production, marketing, and
operations for the purpose of guiding these departments towards strategic goals.
- Those long-term plans consider proposed outlays for fixed assets, research and development activities, marketing and product
development actions, capital structure, and major sources of financing.
- Also included would be termination of existing projects, product lines, or lines of business; repayment or retirement of outstanding debts;
and any planned acquisitions(Gitman & Zutter, 2012).
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• Short-term financial plans
- Specify short-term financial actions and the anticipated impact of those actions. Part of short term financial plans include setting the sales
forecast and other forms of operating and financial data. This would then translate into operating budgets, the cash budget, and pro forma
O
financial statements (Gitman & Zutter, 2012).
- For the purpose of this topic, emphasis will be made on short-term financial planning.
C
Long-Term Planning Short Term Planning
Persons More participation from top Top management is still involved but there is more
Involved management participation from lower level managers (production,
1 year or less
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Level of Less More
Detail
Table 1: Comparison of Short-Term and Long-Term Planning (Gitman & Zutter, 2012)
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MOTIVATION (50 MINS)
Teacher Tips
1. Event Planning
If the teacher does not have enough funds
• Description of the Activity to supply the materials, the teacher may
- This is a simulation of conducting a campaign event beginning from inception (planning stage) change the materials or the learners may be
to actual performance (execution). asked to use their own materials as long as
- This will involve the facilitator role playing as provider of the goods and services needed, and their simulated budget can cover the
materials.
the learners as the event coordinators and performers for the event (i.e. the learners will act as
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the celebrities/dancers/singers who are part of promoting the cause of the event.)
• Objectives
- Inform the learners that this section aims to let them experience the planning process in a
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simple activity given a short amount of time and resources.
- At the end of this activity, they will be able to:
• Organize a small classroom event given the limited time and resources in the class.
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• Perform the functions of planning and implementing plans under a controlled set up.
• Evaluate result of event based on a predetermined criteria (see Annex for Grading Rubrics).
• Materials
5
ED
EP
Colored Papers (or art paper) 10
Tape 5
Glue 5
D
Pencils 15
Markers 20
Pens 12
Crayons 20
PHP 100
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• Mechanics
- As facilitator, you will act the following roles:
• Supplier of materials/paraphernalia to be used in the campaign.
• Proprietor of the venues where the event will be held.
• Talent manager of the special guests.
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featuring a performance from the XX group of dancers)
• Campaign paraphernalia (posters/brochures) containing the following:
‣ Title of the event
‣ Date and time
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‣ Campaign slogan
‣ Vision Statement (Example: To save the endangered Philippine Forest)
‣ Mission Statement (Example: To increase awareness of deforestation by organizing events that emphasize on tree planting)
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• to 5 minutes informative presentation on the campaign.
3
• 3 to 5 minutes production number (may be song, dance or any creative presentation) from the special guest (which will be role played
by the learners). Back up performers may participate.
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• The informative presentation may be incorporated in the production number. Whole presentation should be 7 (min) to 10 (max) minutes.
Event Chairperson Oversees the functions of the other • Event title and slogan
committees. Must be able to set the • Mission and vision of the campaign
overall direction of the group.
D
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Position Description Short Term Planning
Budgeting Team Responsible for the allocation of the • Record of goods and services
given budget to purchase the necessary purchased
materials to make the event possible. • Documentation of timeline of
They will also negotiate with the activities done during the planning
facilitator regarding prices of the and execution stage
required materials.
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Production Team Responsible for organizing the • Song/dance number incorporated in
performances to be presented during the campaign
the event. This includes role playing as • Not all need to present. Some may
the celebrities who will perform in the just choreograph.
campaign event.
O
Marketing Team Responsible for the presentation that • Persuasive/informative speech
would persuade the audience to join incorporated in the campaign. May be
C
the campaign initiative. done in between song/dance
numbers
Tip: Emphasize on the importance of • Not all need to present. Some may
Creatives Team
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the campaign, how the audience can be
involved and what would they get from
supporting the campaign.
- In 20 minutes, the learners should be able to come up with an event to raise awareness of either of the following suggested issues:
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- The following are available to them:
• Venue
‣ Center of the Community Plaza – PHP150,000 (Restrictions: Performance must include singing)
‣ Concert grounds – PHP200,000 (Restrictions: None, any type of performance is allowed)
‣ School Auditorium – PHP100,000 (Restriction: Performance must include dancing)
‣ Basketball Court – PHP90,000 (Restriction: Performance must include a song and dance number)
• Materials – may be used for posters, stage design, and other campaign paraphernalia.
‣ Cartolina – PHP50,000 each
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‣ Marker – PHP10,000 each
‣ Pencil – PHP5,000 each
‣ Pens – PHP7,000 each
‣ Crayons – PHP5,000 each stick
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‣ Tape – PHP8,000 per roll
‣ Glue/paste – PHP3,000 per bottle/tube
‣ Colored papers – PHP5,000 per piece
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‣ Bond Papers – PHP10,000 per piece
• Special Guest (to be role played by the learners from the productions team)
‣ Kathryn Bernardo and Daniel Padilla – PHP200,000 (Restrictions: None, may perform anywhere)
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‣ Nadine Samonte and James Reid – PHP100,000 (Restrictions: Will not perform in a basketball court or school auditorium)
‣ Maine Mendoza and Alden – PHP150,000 (Restrictions: Will not perform in a basketball court)
‣ Jolina Magdangal and Marvin Agustin – PHP90,000 (Restrictions: Will not perform in a school auditorium)
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INSTRUCTION/DELIVERY (30 MINS)
• Ask the learners to identify what are the steps they did in planning for their event.
- Sample Answers:
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• Identify the leader
• Divide the group to different functions
• Think of a slogan
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• Conceptualize an idea/design
• Made a budget
• Made the plan operational
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• Measuring the actual performance vis a vis the plans
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• Inform the learners that the events they presented are a result of the planning process.
2) Identify Resources
For the activity done, the resources the learners have are the following:
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• PHP 300,000
• Man power
Resources include production capacity, human resources who will man the operations and financial resources (Borja & Cayanan, 2015).
O
3) Identify goal-related tasks
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• For the activity done, the goal-related task is to prepare an event to increase awareness of (whatever issue you want).
• Event Chairperson
• Budgeting Team
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For the activity done, there were different responsibilities formed as follows:
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• Production Team
• Marketing Team
• Creatives Team
• Administrative Team
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Also, there must be a timeline for the activities, especially since they were allotted a specific time to do the activity.
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5) Establish the evaluation system for monitoring and controlling
• For the activity done, the learners were given an expectation of their output and the teacher will Teacher Tips
This section is further discussed in the
grade them based on a predetermined criteria. Other evaluation for awareness events may be
budgeting discussion proper.
number of attendees, feedback, etc.
• For corporations, the management must establish a mechanism which will allow plans to be
monitored. This can be done through quantified plans such as budgets and projected financial
statements. The management will then compare the actual results to the planned budgets and
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projected financial statements. Any deviations from the budgets should be investigated.
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activity, but in reality, this is something that
• Budgets and projected financial statements are anchored on assumptions. If these assumptions do
should be part of planning.
not become realities, management must have alternative plans to minimize the adverse effects on
the company (Borja & Cayanan, 2015).
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ENRICHMENT (10 MINS)
1. Integration of learning.
• Ask the learners the following:
- Retell briefly the steps in Planning.
ED
- What is the difference between long term and short term goals?
EP
2. Homework
• Assign the students to read about budgeting and projected financial statements. Refer to the
following references:
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Appendix
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Position Description Expected Output Evaluation Critera
On the whole The event was The event was There were The event was There were a lot
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carried out carried out minor carried out but of disorder in
smoothly and the smoothly but challenges the members of the
whole class was there are during the the class were presentations
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participative. members of the presentations only focusing on and the
class that did not but the class their own members of the
participate. made the effort functions which class have not
Event
Chairperson
Oversees the functions of
the other committees.
ED
• Event title and
slogan
Leads
discussions and
Leads the
discussions but
to give a good
presentation.
Did not
consistently
did not translate
to the whole.
Occasionally
intervenes in the
been working
together.
Watches and
lets everyone
Must be able to set the • Mission and made timely was reluctant at engage in activity only else do their
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overall direction of the vision of the decisions. making discussions but when problems own job.
group. campaign decisions. still had a final arises.
say on what to
do.
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Budgeting Responsible for the • Record of goods Was on time on Had a few delays Wanted to cater Prepared No
Team allocation of the given and services creating the on delivering the to ALL needs of budgets but did documentation
budget to purchase the purchased budget and budget but was ALL teams not show was presented.
necessary materials to • Documentation organized in the able to give what which initiative to
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make the event possible. of timeline of documentation the other teams compromised incorporate what
They will also negotiate activities done of the timeline of needed. deadlines. other teams
with the facilitator during the events. needed.
regarding prices of the planning and
required materials. execution stage
O
Production Responsible for organizing • Song/dance Was confident Provided a good Provided a Presented with a Unable to
Team the performances to be number and entertaining presentation but good lot of flaws but present
C
presented during the incorporated in and was able to time limit was presentation made the effort anything.
event. This includes role the campaign present within not observed. but some of the to give the
playing as the celebrities the time limit. members did presentation.
Marketing
Team
who will perform in the
campaign event.
Provided a
good
Presented with a
lot of flaws but
Unable to
present
persuade the audience to speech able to catch the within the time presentation made the effort anything.
EP
join the campaign incorporated in attention of limit. but some of the to give the
initiative. the campaign. listeners. members did presentation.
May be done in not participate.
Tip: Emphasize on the between song/
importance of the dance numbers
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Position Description Expected Output Evaluation Critera
Creatives Responsible for the • Whole cartolina Materials were Materials were Both materials Only the poster No campaign
Team production of the campaign poster appealing and appealing but were made but or the pamphlet materials were
campaign paraphernalia. • Whole bond complete in all incomplete. it wasn’t very was made. made.
The posters and brochures paper campaign requirements . appealing.
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should be able to catch the pamphlet
attention of the target
audience.
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Annex 2: Sweet Beginnings Co. Case Study
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Sweet Beginnings Co. is currently the most talked about clothing shop in town. Not only was the shop filled with customers every day, but they
have been a major supplier of clothing to other shops. Ms. Muff, the owner of the shop has remained confident that the operations will go
smoothly until one early morning when there had been problems with the delivery that was supposed to leave the shop. The clothes which
were scheduled to be delivered were already packed and waiting on the loading bay. It was past 30 minutes of the scheduled delivery and no
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delivery truck was in sight. Ms. Muff decided to call the delivery contractor to find out what was taking the trucks so long.
“You’ve been one month late from your scheduled payment for our delivery service,” the frustrated delivery contractor said. “We’ve been
sending you notices every day for the past week and your company doesn’t seem to be responding. Unless you will be able to pay the amount
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due by this morning, we will not send any truck to deliver your goods.
Ms. Muff was astounded to hear of the unpaid fee. To clear up the mishap, Ms. Muff hurriedly approached the company’s accountant, Mr. Phil in
hopes of drawing cash from the company. Mr. Phil regrettably reported that the company does not have cash to pay the delivery contractor. In
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fact, the company has been consistently borrowing short term funds for three months from the start of the year. The company has yet to pay
any of these borrowings and Mr. Phil informed Ms. Muff that the short term lenders have been reluctant to lend money at this point.
As a result, the shipments will not be delivered to the customers until the company figures out how to pay their delinquency with the delivery
contractors. The outside customers have been understanding enough to acknowledge that there will be a delay on the deliveries for this day.
However, too much delay may frustrate these customers and may cause bad reputation to the company. Ms. Muff is looking into taking a loan
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from Fresh Rural Bank to pay for the delinquent fees. The bank manager of Fresh Rural Bank has requested a meeting with Ms. Muff to discuss
the financial condition of Sweet Beginnings Co. and plans for restoring its liquidity.
Outraged, Ms. Muff told Mr. Phil, “Why don’t we have any balance in our cash account? Our company has been very profitable but we seem to
be depending on loans to finance our operations. We need to figure out what is going wrong. Otherwise, we may lose our customers.”
Company Background
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Sweet Beginnings Co. was founded in 20X0 as a manufacturer of summer clothes. The first shop was located near a calm beach with sky blue
waters and powdery sands. Families and tourist would usually flock to the beach on summer weekends which gave the clothing shop foot traffic
and gained the market’s attention. Due to its high quality products, the clothing store became a popular stop shop for vacation goers. In 20X1,
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a known blogger fancied the clothing line displayed in Sweet Beginnings and published an article promoting the shop. This earned the
company nationwide publicity which led to other clothing stores offering shelf space for Sweet Beginning’s brand. In 20X3 it expanded its
garment productions due to the increasing demand of their products. To this day, the company maintained its position as a summer clothing
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store since this line has brought its brand equity.
Clothing Market
ED
The demand for clothing was characterized by a stable year-to-year growth. Unit demand increased with both population and individual
income. However, the seasonal character of the company’s product has resulted to cyclical sales.
EP
Competition among other clothing shops in the town is unlikely to clash with the company’s sales growth. The company believes it will maintain
its average growth rate for sales for the succeeding years.
Sales Forecast
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Sweet Beginnings Co. had been consistently profitable. Moreover, sales had grown at an annual rate of 18 percent in 20X5. Gross sales were
projected to grow at 20% of the sales of the same months on the first quarter, 30% of sales of the same months on the second quarter and 25%
of sales of the same months on the third and 4th quarter. This growth rate is expected to be constant until 20X8.
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Financial Information
To prepare a forecast on a business-as-usual basis, Ms. Muff and Mr. Phil agreed on various parameters. Cost of goods sold would run at 73.7%
of gross sales—a figure that was up from recent years because of increasing price competition. Operating expenses would be about 6% of sales
—also up from recent years to include the addition of a quality-control department and two new sales agents. Depreciation is at 10% of cost of
property, plant and equipment (PPE). Additions during 20X6 is expected to amount to PHP1,200,000 which will be paid on January 20X7. The
Company’s policy is to expense full year’s depreciation on the date of purchase. The Company expects inventory level for 20X6 to be the same
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as 20X5.
The company’s income tax rate was 30% paid for each quarter in May, August, November, and April of the following year, respectively. The
company opts to use optional standard deduction of 40% from the company’s gross profit to arrive at the taxable income for the quarter.
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The delivery contractor’s fee (at 3% of sales) was collected at the loading gate as trucks left to make deliveries to customers. Ms. Muff proposed
to pay dividends of PHP450,000 per quarter. For years Sweet Beginnings had paid high dividends.
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Mr. Phil observed that sales collections in any given month had been running steadily at the rate of 40% of the last month’s sales plus 60% of
the sales from the month before last. The value of raw materials paid in any month represented on average 55% of the value of sales expected
ED
to be made two months later. Wages and other expenses in a given month were equivalent to about 34% of purchases in the previous month.
As a matter of policy, Ms. Muff wanted to see a cash balance of no less than PHP640,000.
Sweet Beginnings Co. had a line of credit from Fresh Rural Bank, where it also maintained its cash balances. Fresh Rural Bank’s short-term
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interest rate was currently 16%. Return on investment for short term investments is at 12%.
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Historical Information
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O
C
ED
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Problem
Ms. Muff needs to prove that the company will be liquid enough to pay for its loans with Fresh Rural Bank so that it will be allowed to ask for
another loan to meet the delivery contactor’s fee. How should Ms. Muff explain to First Rural Bank that the company is in a good financial
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position? Moreover, should the company prove to have financial liquidity problems, what can to company do to cope with their need for cash?
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Learner’s Guide
1. Assume that you are Ms. Muff and you will be presenting to the Fresh Rural Bank. Convince the bank that you are in a good financial
position evidenced by your cash budget and projected financial statements.
2. Prepare a monthly cash budget for Sweet Beginnings Co. for the year ending December 20X6. Start with the monthly sales forecast (Tip:
Forecast sales up to Feb 20X7).
3. The following table format may be used for the cash budget:
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Jan Feb … Nov Dec Total
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Less: Purchase of Raw Materials
C
Less: Payment to Delivery Contractors
Required Financing
Excess Cash
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Jan Feb … Nov Dec Total
Less: Repayments
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Investment Balance - Beginning
Less: Liquidations
O
Investment Balance - End
C
4. Forecast Financial Statements. Start with income statement.
Cost of goods
Gross profit
Delivery Fees
73.7% of Sales
3% of sales
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Operating expenses 6% of sales
EP
Depreciation 10% of Total PPE cost
Interest expense Total of Interest from borrowings and return of investment from cash budget
Pretax profit
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Net profit
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5. Forecast Financial Statements. Start with income statement.
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Total current assets
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Accumulated depreciation Beginning balance + depreciation expense
Net PPE
C
Total Assets
Accounts payable Accounts payable 20X5 + Purchases* + Operating Expense - Cash payment
for raw materials - Cash Payment for Salaries and Wages
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Format of Paper/Presentation
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Presenting Group
O
Prepare a 20-minute presentation using the following outline
• Case Background: Brief explanation of the problem of the Company.
• Methodology: Explain why the cash budget and projected financial statements was made in order to help the company in their dilemma.
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• Budgets and Projections: Present the resulting budgets and implications of the figures that were derived. Explain in class how you were able
to derive your figures.
• Conclusion: Was the company performing well based on the budgets and projections and will it be able to sustain its operations?
Critic Group
ED
EP
Take the point of view of Fresh Rural Bank. From the presentation of Budgets and Projections, ask questions that will challenge the presenting
group’s conclusions. The critic may also ask clarifications on the presentation or comment on how differently they did their analysis.
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Business'Finance 375 MINS
PY
Content Standards 15
/Review
The learners demonstrate an understanding of the financial planning process,
including budget preparation, cash management, and working capital Motivation Planning and Controlling 15
management.
O
Instruction/ Budgeting and Financial Statement 235
Performance Standards Practice Projection
The learners will be able to prepare budgets such as projected collection, sales a. Sales Forecast (20 mins)
C
budget, production budget, projected statement of comprehensive income, b. Production Forecast (30 mins)
projected statement of financial position, and projected cash flow statement. c. Operations Forecast (5 mins)
d. Cash Budget (75 mins)
Learning Competency
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The learners shall be able to illustrate the formula and format for the
preparation of budgets and projected financial statements. (ABM_BF12-IIIc-
d-11)
Evaluation
e.
f.
Uncertainties in the Cash Budget (45
mins)
Projected Financial Statements (60 mins)
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INTRODUCTION (15 MINS)
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• Recall the steps in planning as follows:
A. Set goals or objectives.
B. Identify Resources.
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C. Identify goal-related tasks.
D. Establish responsibility centers for accountability and timeline.
E. Establish the evaluation system for monitoring and controlling.
C
F. Determine contingency plans.
• In planning, the goal of maximizing shareholders’ wealth must always be put in mind.
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• The following criteria may be used for effective planning:
- Specific – target a specific area for improvement.
- Measurable – quantify or at least suggest an indicator of progress.
- Assignable – specify who will do it.
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- Realistic – state what results can realistically be achieved, given available resources.
- Time-related – specify when the result(s) can be achieved. (Doran, G. T. (1981). "There's a S.M.A.R.T. way to write management's goals and
objectives". Management Review (AMA FORUM) 70 (11): 35–36.)
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MOTIVATION (15 MINS)
- What is a budget?
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Get at least two to three insights from the
- What is the importance of a budget? learners. Relate their answers to the class
- What will happen if the budget is not met? activity done taking note what should
happen or what could have happened
based on their answers.
• Tell the students that a plan is useless if it is not quantified. A quantified plan is represented through
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budgets and projected or pro-forma financial statements.
• These budgets and pro-forma financial statements are useful for controlling. They serve as the bases
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for monitoring actual performance.
• Tell the students that meeting the plans is good. However, failing to meet the plans is not equivalent
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to failure if the reasons for not meeting such plans can be justified especially when the reasons are
fortuitous in nature and are beyond the control of management.
- Measuring actual performance vis a vis the plans even at the early start of the year allows the
management to assess the company’s performance and come up with remedial actions if
warranted (Cayanan, 2015).
EP
1. Sales Budget
• Discuss how a sales budget is formulated.
- The most important account in the financial statement in making a forecast is sales since most of
the expenses are correlated with sales.
- Recall from Lesson 2: Financial Statement analysis that cost of sales ratio, gross profit ratio, and
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variable operating expenses ratio are based on the sales figure.
- Given the importance of the sales forecast, the financial manager must be able to support this figure with reasonable assumptions. The
following external and internal factors should be considered in forecasting sales:
External Internal
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• Inflation • management style of
• Interest Rate managers
• Foreign Exchange Rate • reputation and network of
• Income Tax Rates the controlling stockholders
• Developments in the • financial resources of the
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industry company
• Competition
• Economic Crisis
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• Regulatory Environment
• Political Crisis
Table 1: Factors that Influence Sales
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• Discuss the following external and internal factors influencing sale, among others:
- Macroeconomic Variables (external)
Macroeconomic variables such as the GDP rate, inflation rate, and interest rates, among others play an important role in forecasting
EP
sales because it tells us how much the consumers are willing to spend. A low GDP rate coupled by a high inflation rate means that
consumers are spending less on their purchases of goods and services. This means that we should not forecast high sales of the periods
of low GDP.
- Developments in the Industry (external)
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Products and services which have more developments in its industry would likely have a higher sales forecast than a product or service in
slow moving industry. Consumer trends are always changing, thus the industry should be competitive to be able to appeal to more
customers and stay in the market.
- Competition (external)
Suppose you are selling bread and you know that each person in your community eats an average of one loaf of bread a day. The
population of your community is 500 people. If you are the only person selling bread in your town, then your sales forecast is 500 units
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of bread. However, you also have to take account your competition. What if there are 4 other sellers of bread? You will need to have to
divide the sales between the 5 of you. Does this mean your new forecast should be 100 units of bread? Not necessary. You should also
know the preference of your consumers. If more of them would prefer to buy more bread from you, then you should increase your sales
forecast.
- Production Capacity and man power (internal)
Suppose that you have already evaluated the macroeconomic factors and identified that there is a very strong market for your product
and consumers are very likely to buy from you. You forecasted that you will be able to sell 1,000 units of your product. However, you
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only have 20 employees who are able to produce 20 units each. Your capacity cannot cover your expected demand hence, you are
limited by it. To be able to increase capacity, you should be able to expand your operations.
• Discuss the implications if sales budget is not correct. If understated, there can be lost opportunities in the form of forgone sales. If it is too
optimistic, the management may decide to unnecessarily increase capacity or hire more employees and end up with more inventories.
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2. Production Budget
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• Discuss what a production budget is and how it is formulated.
- A production budget provides information regarding the number of units that should be produced over a given accounting period based
on expected sales and targeted level of ending inventories.
- It is computed as follows
ED
Required production in units = Expected Sales + Target Ending Inventories - Beginning Inventories
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Note: Ending inventory of current period is beginning inventory of next period.
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- Moreover, [A] Company would like to maintain 100 units in its ending inventory at the end of each month.
- Beginning inventory at the start of January amounts to 50 units.
- How many units should [A] Company produce in order to fulfill the expected sales of the company?
- Answer Key:
MONTH
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Projected Sales 2,000 2,200 2,500 2,800 3,000 12,500
Target level of ending inventories 100 100 100 100 100 100
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Less: beginning inventories 50 100 100 100 100 50
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Required production 2,050 2,200 2,500 2,800 3,000 12,500
3. Budgeting Cash
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• Discuss what an Operation Budget is and how it is formulated.
- Operations budget refers to the variable and fixed costs needed to run the operations of the company but are not directly attributable to
the generation of sales.
- Examples of this are the following:
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• Rent payments
• Wages and Salaries of selling and administrative personnel
• Administrative Costs
• Travel and representation expenses
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• Professional fees
• Interest Payments
• Tax Payments
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4. Cash Budget
• Discuss the importance of a Cash Budget and how it is formulated.
• Recall from the start of the term the exercise you did where the learners were asked how much
allowance they were given and how much expenses they would incur in a day. Recall that at the end
of the activity, they were able to identify whether they had excess cash or they had a deficit.
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• Relate that this is what the cash budget aims to do.
- For a business enterprise, having the right amount of cash is important since cash is used to make Teacher Tips
The cash budget, or cash forecast, is a
payments for purchases, for operational expenses, to creditors, and for other transactions.
statement of the firm’s planned inflows and
- The cash budget forecasts the timing of these cash outflows and matches them with cash inflows outflows of cash. It is used by the firm to
O
from sales and other receipts. The cash budget is also a control tool to monitor the way the estimate its short-term cash requirements,
with particular attention being paid to
company handles cash.
planning for surplus cash and for cash
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shortages (Gitman & Zutter, 2012).
CASH BUDGET
Cash Receipts
Jan
xxx
ED Feb
xxx
…
…
Nov
xxx
Dec
xxx
Total
xxx
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• The following are the steps in formulating a cash budget:
A. Form the sales forecast, identify how much would be collected in the cash budget period. Sales may be made in cash or for credit. Cash
sales are translated to cash at the point of sale while credit sales are collected depending on the credit period. Credit periods may range
from 10 days to more than a month depending on the strategy of the company. Recall from Lesson 2: Financial Statement Analysis the
implications of the company’s credit policy.
- Continuing from previous example, assume selling price is PHP100/unit. Sales for each month are expected to be collected as follows:
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‣ Month of sales : 20%
‣ A month after sales: 50%
‣ 2 months after sales: 30%
- How much is total receipts from sales (DIFFICULT)?
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Jan Feb Mar Apr May Total
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Units 2,000 2,200 2,500 2,800 3,000 12,500
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Collection from current months sales
100,000
50,000
110,000
60,000
56,000
125,000
66,000
60,000
140,000
75,000
250,000
150,000
84,000
Total Collections from Sales 40,000 144,000 220,000 247,000 275,000 926,000
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‣ interest received
‣ return on principal investments
‣ proceeds from sale of non-operating assets
‣ issuance of capital stock
‣ proceeds from borrowings
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- Add these receipts to the collections from sales to get to total receipts.
C. From the Production Budget, identify how much of the purchases made will be paid by the company on the cash budget period. Like
sales, purchases may be made in cash or on credit depending on the supplier’s credit terms.
- Continuing from previous example:
‣ Assume that cost per unit is PHP50.
‣ All purchases this month are paid the following month. How much is total cash disbursements for purchases (AVERAGE)?
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Jan Feb Mar Apr May Total
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Cost in Peso 102,500 110,000 125,000 140,000 150,000 627,500
Payment from current months sales 102,500 110,000 125,000 140,000 477,500
C
Payment from previous months sales 150,000
ED
Total Payments for Purchases 0 102,500 110,000 125,000 140,000
D. From the operations budget, identify which expenses will be paid in cash during the cash budget period.
- The following expense items will be paid based on the following periods:
477,500
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‣ Rent payments: Rent of PHP5,000 will be paid each month.
‣ Wages and salaries: Fixed salaries for the year are PHP96,000, or PHP8,000 per month. Wages are estimated as 10% of monthly sales.
‣ Tax payments: Taxes of PHP25,000 must be paid in April.
D
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‣ Cash dividend payments: Cash dividends of PHP20,000 will be paid in January.
‣ Principal payments (loans): A PHP20,000 principal payment is due in February.
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Total Payments for Purchases - 102,500 110,000 125,000 140,000 477,500
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Wages 20,000 22,000 25,000 28,000 30,000 125,000
Tax Payment
Interest Payment
ED 25,000
130,000
10,000
25,000
130,000
10,000
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Cash Divident 20,000 20,000
F. Match the receipts and disbursements on the periods they become collectible and payable, respectively.
G. Set a minimum required cash balance. This balance is maintained in case contingencies arise. Recall from the steps in planning that we
should also plan for contingencies.
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H. If the net cash flow is above the minimum cash balance, the company is in excess cash and may consider putting it in short term
investments. If it is below, the company should make a short term borrowing during that period.
- Moreover, [A] Company has a beginning cash balance of PHP80,000 and would like to maintain an ending cash balance of PHP100,000
per month. Prepare [A] Company’s Cash Budget for January to May. Prepare a cash budget (DIFFICULT).
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Cash Receipts 40,000 144,000 220,000 247,000 275,000 926,000
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Add: Beginning Cash 80,000 67,000 53,500 125,500 51,500 80,000
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Less: Minimum Cash Balance (100,000) (100,000) (100,000) (100,000) (100,000) (100,000)
Cumulative excess cash balance (33,000) (46,500) 25,500 (48,500) 33,500 33,500
ED
(Cumulative required financing)
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- Projected financial statements is a tool of the company to set an overall goal of what the company’s performance and position will be for
and as of the end of the year. It sets targets to control and monitor the activities of the company. The following reports may be
forecasted:
‣ Projected Income Statement
‣ Projected Statement of Financial Position
‣ Projected Statement of Cash Flows
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• Provide the learners a historical financial statement that they would use to make their forecast. You may use your own set of financial
statements or the one found below.
[A] Company
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Income Statements
For the years ended December 31
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2014 2013 2012 2011 2010
Gross Profit
ED
Operating expenses
Operating income
945,000
314,750
810,900
297,890
646,500
246,231
782,000
221,500
567,520
217,538
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[A] Company
Statement of Financial Positions
As of December 31
Assets
Current Assets
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Cash 1,060,000.00 990,000.00 770,000.00 760,000.00 880,000.00
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Other current assets 1,050,000.00 980,000.00 984,000.00 735,000.00 998,000.00
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Non-current Assets
Property, plant, and equipment, net 2,440,000.00 2,260,000.00 1,810,000.00 1,870,000.00 1,900,000.00
Total assets
ED 835,689.00
3,275,689.00
266,175.00
925,681.00
3,185,681.00
184,107.00
896,842.00
2,706,842.00
105,181.00
876,235.00
2,746,235.00
77,350.00
827,490.00
2,727,490.00
34,987.00
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Liabilities and Equity
Current Liabilities
7,414,120.00
151 7,304,425.00 5,182,260.00 5,338,978.00 4,911,640.00
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2014 2013 2012 2011 2010
Non-current Liabilities
Stockholders’ equity
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Capital stock 1,000,000.00 1,000,000.00 1,000,000.00 1,000,000.00 1,000,000.00
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Total liabilities and stockholders’ 12,536,189.00 11,575,681.00 9,979,842.00 8,985,235.00 9,351,490.00
equity
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Earnings Income Tax Expense Finance Cost Operating Expense
• Enumerate and discuss the Steps on Cost of Sales
Financial Statement Projection.
a. Forecast Sales.
- Reiterate the importance of Sales
in forecasting financial statements.
100
75
ED
Recall from lesson 2: Financial
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Statement Analysis that most of
the income statement items are
related to sales. 50
- Recall the financial ratios related
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0
Sales Gross Profit Operating Profit Earnings Before Tax Net Income
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- Start the exercise in financial statement projection with the Projected Income Statement. Provide the information below.
Sales are expected to increase by 10% in 2015 from the 2014 sales level. This
growth assumption is based on the assessment of the external and internal
factors related to the Company and the historical growth of the company. The
company’s sales grew by 10.3% annually from 2010 to 2014.
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- Ask the learners to prepare pro-forma financial statements without numbers. The blank spaces will be filled as the steps on financial
statement projections are discussed.
- Flash an excel file of the blank FS on the screen if there are available facilities. Otherwise a set of blank pro-forma FS can be written on
the board.
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[A] Company
Projected Income Statement
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For the year ending December 31
ED
Cost of sales
Gross Profit
Operating expenses
xxx
xxx
xxx
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Operating income xxx
Taxes xxx
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[A] Company [A] Company
Projected Statement of Financial Position Projected Statement of Financial Position
December 31, 2015 December 31, 2015
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Total liabilities xxx
Receivables xxx
Stockholders’ equity
Inventories xxx
Capital stock xxx
Other Current Assets xxx
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Retained earnings xxx
Total Current Assets xxx
Total stockholders’ equity xxx
Non-current assets
C
Total liabilities and stockholders’ xxx
Property, plant, and equipment, net xxx
equity
Other non-current assets xxx
Total Assets
xxx
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Current liabilities xxx
xxx
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- Compute for projected sales.
Projected Sales in 2015 = 5,250,000 x (1 + 10%) = 5,775,000
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- Suppose that the company has an average of 60% cost of sales ratio. In doing projections, the financial manager may use the same
average ratio or, if the company is pushing for efficiency, the financial manager may reduce this ratio to say 57% depending on his
judgment.
- Operation costs are a mix of variable and fixed costs. Variable costs usually vary with sales. To project these costs, the percentage of
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sales method may be used. On the other hand, fixed costs remain the same no matter how the volume of sales has changed.
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The Company wants to maintain the same gross profit per year as 2014.
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Depreciation expense is 5% of the gross beginning balance of property, plant and equipment. As of December
31, 2014, the gross balance of PPE is PHP5,200,000. For January 2015, PHP1,000,000 new PPE will be acquired.
It is the policy of the company that PPE acquired in the first half of the year will be depreciated for one full year.
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- Compute for Cost of Sales, Variable Operating Expense, and Depreciation Expense.
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(5,200,000 + 1,000,000) x 5% 310,000
Total operating expenses 598,750
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Less: Depreciation (310,000)
PPE net, end 3,130,000
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c. Forecast Net Income and Retained Earnings.
- To forecast net income, interest expense and income tax expense should also be considered using the relevant interest and tax rates.
Retained earnings is arrived at by adding projected net income to beginning retained earnings then deducting dividends to be declared
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during the year.
- Just note this information. Return to this when all income statement items are complete.
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Income tax rate is 30% of the income before taxes. 75% of the income tax expense will be paid in 2015 while the
balance will be paid in 2016.
d. Determine balance sheet items that will vary with sales or whose balances will be highly correlated to sales.
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- Balance sheet items that may vary with sales or will be highly correlated with sales are cash, accounts receivable, inventories, accounts
payable, and accrues expenses payable.
- Compute as follows:
D
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C. Inventories
D. Other current assets
E. Trade accounts payable
Cash
Cash as a percentage of sales in 2014 = ( 1,060,000 ÷ 5,200,000) x 100%
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Cash as a percentage of sales in 2014 = 20.19%
Projected cash in 2015 = 20.19 % x 5,775,000
Projected cash in 2015 = 1,165,973
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Accounts receivable
Accounts receivable as a % of sales in 2014 = (2,300,500 ÷ 5,200,000) x 100%
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Accounts receivable as a % of sales in 2014 = 43.82%
Projected accounts receivable in 2015 = 43.82% x 5,775,000
Projected accounts receivable in 2015 = 2,530,605
Inventories
Inventories as a % of sales in 2014
ED = ( 4,850,000 ÷ 5,200,000) x 100%
Inventories as a % of sales in 2014 = 92.38%
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Projected inventories in 2015 = 92.38% x 5,775,000
Projected inventories in 2015 = 5,334,945
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Accounts payable
Accounts payable as a % of sales in 2014 = (5,050,000.00 ÷ 5,200,000) x 100%
Accounts payable as a % of sales in 2014 = 96.19%
Projected accounts payable in 2015 = 96.19% x 5,775,000
Projected accounts payable in 2015 = 5,554,973
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- Compute for interest expense:
As of December 31, 2014, there are two long-term loans. Both have an annual interest rate of 8%.
A. The first loan will mature on June 30, 2015 and the remaining principal balance to be paid on June 30, 2015 is
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PHP1,250,000.
B. The second loan which was incurred on December 31, 2014 is paid at the rate of PHP500,000 principal
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balance every June 30 and December 31.
New loans of PHP3,500,000 will be incurred on December 31, 2015 payable at the rate of PHP500,000 every June
ED
30 and December 31. Annual interest rate is expected at 8%.
First Loan
Interest from January 1 to June 30, 2015
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1,250,000 x 8% x (6 mos ÷ 12 mos) 50,000
Second Loan
Interest from January 1 to June 30, 2015
(1,000,000 + 2,000,000) x 8% x (6 mos ÷ 12 mos) 120,000
D
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- Complete projected income statement as follows:
[A] Company
Projected Statement of Profit or Loss
For the year ending December 31
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Gross Profit 1,039,500
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Interest Expense 270,000
C
Income before taxes 170,750
Taxes 51,225
Loan incurred on December 31, 2014 of PHP3 million 1,000,000 1,000,000 2,000,000
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f. Check for other information
Other non-current assets and other current liabilities will remain unchanged.
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Retained earnings, beginning 2,122,069
Add: Net Income 119,525
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Less: Dividents (300,000)
Retained earnings, end 1,941,594
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g. Determine external funds needed (EFN).
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h. Determine how external funds needed may be financed.
- External Funds Needed is a plug figure to make projected assets equal projected liabilities and shareholders’ equity.
EFN = change in total assets – (change in total liabilities + total change in stockholders’ equity)
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Or
EFN = Squeeze figure to balance assets to Liabilities and equity
EFN 57,239
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- Ask the learners what the implication of a positive or negative EFN is.
- Suggested discussion:
‣ A positive value for EFN, means that the company needs more funds equivalent to the positive value of EFN. As to how this will be
raised depends on the management and the company’s ability to access funds. This EFN can be raised in the form of short term
borrowing, long term borrowing or equity, or a combination of all sources. The projected balance sheet which generated this EFN is
just the first iteration in preparing a pro-forma balance sheet.
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‣ A negative value for EFN, means that the company has excess cash. As to how this excess cash will be distributed will be the subject
of the next iteration for the pro-forma balance sheet. This can be disposed by adding it to the projected cash balance or it can be
used to retire some of the debt if pre-termination is allowed.
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- Complete FS as follows:
C
Projected Statement of Financial Position Projected Statement of Financial Position Projected Statement of Financial Position
December 31, 2015 December 31, 2015 December 31, 2015
Current Assets
Cash 1,165,973
ED
Current liabilities
Total liabilities
3,500,000
11,210,618
Receivables 2,530,605
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Trade payables 5,554,973 Stockholders’ equity
Inventories 5,334,945
Income taxes payable 12,806 Capital stock 1,000,000
Other Current Assets 1,155,000
Current portion of long term 2,000,000 Retained earnings 1,941,594
Total Current Assets 10,186,523 debt
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Cash flows from operating activities Cash flows from financing activities
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Income before taxes 170,750 (300,000)
Changes in the following accounts Cash flows from financing activities 1,007,239
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Decrease (Increase) in accounts receivable (230,105) Net change in cash 105,973
C
Decrease (Increase) in inventories (484,945) Cash, beginning 1,060,000
(66,939)
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EVALUATION (100 MINS)
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• Assign a critic group to each presenting group. They will be required to ask questions to the presenters. Let the second presenting group
leave the room while the first presenting group is doing their presentation. All groups are required to submit their papers.
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• Reveal to the class any oversight they may have made in analyzing the case. Discuss corrections and additional solutions. See Annex 1 for
suggested solutions.
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ENRICHMENT (5 MINS)
Integration of Learning:
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Ask the learners the following: What should the management do if the actual performance of the company fell short of the plans as early as in
the first quarter?
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Suggested Answer: Try to identify the sources of the differences, whether these are beyond or within the control of the management. Whatever
the causes are, remedial actions should have to be taken. Or depending on the circumstance, the plans may have to be adjusted.
D
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Appendix
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Sales Forecast 20X7 1,960,186 2,930,486
Cash receipts from sales two months before (60%) 1,433,388 1,167,942 980,092.80 1,465,243.20 2,166,004.80 4,831,047
Cash receipts from sales last month (40%) 778,628 653,395 976,829 1,444,003 3,220,698 5,521,194
O
Cash Receipts From Collections 2,212,016 1,821,337 1,956,922 2,909,246 5,386,703 10,352,241
Less: Payment for purchase of Raw Materials 1,985,504 4,428,460 7,591,641 9,616,078 8,577,092 4,318,964
C
Less: Payment for Salaries and Wages 456,667 675,071 1,505,676 2,581,158 3,269,466 2,916,211
Less: Payment to Delivery Contractors 49,005 73,262 108,300 241,552 414,090 524,513
1,321,900
(7,698,696) (10,851,442)
363,835
(7,237,780)
450,000
2,142,552
EP
Add: Beginning Cash 641,123 640,000 640,000 640,000 640,000 640,000
Less: Required Ending Balance (640,000) (640,000) (640,000) (640,000) (640,000) (640,000)
Less: Interest on Borrowing (16%) (7,834.33) (11,645.96) (56,540.65) (159,943.81) (306,762.29) (407,356.18)
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Investment Balance - Beginning - - - - - -
O
Less: Liquidation of Investment - - - - - -
C
ED
EP
D
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ANNEX 1: Sweet Beginnings Co. Suggested Solution
Sales Forecast 20X6 15,594,713 7,852,663 4,424,038 3,760,425 2,986,225 2,433,213 84,075,350
PY
Cash receipts from sales two months before (60%) 8,281,790.40 10,490,266.80 9,356,827.50 4,711,597.50 2,654,422.50 2,256,255.00 49,794,878
Cash receipts from sales last month (40%) 6,993,511 6,237,885 3,141,065 1,769,615 1,504,170 1,194,490 33,435,483
Cash Receipts From Collections 15,275,302 16,728,152 12,497,893 6,481,213 4,158,593 3,450,745 83,230,361
O
Less: Payment for purchase of Raw Materials 2,433,221 2,068,234 1,642,424 1,338,267 1,078,102 1,611,768 46,689,754
Less: Payment for Salaries and Wages 1,468,448 827,295 703,199 558,424 455,011 366,555 15,783,183
C
Less: Payment to Delivery Contractors 467,841 235,580 132,721 112,813 89,587 72,996 2,522,261
640,000
1,862,285
11,734,758
640,000
9,569,548
640,000
4,471,709
640,000
1,319,433
1,216,460
640,000
949,426
640,000
4,867,453
11,567,710
641,123
EP
Less: Required Ending Balance (640,000) (640,000) (640,000) (640,000) (640,000) (640,000) (640,000)
Required Financing - -
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Jan Feb Mar Apr May June
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Investment Balance - Beginning - - - 2,674,705 7,173,161 8,461,353
O
Less: Liquidation of Investment - - - - - -
C
ED
EP
D
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ANNEX 1: Sweet Beginnings Co. Suggested Solution
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Delivery Fees 84,075,350 x 3.00% 2,522,260.50
O
Interest Expense Return on Investment + Interest on borrowings 1,485,866
C
Income Tax 22,111,817 x (1-40%) x 30% 3,980,127
Balance Sheet
Cash
ED
Computation
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Total current liabilities 6,823,926
O
Total liabilities and equity 23,064,240
C
Inventory 20X5 1,076,000
Add: *Purchases
Less: Inventory 20X6
Cost of goods sold
61,963,533
1,076,000
61,963,533
ED
EP
D
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Business'Finance 180 MINS
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Content Standards 10
/Review
The learner demonstrates and understanding of the financial planning process
including budget preparation, cash management, and working capital Motivation Present Actual Company Financial 20
management.
Statements
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Instruction/ Discussion Proper 90
Performance Standards Delivery
The learner will be able to describe concepts and tools in working capital Practice
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Seatwork 20
management.
management. (ABM_BF12-IIIc-d-12)
• Compute and analyze the effects of an operating cycle and cash conversion
cycle on the working capital requirements of the company,
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INTRODUCTION (10 MINS)
Communicate the learning objectives by asking a learner to read the following aloud in class: Teacher Tips
1. I will be able to understand working capital management, net working capital, and the related If the learners still do not know what they
trade-off between profitability and risk. want five years from now, write “not sure”.
2. I will be able to describe the cash conversion cycle, its funding requirements, and the key strategies
for managing it.
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MOTIVATION (20 MINS)
Teacher Tips
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1. Give an example of a local Philippine company and its working capital practices. You can choose a local company that the
learners’ are familiar with. The purpose of
Sample: this exercise is to expose the learners to a
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real world example. The learners should be
guided on the importance of working
Jollibee Foods Corporation capital on the daily operations of a business
Statements of Financial Position enterprise.
Current assets
As of December 31, 2014
(In Millions of PHP)
ED
Cash and cash equivalents 7,618
EP
Accounts receivable, net 7,621
Inventories 5,972
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Current liabilities
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Total liabilities 26,041
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2. Ask the students: What are the assets needed by Jollibee for its daily operation?
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3. Cross reference the students’ answers with the Statement of Financial Position of Jollibee.
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• The operating cycle is the sum of days of inventory and days of receivables.
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3) Explain how to compute the Days of Inventory and Days of Receivables.
• Days of Inventory or inventory conversion period or average age of inventories, is the average number of days to sell its inventory.
- A DSI of 20 days means that on the average it takes 20 days to sell its inventory. The formula is:
- Since the Statement of Financial Position tells the financial condition of a company at the end of the period, we take Average Inventory for
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the year in our calculation.
Or, this formula can be used without computing for inventory turnover:
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Average Inventory
Days of Inventory =
Average COGS per day
• Days of Sales Outstanding (DSO) is the average time for the company to collect its receivables.
- For example, a DSO of 40 days means that a customer who purchased on the company on account will pay his/her balance in 40 days.
- The formula is:
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365 (or 360) days
Days of Inventory =
Receivable Turnover*
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Net Credit Sales
*Receivable Turnover =
Beginning Accounts Receivable + Ending Accounts Receivable
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2
- Revenue is from the Statement of Comprehensive Income and Accounts Receivables is from the Statement of Financial Position.
- We use the Average Receivables for the year in our calculation. For revenue we generally use the credit sales so we may have to exclude
cash sales from the total sales figure.
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4) Discuss how to compute Cash Conversion Cycle (CCC).
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• Cash Conversion Cycle, also called the net operating cycle, is computed as the operating cycle less days of payable.
- In formula form:
- The Cash Conversion Cycle is the length of time it takes for the initial cash outflows for goods and services purchased (materials, labor,
etc.) to be realized as cash inflows from sales (cash sales and in the collection of receivables).
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• Days of Payables Outstanding (DPO) is the average number of days for the company to pay its Teacher Tips
creditors. A DPO of 30 days means that the company waits for 30 days before paying its creditors. Ending Balance Sheet Accounts such as
- The formula for DPO is: Ending Accounts Receivable can also be
used in the computation of Turnover ratios
however, consistency must be applied.
365 (or 360) days
Days of Inventory =
Payables Turnover*
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Net Credit Purchases
*Payables Turnover =
Beginning Accounts Payables + Ending Accounts Payables
2
- Purchases are taken from the Statement of Comprehensive Income and Accounts Payables are
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taken from the Statement of Financial Position.
- Since the Statement of Financial Position tells the financial condition of a company at the end of
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the period, we take Average payables for the year in our calculation.
- For purchases we are generally concerned about the credit purchases so the learner may have to
exclude cash purchases from the total sales figure.
FORMULA
Inventory Turnover
Receivables Turnover
NUMERATOR
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Cost of Goods Sold
Average Inventory
Average Receivables
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Payables Turnover Net Credit Purchases Average Payables
- We can see that the numerators of the turnovers needed for the computation of cash conversion
cycle are all Income Statement Accounts, while the denominators are all Average Balance Sheet
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Accounts.
- Graphical Representation
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PY
Figure 1: Corelation of the Operating Cycle and Number of Days
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Also, there must be a timeline for the activities, especially since they were allotted a specific time to do Teacher Tips
the activity. It should be noted that as the operating
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cycle and cash conversion cycle increase,
more funds are tied up in the working
• Using the above figures, the CCC will be: capital accounts.
CCC = 20 + 40 – 30 = 30
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30 days is the time between the cash outlay and the cash received.
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If the CCC is negative, it indicates that the company has excess cash to invest. A CC of -10
indicates that the company has excess cash to invest for 10 days.
• Working Capital Management is the administration and control of the company’s working capital.
The primary objective is to achieve a balance between profitability and risk. Basically, there are
three types of working capital financing policies the management can choose from:
- Maturity-matching working capital financing policy
- Aggressive working capital financing policy
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- Conservative working capital financing policy
• Managing working capital is important because failure to do so may result in the closure of business.
- It must be noted that working capital requirements increase as the size or volume of the business increases.
- For example, a company needs PHP10 million in working capital to support an annual sales of PHP50 million. If the sales increase to
PHP100 million, will the PHP10 million working capital be enough? Most likely, the answer is no.
• Why? Because with PHP100 million sales, there will be more cash needed for the operations, more accounts receivable, and if the
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company is a trading or a manufacturing company, more inventories.
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production capacity or relevant sales range.
• Temporary working capital is the excess of working capital over the permanent working capital given its production capacity or relevant
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sales range. (Source: Learn Accounting with Online Accounting Course | Simplestudies.com. (2016). Simplestudies.com. Retrieved 13 May
2016, from http://simplestudies.com/what-are-the-types-of-working-capital)
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• During the year, sales are not the same every month. This is why companies have slack season and peak season. If a company has annual
sales of PHP50 million, chances are these sales are not generated uniformly throughout the year. Given this situation, the net working capital
requirements during the slack season is lower than those during the peak season. The net working capital needed to support an operation
during the slack season represents the permanent working capital requirements while the additional net working capital needed during the
peak season represents the temporary working capital requirements.
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• Illustrative Sample: Bugay is managing the working capital of SR Ice Cream. SR Ice Cream is engaged in the selling of different ice creams.
The following are the sales volume, and the working capital needed based on the recent years:
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• Based on the maturity-matching working capital financing policy, permanent working capital requirements should be financed by long-
term sources while temporary working capital requirements should be financed by short-term sources of financing.
• Long-term sources of financing include long-term debt and equity such as common stock and preferred stock. Short-term sources include
short-term loans from a bank.
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• These short-term loans from banks are called working capital loans which perfectly describe the reasons why these loans are incurred.
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ED
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• In maturity-matching, all permanent working capital must be financed by long-term sources while temporary working capital requirements
should be financed by short-term sources.
- Aggressive Working Capital Financing Policy
• Under the aggressive working capital financing policy, some of the permanent working capital requirements are financed by short-term
sources of financing.
• Why do managers of some companies adopt this policy? It is because long-term sources of funds have higher cost as compared to short-
term sources of financing. By financing some of the permanent working capital requirements with short-term sources of financing,
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financing cost is minimized which in turn, improves net income.
• But what is the trade-off? Since it is short-term, the debt has to be paid soon and the company may not yet have enough cash by the time
the debt matures. This refers to liquidity risk and this risk increases with the aggressive working capital financing policy.
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C
ED
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Source: Cayanan and Borja. Business Finance. 2016.
• Illustrative Sample: B. Bugay is managing the working capital of SR Ice Cream. SR Ice Cream is engaged in the selling of different ice
QUARTER
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creams. The following are the sales volume, and the working capital needed based on the recent years:
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BANK TERM (OR DURATION) AMOUNT
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What banks will be probably chosen by B. Bugay when choosing different policies?
Answer Key:
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Permanent working capital = P120,000
Temporary working capital = P300,000 – P 120,000 = P180,000
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POLICY TEMPORARY PERMANENT
Aggressive
Conservative
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AUB, BPI
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8) Explain the strategies for managing the cash conversion cycle.
• The central issue in managing the working capital is the ability to reduce operating cycle days. This is to ensure that such operating cycle
days will be shorter than the payable days. The quickness of completing the operating cycle is measured by the operating cycle days.
• The following are some of the strategies in efficiently managing the cash conversion cycle:
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1. Turn over inventory as quickly as possible without stockouts that result in lost sales.
2. Efficiently manage the accounts receivable consistent with the company’s credit policies. You need to also consider accelerating the
collection of receivables through:
A. Shorter credit terms.
B. Offering special discounts to customers who pay their accounts within a specified period.
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C. Speeding up the mailing time of payments from customers to the firm.
D. Minimizing the float or reducing the time during which payments received by the firm remain uncollected funds. For example, a
customer deposited a check in the name of the company on a Friday and the check will be cleared on Monday. The payment is said
to be floating for two days.
3. Manage mail, processing, and clearing time to reduce them when collecting from customers and to increase them when paying
suppliers.
4. Pay accounts payable as slowly as possible without damaging the firm’s credit rating.
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PRACTICE (20 MINS)
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Philippine Products Company is concerned about managing cash efficiently. On the average, inventories have an age of 90 days and accounts
receivable are collected in 60 days. Accounts payable are paid approximately 30 days after they arise. The firm has annual sales of about PHP30
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million. Assume there is no difference in the investment per peso of sales in inventory, receivables, and payables and that there is a 360-day
year.
1. Calculate the firm’s operating cycle.
2. Calculate the firm’s cash conversion cycle.
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3. Discuss how management might be able to reduce the cash conversion cycle.
Answer Key:
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1. 90+60=150 days
2. 90+60-30=120 days
3. Reduce days to sell inventory, reduce days to collect accounts receivable and lengthen payable payment period without negatively affecting
relationship with suppliers.
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ENRICHMENT (30 MINS) Teacher Tips
Make sure that all members of the group
participate in the discussion and no one
As a group work, ask the learners to download the financial statements of Jollibee Foods Corporation. dominates the discussion.
Reflection questions:
1. What is the impact of the working capital management to the profitability and risks based on the
group’s analysis of Jollibee Foods Corporation financial statements?
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2. What types of working capital policies is JFC using based from your analysis of it’s financial
statements?
3. What impact can you observe this strategy has to JFC's profits?
4. Is there any effect on the riskiness such as liquidity or solvency?
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Notes:
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• Remind the groups to have a “Group Facilitator” who will direct the discussion.
• Remind the groups to have a “Scribe/Reporter” who will write the key concepts shared by each
member and report the group’s findings to the class.
• Allow them to discuss for ten (10) minutes.
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• Ask each group to share their findings to the class for 2 minutes per group.
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Business'Finance 180 MINS
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Content Standards 10
/Review
The learner demonstrates and understanding of the financial planning process
including budget preparation, cash management, and working capital Motivation Real life situational analysis 20
management.
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Instruction/ Discussion 90
Performance Standards Delivery
The learner will be able to describe concepts and tools in working capital Enrichment Group work
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management. 30
Evaluation Quiz 30
Learning Competency
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INTRODUCTION (10 MINS)
Communicate the learning objectives by asking a learner to read the following aloud in class: Teacher Tips
1. List the reasons for holding cash. If the learners still do not know what they
want five years from now, write “not sure”.
2. Construct a cash budget and explain its purpose.
3. Briefly explain useful tools and procedures for effectively managing cash inflows and outflows.
4. State the goal of inventory management and identify the three categories of inventory costs.
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5. Identify and briefly explain the use of several inventory control systems.
6. List and explain the four elements of a firm’s credit policy and identify other factors influencing
credit policy.
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MOTIVATION (20 MINS) Teacher Tips
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This exercise is geared toward letting the
You are to organize your birthday celebration this year. What are the things that should be considered learners relate common activities and the
need of working capital for these activities.
in planning? List on the board the needed resources that will be needed for the birthday celebration.
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Based on the listings the learners made, separate the current assets and long term assets then relate
them to the need of working capital assets in any activity.
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INSTRUCTION/DELIVERY (120 MINS)
1. Cash
• Being the most liquid asset, cash is an important account in the balance sheet that will affect the
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liquidity, and solvency of a company. It is also the most vulnerable when it comes to theft.
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- If all collections need to be deposited, then payments must be made through a check voucher
system. There must also be two signatories in the check to provide a check and balance. If the
business is small then the entrepreneur’s signature may suffice.
- For small payments like the fare given to a messenger, a petty cash fund is used. A petty cash fund
which should be minimal in amount, will be issued to a petty cash fund custodian, say the office
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administrator. The petty cash fund may be PHP10,000 or PHP20,000. Disbursements from this
petty cash funds must be supported by a petty cash voucher signed by the recipient of the petty
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cash. When the petty cash fund is almost depleted, the petty cash fund custodian will get
reimbursements. This reimbursement will go through the check voucher system where the
custodian gets a check with the petty cash vouchers as supporting documents.
- The check must also be cross-checked by drawing two lines on the payee section of the check.
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This cross-checking requires depositing of a check. It cannot be encashed. This makes it more
difficult for somebody who stole a check to get the money. Teacher Tips
Relate the classification of the working
capital assets to operations.
2. Motives For Holding Cash
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• The following are the reasons for holding cash: You can discuss and differentiate the
classification of the same assets as classified
- Primary Reasons
in the statement of financial position.
a. Transactional. This is the cash used for paying expenses such as salaries, utilities, rent and
taxes, among others. You may relate your discussion with the
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3. Budgeting Cash
Teacher Tips
• The Cash Budget Money market placements refer to short-
- The cash budget provides information regarding the company’s expected cash receipts and
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term financial instruments with a maximum
tenor of one year.
disbursements over a given period.
- It is useful for identifying future funding requirements or excess cash within a given period. This
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allows managers to find possible sources of financing if the cash budget shows cash shortage or
identify appropriate tenors for money market placements for excess cash.
- Normally, a cash budget is prepared for a one year period broken down into smaller intervals like
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months. This allows managers to see the seasonality of the business which affects the cash flows.
B. BUGAY INDUSTRIES
Cash Budget
For the months of October, November, and December 2015
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OCTOBER NOVEMBER DECEMBER
- Illustrative Example:
Source: Gitman, L. (1976). Principles of managerial finance. New York: Harper & Row.
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B. Bugay Industries, a defense contractor, is developing a cash budget for October, November, and December. Jungaya’s sales in August
and September were PHP100,000 and PHP200,000 respectively. Sales of PHP400,000, PHP300,000, and PHP200,000 have been forecast
for October, November, and December respectively.
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Historically, 20% of the firm’s sales have been for cash, 50% have generated accounts receivable collected after 1 month, and the
remaining 30% have generated accounts receivable collected after 2 months. In December, the firm will receive a PHP30,000 dividend
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from stock in a subsidiary.
Answer Key:
Forecasted sales
ED100,000 200,000 400,000 300,000 200,000
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August September October November December
Collection of AR
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- Cash Disbursements include all outlays of cash by the firm during a given financial period. The most common cash disbursements are:
• Cash purchases
• Purchasing fixed assets
• Payments of accounts payable
• Interest payments
• Rent (and lease) payments
• Cash dividend payments
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• Wages and salaries
• Principal payments (loans)
• Tax
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• It is important to recognize that depreciation and other noncash charges are not included in the cash budget, because they merely
represent a scheduled write-off of an earlier cash outflow.
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• Illustrative Example:
Jungaya Industries has gathered the following data needed for the preparation of a cash disbursements schedule for October, November,
and December.
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- Purchases - The firm’s purchases represent 70% of sales. Of this amount, 10% is paid in cash, 70% is paid in the month immediately
following the month of purchase, and the remaining 20% is paid 2 months following the month of purchase.
- Rent Payments - Rent of PHP5,000 will be paid each month.
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- Wages and Salaries - Fixed salary cost for the year is PHP96,000, or PHP8,000 per month. In addition, wages are estimated as 10% of
monthly sales.
- Tax Payments - Taxes of PHP25,000 must be paid in December.
- Fixed Assets - New machinery costing PHP130,000 will be purchased and paid for in November.
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Answer Key:
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Forecasted purchases (70%) 70,000 140,000 280,000 210,000 140,000
Payment of AP
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2nd month (20%) 14,000 28,000 56,000
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Wages and Salaries 48,000 38,000 28,000
Tax 25,000
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Machinery purchase 130,000
Interest 10,000
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4. Net Cash Flow, Ending Cash, Financing, and Excess Cash
193,000 P418,000 P285,000
• The firm’s net cash flow is found by subtracting the cash disbursements from cash receipts in each period. Then we add beginning cash to
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the net cash flow to determine the ending cash for each period. Finally, we subtract the desired minimum cash balance from ending cash to
find the required total financing or the excess cash balance. If the computed amount is negative, the company needs financing. Otherwise,
the company has excess cash.
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• The cash budget is part of planning. It helps managers anticipate future funding requirements in order to obtain proper financing even
before the need arises. This will help them avoid usurious rates. On the other hand, if the company has excess cash, managers are able
identify the investment instruments that will maximize the returns on the excess cash.
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• Illustrative Example: Given the two illustrative examples, generate a cash budget showing the net cash flow, ending cash flow, financing,
and excess cash. At the end of September, Jungaya’s cash balance was PHP50,000,and its notes payable and marketable securities equaled
PHP0. The company wishes to maintain as a reserve for unexpected needs, a minimum cash balance of PHP25,000.
• Answer Key:
B. BUGAY INDUSTRIES
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Cash Budget
For the months of October, November, and December 2015
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Less: Cash Disbursements (193,000) (418,000) (285,000)
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Add: Beginning Cash Balance 50,000 67,000 (31,000)
42,000
(25,000)
(56,000)
(25,000)
(1,000)
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• Comprehensive Illustrative Example:
It was December 2014 and the president of DCD Corporation wants to find out if the company has enough cash to pay the principal
balance of the company’s loan worth PHP3 million by the end of 2015. He asked the chief accountant to prepare the cash budget for 2015.
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The following assumptions which will be used for the preparation of the cash budget for 2015 are as follows:
Sales are collected 90% in the quarter the sales are made. The remaining 10% is collected the following quarter.
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- The cost of sales is 75% of sales. Merchandise inventories are purchased in the quarter these are sold. All merchandise purchased in
the quarter are paid in the same quarter.
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First quarter - PHP500,000
Second quarter - -PHP750,000
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Third quarter - PHP850,000
Fourth quarter - PHP1,000,000
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On top of these cash operating expenses, depreciation expenses that should be charged to operations is PHP150,000 per quarter.
- Expected cash balance at the end of 2014 is about PHP350,000. For 2015, target cash balance is raised to PHP500,000 because of
expected increase in sales.
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Given the above assumptions, a cash budget can now be prepared for 2015.
DCD Corporation
Cash Budget
For the Year Ending December 31, 2015
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Collections
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5,300,000 7,250,000 8,400,000 9,850,000
Payments
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Purchases 3,750,000 5,625,000 6,375,000 7,500,000
Income taxes
Loan payment
Interest expense
225,000
75,000
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157,500
75,000
270,000
75,000
315,000
3,000,000
75,000
Teacher Tips
Target cash balance 500,000 500,000 500,000 500,000
The 5Cs of credit will also be discussed in
Sources and Uses and long-term funds that
Cumulative excess cash (funding 600,000 1,242,500 2,072,500 32,500
will be discussed in the third quarter.
requirements)
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5. Accounts Receivable
• Accounts receivables spring out of the need to sell merchandise.
• An excellent business proposition is to generate sales without offering a credit facility to customers. However, this concept is theoretically
sound, but not sustainable.
- Consider a real estate company which sells condominium units at PHP5 million per unit. How many units can the property developer sell if
he sells the units only on cash basis? Do you think he can sell a lot? Probably not as many as compared to providing instalment payments.
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• Credit management strategically defines the quality of account receivables collection.
• The collectability of accounts receivables depends largely on the quality of customers. The quality of customers depends on the standards
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or credit policies set up and used by an organization. Credit policies are an integral part of the credit evaluation and there are 5C’s used in
credit evaluation. These are:
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- Character –the willingness of the borrower to repay the loan
- Capacity – a customer’s ability to generate cash flows
- Collateral – security pledged for payment of the loan
-
-
Capital – a customer’s financial resources
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Condition – current economic or business conditions
• Proper management of accounts receivable entails having a good billing and collection system.
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- A good system should lead to the sending of statements of account to customers on time.
- Follow-ups through phone calls or any form of gentle reminders should be made if customers fail to pay on time. These follow-ups can also
serve as the management’s way of validating if the contact details given by customers are still valid and if the customers still occupy the
same office.
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• Aging of receivables is also a control measure to determine the amount of receivables that are still outstanding and past due.
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Current P 60 million
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Total Php 100 million
• Accounts which have been past due for more than 90 days have higher probability to default. The aging of receivables is useful in
determining the allowance for doubtful accounts.
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6. INVENTORY MANAGEMENT
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• Inventory management involves the formulation and administration of plans and policies to efficiently and satisfactorily meet production and
merchandising requirements and minimize costs relative to inventories.
- Effective inventory management becomes critical when the nature of the products are either perishable (e.g. fruits, vegetables), fragile
(e.g. glasses), or toxic (e.g. bleaching agent).
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• Proper inventory management involves the determination of reasonable levels of inventories considering the size and nature of business.
- Maintaining too much inventories has costs such as carrying or holding costs, possible obsolescence or spoilage.
- On the other hand, too low inventory can result to stockout, and eventually lost sales.
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- Raw materials – these are purchased materials not yet put into production.
- Work in process – these are goods and labor put into production but not yet finished.
- Finished goods – these are goods put into production and finished. These are ready to be sold.
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• One way to control inventory is to classify inventory into a classification system called ABC Analysis.
• Inventories classified as “A” are high valued items which should be safeguarded the most.
• B items, on the other hand, are average-cost items that should be safeguarded more than C items but not as much as A items.
• While C items have low cost and is the least safeguarded.
To summarize:
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INVENTORY CLASS
A B C
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Quality of control Very strict Strict Not too Strict
C
Sources:
Agamata, F. (2014). Management Services.
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Gitman, L. (1976). Principles of managerial finance. New York: Harper & Row.
Gitman, L. & Joehnk, M. (1981). Fundamentals of investing. New York: Harper & Row.
Horngren, C. (1972). Cost accounting; a managerial emphasis. Englewood Cliffs, N.J.: Prentice-Hall.
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Roque, R. (1990). Reviewer in Management Advisory Services. Roque Press, Inc.
Group work:
What are the three ways for Maria to better manage her cash balance?
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Maria Luna, a 25-year-old nurse, works at a hospital that pays her every 2 weeks by direct deposit into her checking account which pays
no interest and has no minimum balance requirement. She takes home about PHP9,000 every 2 weeks or about PHP18,000 per month.
She maintains a checking account in the bank that does not earn any interest income with a balance of around PHP7,500. Whenever it
exceeds that amount she transfers the excess into her savings account, which currently pays 1.5% annual interest.
She currently has a savings account balance of PHP85,000 and estimates that she transfers about PHP3,000 per month from her
checking account into her savings account.
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Maria pays her bills immediately when she receives them. Her monthly bills average about PHP9,500, and her monthly cash outlays for
food and transportation cost total about PHP4,500.
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An analysis of Maria’s bill payments indicates that on average she pays her bills 10 days early. Bank Time Deposit are currently yielding
about 4.2% annual interest. Maria is interested in learning how she might better manage her cash balances.
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Answer Key:
The three ways for Maria to better manage her cash balance:
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1. Invest current balances. Maria can transfer her current savings account balances into a Time Deposit, thereby increasing the rate of interest
earned from 1.5% to about 4.2%. On her current P17,000 balance, she will immediately increase her annual interest earnings by about
PHP2,295. (0.042 - 0.015) X P85,000
2. Invest monthly surpluses. Maria can transfer monthly the PHP3,000 from her checking account to the Time Deposit, thereby increasing the
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annual earnings on each monthly transfer by about PHP81(0.042 - 0.015) X PHP3,000 which, for the 12 transfers, would generate additional
annual earnings of about PHP972 (12 months X PHP81).
3. Slow down payments. Rather than paying her bills immediately on receipt, Maria can pay her bills nearer their due date. By doing this she
can gain 10 days of disbursement float each month, or 120 days per year (10 days per month over12 months), on an average of PHP9,500 of
bills. Assuming she can earn 4.2% annual interest on the PHP9,500, slowing down her payments would save about P133 annually (120/360)
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X 0.042 X P9,500 .
Based on these three recommendations, Maria would increase her annual earnings by a total of about PHP3,400 (PHP2,295 + PHP972 +
PHP133) . Clearly, Maria can grow her earnings by better managing her cash balances.
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EVALUATION (30 MINS)
Teacher Tips
Multiple Choice Answer Key
1. B
2. C
1. The _________ inventory consists of all items currently in the production process. 3. D
(a) raw materials 4. A
5. D
(b) work-in-process
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(c) finished goods
(d) apital goods
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2. The _________ inventory consists of items that have been produced but not yet sold.
(a) raw materials
(b) work-in-process
C
(c) finished goods
(d) capital goods
4. The _________ inventory contains the basic components of the production process.
D
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5. The credit applicant’s _________ is the amount of assets the applicant has available for use in securing the credit.
(a) character
(b) capacity
(c) capital
(d) collateral
Problem Solving:
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Gerry Jacobs, a financial analyst for Best Valu Supermarkets, has prepared the following sales and cash disbursement estimates for the period
of August through December of the current year.
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Month Sales Cash Disbursements
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August $400 $300
November
December
600
700
400
500
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90% of sales are for cash, the remaining 10% are collected one month later. All disbursements are on a cash basis. The firm wishes to maintain a
minimum cash balance of $50. The beginning cash balance in September is $25. Prepare a cash budget for the months of October, November,
and December, noting any needed financing or excess cash available.
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Answer Key:
Cash receipts
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Sales Collected (1 mo. lag 10%) 40 50 50 60
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Net cash flow (10) (200) 190 190
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Ending cash balance 15 (185) 5 195
Minimum balance 50 50 50 50
Required financing
Excess Cash
35
ED 235 45
45
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Best Valu Supermarkets should arrange for a line of credit for at least $235 during the four-month period.
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Business Finance 160MINS
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15
Content Standards /Review
The learners demonstrate an understanding of the sources and uses of short-
term and long-term funds, and the requirements, procedures, obligation to Motivation A. Share news articles that feature actual 35
creditor, and reportorial necessities. companies that avail of debt and equity
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financing.
B. Discuss potential liquidity problems or
Performance Standards
higher default risk if company does not
The learners shall be able to:
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use appropriate source of financing.
• Distinguish debt and equity financing as well as the risks associated with Instruction/ Discussion proper
each source of financing. 60
Delivery
• Identify the bank and non-bank institutions in the vicinity that are possible
Practice
sources of funds.
Learning Competencies
The learners will be able to:
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Seatwork on matching the company
objectives with either short or long-term
financing
30
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Materials • Projector, if available
• Cite bank and nonbank institutions in the locality that would serve as
possible sources of funds for business operations. (ABM_BF12-IIIe-f-13) • Board and writing materials will suffice
• Identify uses of funds. (ABM_BF12-IIIe-f-17) Resources
(1) Brealey, R. Myers, S., & Marcus, A. (2004). Fundamentals of corporate
finance. Boston, Mass.: McGraw-Hill Irwin.
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• Equity Infusion from investors/business partners Settlement Risk – risk that the bank may
not be able to give back their deposit.
• Start-up capital from owner Philippine banks are normally insured by the
• Loan from a bank Philippine Deposit Insurance Corporation
(PDIC). Depositors may recover up to
• Loan from other financial institutions, etc.
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PHP500,000 per depositor from PDIC in
• Loan from family members/friends, etc. case of bank default/bankruptcy.
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Misconceptions:
MOTIVATION/ENRICHMENT (20 MINS) Emphasize to the students that it is a
1. Ask the students to read news articles relating to financing used by companies. common misconception that all of these
• Jonsson, A. (2013). JG Summit raises $200 million from placement. FinanceAsia. Retrieved 5
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April 2016, from http://www.financeasia.com/News/365482,jg-summit-raises-200-million-
from-placement.aspx
• Companies can choose between two sources of financing, either debt or equity.
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2. Discuss the articles using the following guide questions (EASY TO AVERAGE):
• What are the subject companies? What are their main activities?
• What do they need financing for?
• How much did they raise through financing? In what manner did they manage to raise funds?
• What are the companies’ plans after achieving their proposed funding?
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INSTRUCTION (25 MINS)
1. Ask the learners which they think is more expensive, debt, or equity financing?
• Learners will usually answer that equity financing is less expensive since equity uses their own funds
and they do not pay interest.
• Discuss that equity financing also has costs that may be more expensive than the cost of debt.
Why? Because there is no guaranty on the returns. Even if the cost of equity is more expensive,
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companies still utilize equity due to its benefits such as no maturity, and other advantages which will
be further discussed.
2. Definitions
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• Debt Financing - borrowing money from lenders and not giving up ownership.
• Equity Financing - the method of raising capital by selling company stock to investors (stockholders)
in exchange of ownership interests in the company.
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Teacher Tip:
• Discuss the advantages and disadvantages of debt financing and equity financing.
This is in the point of view of the Company.
DEBT FINANCING EQUITY FINANCING Note that if debt is cheaper, why doesn’t
Cost
Advantages
It is limited to interest
payments.
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Disadvantages Advantages
• Fabrics Inc. put up a clothing outlet worth PHP10 million and funded the entire amount using a one-year short-term loan. The company’s
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average annual operating cash flows for the last three years is PHP 1.5 million.
Ask the learners what they think would happen to the company.
Sample Response:
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• Given the average annual operating cash flows of the company of only PHP1.5 million, there is a very high probability that Fabrics
Inc. will not be able to pay the loan within one year.
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• Given the amount of the loan in relation to operating cash flows, management may be become very stressed thinking about how to
settle this loan. This will adversely affect the executive time they spend in managing the core business of the Company.
• Dragon Inc. is in the business of fireworks production. Their peak season is usually during the holidays, especially during Christmas and New
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Year. The company needs additional PHP500,000 to finance their working capital needs during the holiday season.
Ask the learners how this should be financed. Should it be financed using short-term loan, long-term loan, or through equity?
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Sample Response:
• This should be financed by short-term loan. Long-term loan and equity financing are not recommended for this temporary financing
requirement because of the following reasons:
• The need for financing is limited to the holiday season.
• Equity financing is the most expensive, as previously discussed, while interest rates on long-term debt is also generally higher as
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compared to interest rates on short-term debt. Also, if the funds are needed only for a limited period, there is no need for the
company to secure a long-term source of funds.
2. Ask the students if they can think of other scenarios where a mismatch for financing could be a problem for a business.
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• Sample response: Financing a long-term investment through a short-term loan. Let us say you are a
Teacher Tip:
restaurant owner and you are planning to open another branch which will cost you PHP8 million.
If the learners are passive, cite a few more
The returns on this investment will be realised over a number of years. Therefore, financing it examples, such as a small lending company
through a short-term loan, say one year, will give you too much pressure to pay the loan because with collections that have mismatched when
the new branch may not have generated enough cash flow within the year to cover the PHP8 giving out loans, to give them more insights
million. on the topic at hand.
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INSTRUCTION (35 MINUTES)
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paid in more than a year.
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2. Recap on liquidity risks and liquidity ratios.
Liquidity risk typically refers to the inability of an investor to buy or sell an asset to avoid financial loss. It
can also refer to the inability to meet obligations since assets are tied up with investments or inventory.
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Ratios such as the current ratio and quick ratio measure the institution’s liquidity. There should be a
balance between liquid funds and investments. Too high liquidity ratios will have opportunity costs
since these funds could have been invested to yield earnings. Too low liquidity ratios, however, may
cause the institution to default on payments should emergency situations arise. Enough liquid assets
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should be available to meet short term obligations.
3. Enumerate and describe the sources and uses of short-term funds. Provide actual examples under Teacher Tip:
each type of source, if applicable. You may ask the learners to identify the
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not availing of the discount, the one who ordered the supplies from the supplier in
Teacher Tip:
effect borrowed at 14.69%. It may also be viewed as the opportunity cost forgone.
There are other sources of short-term funds.
• Advances from stockholders or other owners – personal funds advanced by a stockholder to a Single proprietors and rich members of
company that usually requires interest. These usually require little to no interest on advances, family and friends can be taped. Tell the
especially if the owner is advancing funds to assist the company in sudden liquidity crisis. This learners that should they decide to do this
source, however, is depended on the availability of funds of an individual. in the future, everything has to be
documented to avoid a fall out or a family
• Credit cooperatives – provided lending services to its members. Members usually pay feud. The ones listed in this teaching guide
contributions to the cooperative. are the most commonly used. Add personal
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• Banks – provides several loan products catering to different types of needs. experiences and ask the learners whether
• Credit Cards – just take note of the high interest rates on this source of funds. they have encountered or have utilized
funds from these sources.
• Lending Companies – companies that are dedicated to lending. They usually charge higher interest
than banks but their credit requirements are more lenient compared to banks.
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• Pawnshops – provides funds in exchange for collateral, usually jewellery, or other items of value.
• Informal lending sources (5/6)
• Describe the actual interest paid for this type of lending
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• Interest is usually paid per month, and monthly interest is (6-5)/5 or 20%. Annual
interest is actually 20%*12 or 240%.
•
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4. Discuss the factors considered in selecting the source of short-term financing.
Cost (Interest)
• Informal lending sources like 5/6 may be the most expensive.
Availability of short-term funds
• Informal lending sources like 5/6 is most available because there are no formal requirements
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to avail of the facility.
• Risk
• Whatever the source of fund is, if the company defaults, the lenders may foreclose some of
the company’s properties or even the entire business itself to settle the loan.
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• Flexibility
• This pertains to the ability of the company to access funds.
• or example, a bank loan may be cheaper but the bank may reject the loan application of the
borrower because he/she did not pass the credit evaluation process of the bank.
• This financial flexibility can be influenced by:
• Nature of the Company’s business
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• Leverage ratio
• Stability of operating cash flows
• Restrictions (Debt covenants)
• Some lenders like banks may require a minimum deposit balance with their branch for as
long as the loans remain outstanding.
• The bank’s approval may also be secured before cash dividends can be declared.
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• Equity investors – these are the individuals/corporations which are issued common stock. They Teacher Tip:
share in the ownership of the company. There are also equity investors who do not have voting In times of liquidation, this is the order of
payment priority:
rights in the company but have a share in dividends, usually a fixed percentage. These investors are • Creditors
issued preferred stock. Holders of preferred shares are first to receive dividends than common stock • Preferred stockholders
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holders. • Common stockholders
• Internally generated funds – not all profits are distributed to stockholders. Most of the profits are
re-invested and used by companies to finance their needs.
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• Banks – they provide long-term loans, depending on the nature of the need. For example, a 5-year
to 10-year loan may be granted if the purpose of the loan is construction of an office building.
• Bonds – these are debt investments where an investor loans money to an entity which borrows the
•
funds.
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Lending companies – they can also provide long-term loans.
6. The company’s capital structure is a major consideration for deciding which long-term sources of
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funds to utilize. The target would be to balance debt and equity and come up with the minimum
cost of capital.
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3. Provide scenarios and let them decide whether long-term or short-term financing is needed.
Teacher Tip
(AVERAGE TO DIFFICULT)
In addition, define the so-called revolving
line of credit. It allows the borrowers to
Need/Activity Answer Key
renew their loans with a certain limit
Acquisition of equipment Long-term whenever they need it.
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Loan for agricultural needs (i.e. palay production, Short-term
mango, etc.)
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Development of a subdivision Long-term
Auto-loan Long-term
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Loan for sari-sari store supplies Short-term
4. Provide a time limit for them to write their answers on a piece of paper.
5. After the activity, ask the class ‘Why is it important to distinguish between long-term or short term
financing?’
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• It is important so that the sources or funds are matched with the needs of the company/business.
Matching of sources and uses of funds saves the business from encountering defaults on
obligations and incurring losses, and at the same time, use the funds at hand to earn profits.
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Teacher Tip
EVALUATION (30 MINUTES) This exercise is given to make sure the
learners understand the lessons. Self-test
questions may be discussed through class
SELF-TEST QUESTIONS (RECITATION – MEDIUM TO DIFFICULT)
recitation or you may opt to give these
1. What are the advantages and disadvantages of long term debt financing? Give at least 3. Explain. questions as an essay quiz. Since time is
limited, if you opt an essay quiz, choose at
208 most 3 questions for them to answer. If
given as a recitation, make sure that all
This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only. notes are kept before proceeding.
2. What are the advantages and disadvantages of equity financing? Give at least 3. Explain.
3. Identify the different sources of short-term funds and long-term funds. Give at least 3 and define.
4. Discuss when to use short-term funds in business.
5. Discuss when to use long-term funds in business.
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Appendix
MANILA - Property developer Filinvest Land, Inc. (FLI) has raised P8 billion from a bond issue to partially fund new projects that can triple its
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retail and office space portfolio in the next five years. FLI president Josephine Gotianun-Yap said the company had budgeted P24 billion in
capital expenditures this year. FLI listed successfully its seven- and 10-year peso fixed-rate bonds in the Philippine Dealing and Exchange Corp.
on Thursday. The bonds attained the highest PRS Aaa rating from the Philippine Rating Services Corp. (PhilRatings). The Gotianun-owned
property arm's fixed-rate bonds due 2022 and 2025 had an oversubscription of almost thrice the base amount of P5 billion, enabling the
company to exercise the P3 billion oversubscription option approved by the Securities and Exchange Commission. “With this bond issuance,
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FLI is now in full-gear for office and retail space expansion. We are tripling our office and retail rental portfolio to hit close to one million square
meters of gross leasable area in the next five years. We tap the long-term bond market to match our funding sources with our project horizons,”
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said Gotianun-Yap. FLI launched P6 billion worth of projects in the first half of 2015 while it targets a total of P16 billion for the entire 2015. It
has developed over 2,400 hectares of land and more than 600,000 square meters of prime office, residential and retail spaces. “With the
country’s real estate sector experiencing a continued robust growth, in line with the Philippine economy, FLI is in the best position and time to
address the needs of a flourishing economy,” Gotianun-Yap said.
JG Summit, the Philippine conglomerate controlled by the Gokongwei family, has raised Ps8.8 billion ($200 million) from a share placement that
it will use partly to fund its purchase of a stake in power producer Manila Electric Co (Meralco).
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The deal was completed after the market closed on Monday, ahead of JG Summit’s inclusion in the MSCI Philippines index from the close of
trading on Tuesday. The entry into the index was announced on November 7 and, according to a source, is estimated to result in $60 million to
$85 million of additional buying of the company’s shares by passive index funds.
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JG Summit’s share price jumped 12.1% in the first three days after the MSCI announcement to match the record closing high of Ps49 that it hit
in April this year. It has given up all those gains since then, however, as the Philippines have been dealing with the fall-out from Typhoon Haiyan,
which is known to have killed at least 4,000 people.
The share price fell 4.9% on Monday as there may have been some leaks in the market that a placement was coming. Sources said the
bookrunners built a shadow order book in the run up to the transaction and the base deal was largely covered at launch.
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JG Summit offered 220 million shares, which accounted for 3.2% of the existing share capital and consisted of approximately 98.1 million
treasury shares and 121.9 million common shares that were sold through a top-up placement.
They were marketed at a price between Ps40 and Ps41 apiece, which translated into a discount of 1.7% to 4.1% versus Monday’s close of
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Ps41.70.
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According to a source, there was pretty good demand, with orders from more than 40 investors when the books closed after about three-and-a-
half hours, but the price was fixed at the bottom for the maximum 4.1% discount. Even in light of the drop earlier in the day that is still a fairly
tight discount for the Philippines, though.
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The bookrunners clearly felt that was the case as the term sheet listed the discount range versus Monday’s volume-weighted average price
rather than versus the close. Since the VWAP, at Ps42.50, was higher than the closing price, the implied discount listed on the term sheet was
3.5% to 5.9%.
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Most investors are unlikely to have been fooled by that though and it was no real surprise that the price was fixed at the bottom of the range.
After all, the deal accounted for more than 60 days of trading based on the average daily volume in the past three months, or 35 days based on
the more active trading in the past month.
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By comparison, the most recent overnight placement of size in a Philippine-listed company in early October, which was actually a sell-down by
JG Summit in its food and beverage subsidiary Universal Robina, raised $280 million and was priced at a 6.5% discount. A $173 million
placement of treasury shares in Universal Robina in July came at a 4.8% discount.
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JG Summit was also unable to exercise the upsize option of up to 110 million common shares, which could have increased the total deal size to
as much as $300 million.
The deal attracted a mix of long-only funds, passive index funds and hedge funds, the source said. The index funds will have to buy JG Summit
before it goes into the MSCI index in order to keep their exposure intact. The MSCI announcement did not include any information about the
weighting, but analysts estimate the conglomerate will account for between 5.5% and 6% of the index.
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JG Summit is the only stock to go into the MSCI Philippine index following the latest semi-annual index review. No stocks will be removed.
The Philippine conglomerate said on October 1 that it has agreed to buy the San Miguel Group’s 27.1% stake in Meralco for approximately
Ps72 billion ($1.6 billion). This is the Gokongwei family’s first move into the power sector and, while the deal has yet to be completed, it seems
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to have received the thumbs up from investors.
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Confirmation of the acquisition helped to propel JG Summit’s share price from a low of Ps35 in mid-September to the November 12 close at
Ps49 – a gain of 40%.
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Aside from getting a sizeable stake in a high dividend-paying company that supplies electricity to a quarter of the Philippine population, the
acquisition will give JG Summit a foothold in the country’s power industry, which is in the process of ramping up capacity to meet the needs of a
strongly growing economy.
The deal will also cement the company’s relationship with First Pacific. The Hong Kong-listed investment company owns just under 50% of
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Meralco following a battle for control of the Philippine utility with the San Miguel group in 2009. After losing out to JG Summit, the San Miguel
Group has been trying to get out of its holdings in Meralco and after the sale of this 27% stake, the group will own no more shares in the
company.
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When announcing the deal, JG Summit said that it intends to fund the acquisition through a combination of debt and equity, and president
Lance Gokongwei later told reporters in Manila that about two-thirds of the financing will come from debt.
The company has already sold $280 million worth of shares in Universal Robina in early October and, together with the $200 million raised from
this latest placement, it now has enough fresh cash to cover the equity portion.
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Aside from food and beverage, JG Summit is also involved in hotel and property development, airlines, telecommunications, banking and
petrochemicals. In the first nine months this year, the company posted a 9.4% increase in revenues to Ps110.9 billion and a 17.4% improvement
in Ebitda to Ps25.9 billion.
According to local media reports, JG Summit and First Pacific’s Philippine infrastructure unit (Metro Pacific) plan to team up to bid for a $400
million airport project in Cebu province.
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The placement was arranged by CLSA and UBS.
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Business Finance 90MINS
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5
Content Standards /Review
The learners demonstrate an understanding of the sources and uses of short-
term and long-term funds, and the requirements, procedures, obligation to Motivation A. Connect the lesson to real life situations. 15
creditor, and reportorial necessities. B. Share the importance of the banking
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industry.
Performance Standards Instruction/ Discussion proper 30
Delivery
The learners shall be able to identify the bank and non-bank institutions in the
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vicinity that are possible sources of funds. Enrichment Discussion of the research homework. 30
• Projector, if available
• Board and writing materials will suffice
Resources
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• List down obligations of entrepreneurs to creditors (ABM_BF12-IIIe-f-16) (1) Brealey, R. Myers, S., & Marcus, A. (2004). Fundamentals of corporate
finance. Boston, Mass.: McGraw-Hill Irwin.
At the end of this lesson, the learners will be able to: (3) Gitman, L. (2009) Principles of managerial finance. Boston: Pearson
Prentice Hall.
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• Know the basic requirements in loan application of different types of (4) Roque, R. (1990). Management Advisory Services. Malabon: Roque
borrowers; and Press, Inc.
• Define the 5C’s of credit and their applicability in loan approval.
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INTRODUCTION (5 MINS)
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1. Option A: Remind the learners of an example discussed previously regarding the restaurant
expansion worth PHP8 million.
• Financing a long-term investment through a short-term loan. Let us say you are a restaurant owner
and you are planning to open another branch which will cost you PHP8 million. The returns on this
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investment will be realised over a number of years. Therefore, financing it through a short-term
loan, say one year, will give you too much pressure to pay the loan because the new branch may
not have generated enough cash flow within the year to cover the PHP8 million.
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• Pose this question to the learners: How do you plan to finance the PHP 8 million?
• Answer Key: Since this is a long-term investment where the expected benefits are going to be
realized over a couple of years, this investment should be financed by long-term sources. Assuming
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that both long-term debt and equities are accessible, part of the requirements must be financed by
long-term debt. The question is how do you obtain long-term debt.
2. Discuss the importance of Know-Your-Customer (KYC) initiatives. Banks are required to verify the
identity of their customers to ensure that the funds will not be used for illegal activities such as, but
not limited to, money laundering and terrorist financing.
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3. Explain the 5C’s of Credit - the institution’s primary consideration in approving loan applications.
• Character –the willingness of the borrower to repay the loan
• Capacity – a customer’s ability to generate cash flows
Collateral – security pledged for payment of the loan
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•
• Capital – a customer’s financial resources
• Condition – current economic or business conditions
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4. Discuss the following example/case:
Mr. Joe Salazar applied for a PHP1.5 million loan in behalf of his business, “Joe’s Restaurant”, for Teacher Tip:
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additional capital in 2015. He is the Chairman of the Board of Joe’s Restaurant. In their meeting, the
Board decided to open an additional branch for the restaurant. Joe’s Restaurant currently has 3
branches in Metro Manila and would like to open up a small branch in Quezon City. Joe’s Restaurant
has been in the business for 12 fruitful years and has been a previous borrower of the bank. The
Ask the students to read the case out loud.
Involve them in the analysis of the 5C’s of
credit. Ask them what other considerations
they could think of in analysing whether to
grant the loan or not. Take note that the
company had previous late payments before but the reasons are usually justifiable, and the balance of feasibility of the new project is yet to be
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established. Otherwise, the loan analysis is
the loan, along with any penalties, if any, is paid. The three branches earn a net income of PHP900,000/
incomplete. Collateral in itself is not enough
year. The lot where the main restaurant is located is pledged as collateral to the bank. This property is to ensure repayment. The loan should be
valued at PHP2 million. Shown below is an excerpt from Joe’s Restaurant’s 2014 consolidated audited long-term to accommodate the project as
financial statements. well as the company’s cash flow and profit.
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As of 31 December 2014 As of 31 December 2013
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Equity 2,800,000 1,140,000
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Table 1: Sample Consolidated Audited Financial Statements
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Ask the students to identify the information to be used in analysing the 5C’s of Credit. (AVERAGE TO DIFFICULT)
• Character: Check Joe’s Restaurant’s payment history and experience in the business. The fruitfulness of the business proves Mr. Salazar and
the BOD’s ability to manage the business well.
• Capacity: The positive income from the business and positive cash flows from operations proves the borrower’s capacity. Current assets also
borrower. ED
show that the borrower has funds easily available for repayment if necessary. The term of the loan, should be adjusted to the cash flow of the
• Collateral: The property pledged serves as collateral. Its value is usually greater than the loan to provide the bank security for sudden
changes in value of the collateral, as well as to compensate the bank for the collateral’s illiquid nature.
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• Capital: The audit financial statements give a preview of the borrower’s resources.
• Condition: The income statement shows that the business is earning and is even growing. The business has already grown to 3 branches.
This shows a preview of the growth in the food industry. Learners may also research on other business growth trends to know about
macroeconomic conditions.
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• Provide the collaterals as agreed upon in the loan negotiation with proper documentation, if necessary and if applicable (e.g. annotation of
the TCT or CCT). Ensure that these collaterals are in the physical condition perceived by the creditors in determining the loanable value of the
loans.
• Comply with the provisions of loan covenant such as maintaining certain liquidity and leverage ratios. These conditions are supposed to
benefit the borrower so that his company will not be over-exposed to borrowing or he will monitor the liquidity position on a more regular
basis.
• Notify the creditor if the company is acquiring another company or the company is now the subject of acquisition. The interest of creditors
may be jeopardized if new owners take over the company or if the company is going to acquire another company.
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• Do not default on the loans as much as possible. Aside from the creditors, there may be other parties such as the guarantors of the loan who
will be put at a disadvantage if the borrower defaults.
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MOTIVATION (10 MINUTES)
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• Provision of Credit and Liquidity – Banks provide credit facilities to borrowers which allow them to address their liquidity concerns.
}
• Risk Management Services – Banks provideBanksadvisory service
provide on asset-liability
a mechanism management
for people and can
to save which in also provide recommendations regarding
the appropriate financing schemes for a company’s funding
turn is used requirement.and corporations. This
by entrepreneurs
• Money Remittance – Banks can act as conduits
• Economic Development
• Channel for Saving and Investment
• Promotion of Entrepreneurship
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or intermediaries
function for money
of the bank enhances remittances.
economic activity.
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A. Ask the students to visit a bank before the class. Have them inquire on the different loan requirements and steps in loan application, and
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compare the different rates for the different loan products. Give them ample time to prepare for a report on what they have researched.
Divide the class into groups and assign each a topic to report on.
• Different Loan requirements for small business loan, loans to corporation, personal consumption loans, and other desired loan products.
• Steps in Loan Application for secured and unsecured loans.
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Teacher Tip
Evaluate the reports based on content,
especially on the interview part. Have the
B. Assign two groups to report on the requirements of the following institutions: other non-reporting groups turn-in a written
report.
• Pawnshop
• Lending company
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C. Ask the learners to discuss the general steps on Loan Application. Make them prepare a flowchart.
(AVERAGE TO DIFFICULT)
Sample responses of the learners research on the general steps are as follows:
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• Loan applicant inquires with the loan officer to apply for a loan.
• The loan officer provides the loan applicant a loan application form and interviews the client.
• The loan officer then decides what type of loan product the borrower qualifies in, and then provides
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them a list of requirements.
• The applicant then submits the requirements along with the loan application form.
• If collateral is required, the corresponding mortgage documents are made ready.
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• The loan officer then forwards the documents to the credit evaluation department.
• The credit evaluation department checks whether the applicant provided the complete documents.
• Credit investigation is done, and the credit worthiness of the loan applicant is evaluated.
• The credit analyst prepares a recommendation and will present the recommendation before a loan
Teacher Tip
References to this material are actual
committee who approves the loan application. The loan committee is generally composed of top requirements from different institutions
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executives from the bank.
• If the loan is approved, then the post-approval requirements will be sent to the loan applicant for
compliance.
D. Let the learners enumerate the different requirements for a sole proprietorship, consumption loans,
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and loans to corporations, as well as the requirements for non-bank financial institutions. (AVERAGE
TO DIFFICULT)
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Teacher Tip
List of Bank Requirements for Loan Application for a Corporation
This may be given as recitation and
(Arthur S. Cayanan) questions may be asked per group or
individually.
Pre-approval Requirements:
• Duly accomplished application form
• Securities and Exchange Commission (SEC) registration
• Articles of incorporation and by-laws
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• List of elected officers
• Board resolution or corporate secretary’s certificate regarding loan application
• Company profile or business background
• List of major suppliers and customers with contact information
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• Audited financial statements (2 to 5 years depending on the bank)
• Bank statements (most banks require bank statements for the past 6 months)
• Collateral documents such as the following:
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• Copy of transfer certificate of title (TCT) or condominium certificate of title (CCT)
• Copy of tax declaration
• Appraisal Fee with official receipt
• For construction loan
• Building plan or floor plan
• Bill of materials and labor cost
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• Building specifications certified by architect/civil engineer
• Development permit
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• Copy of lease contracts (if applicable)
Post-approval Requirements:
• Original owner’s duplicate copy of TCT/CCT
• Original certified true copy of latest tax declaration on land and improvement
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‘Character and Capacity are the most important factors a bank considers in approving a loan. They go
hand-in-hand because without willingness to repay, the available funds to pay the loan will not in itself
guarantee payment.’
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3. Why is it important for banks to collect all the loan requirements? Which requirements are meant to
be used to evaluate each of the 5C’s of credit? (AVERAGE TO DIFFICULT)
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Sample Responses:
• Documents are required to provide support on the analysis of the borrower’s existence and
creditworthiness.
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• Character – Interview, Fully filled out loan application form, NBI clearance, Police Clearance, etc.
• Capacity – Income documents (Certificate of employment, Audited financial statements, Income tax
return, etc.)
• Collateral – Copy of TCT, Tax declaration, Building plan, etc.
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• Capital – Statement of Assets and Liabilities, Audited financial statements, etc.
• Condition – Latest news articles relating to the company (if listed), Trends in the financial statements,
Business Background/Company Profile, etc.
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Business'Finance 180 MINS
PY
5
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importance of interest and compounding
• Solve exercises and problems in computing for the time value of money with c. Present a scenario showing the use of
the aid of present and future value tables. future value and present value
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Instruction/ Discussion Proper 95
Delivery
Learning Competencies
The learners will be able to: Practice Exercises regarding solving for the present 25
• Define the concepts regarding the time value of money. Materials • Projector, if available. Board and writing
• Compute the present value and future values with the aid of formulas and materials will suffice.
tables. • Scientific calculator
• PV and FV tables
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INTRODUCTION (5 MINS)
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MOTIVATION (15 MINS)
1. Ask the learners one or two of their experiences in investing their money. Let them share their Teacher Tips
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experiences. If the learners are passive, be able to share
personal experiences in investing money.
2. Have the learners read the story below: (Appendix A) Time deposits and bank savings can also be
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a type of investment although it only has a
small yield. The objective is to show the
One day, the Master was going on a trip and decided to entrust his wealth to three of his most concept of interest in real-life scenarios
trusted servants. The wealth shall be given to each servant based on the Master’s assessment of
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their talents. To his first servant, he entrusted PHP500,000. To his second servant, believing that
he can make wise choices as well, he also gave an amount of PHP500,000. Finally, he called on
his third servant and gave him PHP500,000. The Master then went on his journey and told the
servants he will not be back for a long time. Since the first servant was a very smart person, he
decided to invest the PHP500,000 given to him. He was very pleased that he was quoted a
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long-term investment for 5 years at 8% per annum compounded annually, and decided to invest
the money in that institution. The second servant saw what the first servant did and also decided
to invest the money. However, when given the choice by the investment firm, he did not Teacher Tips
understand simple and compound interest. In the end, he accepted the quote at 8% per annum This story is based on the Parable of talents
simple interest. The third servant saw them and thought that they were being too much of a
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Total Returned 734,664.04 700,000.00 500,000.00
3. Ask the learners ‘Which servant will make the Master most pleased?’
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INSTRUCTION (35 MINS)
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1. Differentiate simple and compounded interest. Teacher Tips
Learners have the option to use calculators
• Simple Interest – the charging interest rate r based on a principal P over T number of years.
or the present value and future value tables
Principal = PHP500,000
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Rate = 8%
Time = 5 years
Thus,
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Teacher Tips
• Compound Interest - the interest in the first compounding period is added on the principal, which
Usual compounding will make use of annual
will then be the basis for the interest to be computed for the next period. So in our earlier example, compounding. This simplifies the formula
the interest to be earned on the first year is equal to 500,000 x .08 = 40,000. The 40,000 interest to:
will be added to the 500,000 principal which will then be the basis for interest computation for the Interest = P x (1+r)T – P
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second year; 540,000 x .08 = 43,200, and so on. The formula below shows the summary of the
effects of adding on the interest, where m is the compounding frequency.
r
Interest = ( P x (1 + ) (T x m) ) - P
m
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Rate = 8%
Time = 5 years
Compounding frequency = annually
Thus,
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Interest = 500,000 x (1 + (0.08/1))(5x1) – 500,000 = PHP234,664.04
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2. Discuss the use of compounding frequency and provide illustrations.
• Compounding Frequency - the number of times interest is computed on a certain principal in one Teacher Tips
year. Interest rates when quoted without any
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• If the investment pays annually, the interest is the same as computed above since m=1.
• If the investment pays semi-annually, the total interest will be equal to:
qualification is assumed to be an annual
rate.
• Monthly: PHP244,922.85
• Semi-monthly: PHP245,416.34
• Daily (365 days): PHP245,879.66
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4. Introduce the Effective Annual Rate (EAR).
So far, we have discussed about interest earned on investments. It is also important to look at interest
rates from the point of view of borrowers. Both businesses and investors need to make an objective
comparison of loan costs or investment returns over different compounding periods. The effective
annual rate allows this comparison because it is the actual interest actually paid or earned. It should be
distinguished from the nominal rate, or the stated contractual rate which is the interest charged by a
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lender or promised by a borrower. It does not reflect the effect of compounding frequency.
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EAR = ( 1 + ) m) - 1
m
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This is very similar to the formula for computing for interest earned using compounded interest. The
only difference is that EAR only takes into consideration the actual interest for one year.
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Mr. Lopez wishes to find the effective annual rate for his loan in BOD bank with a 5% nominal annual
rate when interest is compounded (1) annually, (2) semi-annually, and (3) quarterly.
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• For annual compounding: 5%
• For semiannual compounding: 5.06%
• For quarterly compounding: 5.09% Teacher Tips
Walkthrough the process of getting each
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The effective annual rate increases with increasing compounding frequency, up to a limit that occurs
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with continuous compounding, which is almost equivalent to daily compounding.
The Truth-in-Lending act for Banks and other financial institutions requires that they disclose the
effective interest rates for loan products to borrowers. The effective rates should reflect the service
charges and other deductions from the loan proceeds.
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MOTIVATION (20 MINS)
1. Ask the learners which is more valuable to them, to receive PHP1,000 today or receive PHP1,000
five months from now.
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• Sample Response: PHP1,000 today, because there is uncertainty with regard to the receipt of the
PHP1000 five months from now. The student can be indifferent if he will be compensated by
receiving more 5 months from now, which is in the form of interest income.
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• Recall the following saying: ‘A bird in the hand is worth two in the bush’ – Miguel de Cervantes
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Consider the case of Lola Clara. When she was 24 years old, her Papa gave her PHP50,000. She was
very happy and was immediately planning on spending the money. However, before she could spend
the money, her Mama taught her the importance of saving. Not wanting to disappoint her Mama, she
invested her money in a bank time deposit with an interest rate of 5% at that time.
Teacher Tips
This story shows how money grows over
time. Its worth in the future is dependent on
the amount invested today, which would be
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a prelude to our discussion in future and
present value.
Lola Clara became a very successful career woman but she somehow forgot that she placed PHP50,000
in the bank. She suddenly remembered and was shocked at what had happened to her money after 50
years.
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INSTRUCTION (60 MINS)
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• Present Value - the amount you have to invest today if you want to have a certain amount of cash
flow in the future.
• These definitions can better be illustrated in a timeline. Teacher Tips
Show the timeline to better explain the
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0 1 2 3 4 5 concept.
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Initial Investment T-0 Value of investment at T-5 the problems.
(PV): Php 500,000 (FV): Php 734,664.04
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• The time value of money analysis helps managers and investors compare cash flows today versus
cash flow in the future. It answers questions such as what amount in the future is equal to
PHP500,000.00 today or what amount today is equivalent to PHP734,664.04 in the future. The
future value is computed using compounding while the present value is computed using
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discounting. In practice, when making investment decisions, investors usually adopt the present
value approach.
• Single Amount (Lump Sum) - a single cash outflow is made and the total receipts will be at a single
future date.
• Annuity - periodic stream of equal cash flow at equal time intervals (annually, monthly, etc.). For
example, payment for a certain item shall be for 12 equal monthly instalments of PHP1,000.
• Mixed Stream - unequal periodic cash flows that reflect no particular pattern. For example,
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payments made by a customer are in 3 unequal instalments.
TIME AMOUNT
Year 1 1,500
Year 2 3,000
Year 3 2,500
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Table 1: Sample of Mixed Stream
C. Ask the learners to compute for what amount they will receive (what is the future value) if PHP150,000 is invested at 6% per annum
compounded semi-annually for 3 years.
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0.06 (3x2)
Answer: 150,000 x (1+ ) = PHP179,107.8
2
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Reminder: Future value is simply the principal multiplied by the FV factor.
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• Present Value - answers the question: How much must be invested today to produce a certain amount in the future. Since future value is
calculated by multiplying the present investment by 1 + interest rate compounded by the number of periods, we shall just reverse the
process. This method is called discounting
FV = PV x (1 + r)T
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FV
PV =
(1 + r)T
• Illustration: You need P25,000.00 to buy a laptop when you enter into college 2 years from now. How much must you invest now if the
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E. Illustrate how to calculate future value and present value of mixed streams of cash flows.
• Future Value: Suppose that you choose to put your savings annually in MRI bank at 8% per annum. Teacher Tips
For today, you put PHP1,200, on the second year PHP1,400, and PHP1,000 for the third year. How Distinguish when the amounts are paid. If
much will you have available at the end of three years? payments are made on the last day or
maturity date, the amount is already the
future value.
Factor multiplied by the Amount Deposited Future Value
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(1.08)3 = 1.2597 PHP1,200 1,511.65
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Total FV P4,224.61
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• The FV factor can either be computed or looked up in the FV table.
1
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• This timeline illustrates the timing of cash flows:
0 2 3
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-1,200 -1,400 -1,100 4,224.61
• (Present Value) Suppose that you can buy a phone for PHP8,000 down payment with 4,000 for
each of the next two years or pay PHP15,500 cash today. Given an interest rate of 8%, which is a
cheaper alternative?
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Present Value Teacher Tips
Distinguish when the amounts are paid. If
PHP8,000 8,000.00 payments are made on day 1, the amount
no longer needs to be discounted, and is
PHP4,000/(1.081) 3,703.70 already the present value.
PHP4,000/(1.082) 3,429.36
Total PV PHP15,133.06
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Table 3: Sample Computation for Present Value
0 1 2
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-8,000 -4,000 -4,000
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PV = 15,133.06
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Figure 3: Sample Timeline for Computation of Present Value
It shows that the installment plan is cheaper. The present value of a stream of future cash flows is
the amount you have to invest today to generate the stream.
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F. Discuss how to compute for present value and future value of annuity payments. Illustrate how the
present and future values are used.
• An annuity is a stream of equal periodic cash flows over a specified period. First, you have to
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distinguish between ordinary annuity and annuity due. Ordinary annuity payments are made at the
end of each period (usually annually), while for annuity due, the cash flow occurs at the beginning of
each period. We shall first illustrate ordinary annuities.
• (Future Value of an Ordinary Annuity) The formula for computing the future value of an ordinary
annuity is as follows:
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[(1+r)t - 1]
Cash flow x {[(1+r)t - 1)]/r} Cash flow x
r
or
Cash flow multiplied by the FV factor seen on the table.
To use the table provided, look for the rate of interest at the uppermost row and the number of periods on the left most column. The
intersection will be the factor to be multiplied to the cash flow.
PY
Illustration: Mr. Mendoza wishes to determine how much the value of his savings in 5 years will be if he will put PHP1,000 per year in a bank
which provides 7% interest per annum.
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• (Present of an Ordinary Annuity) The formula for computing the present value of an ordinary annuity is as follows:
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1
1- (1+r)t
Cash flow x
r
or
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Cash flow multiplied by the PV factor seen on the table
Illustration: Mr. Yusoph wants to buy a pair of shoes worth PHP10,500. He has the option of paying it today for PHP10,500 or buying them in
instalment where he has to pay a down payment of PHP4,000 today, and the balance will be paid in two equal payments of PHP4,000 each
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for the next two years. Given an interest rate of 10%, which is the better option?
PV = 4,000 + 4000 x (PVA factor: 1.7355 period=2, rate=10%) = PHP10,932.00 for buying on instalment vs. PV PHP10,500 for buying today.
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The 4,000 down payment is not multiplied by the annuity factor because it is paid today.
Since buying on instalment would be more expensive, Mr. Yusoph should buy the pair of shoes today.
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PRACTICE (25 MINS)
(EASY)
1. You deposited PHP1,500 in a bank with an interest rate of 5% for 1 year. What is the future value of your deposit?
PY
Answer Key
FV = 1,500 x (1+0.05) = 1,575
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2. You need to save up for P1,500 in 1 year. How much should you save now if the bank offers a rate of 5%? (Find the present value)
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Answer Key
PV = 1,500/(1+0.05) = 1,428.57
(AVERAGE TO DIFFICULT)
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1. FNB pays 6% interest compounded semi-annually. SNB pays 6% compounded monthly. Which bank offers the higher effective annual rate?
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Answer Key
FNB = (1+(0.06/2))2 - 1 = 6.090%
SNB = (1+(0.06/12))12 = 6.168%
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Therefore, SNB offers the higher effective annual rate. For equal rates, the more compounding the better.
2. Compute the present value and future value of PHP100 cash flow for the following combination of discount rates and times:
a. r = 8%, t = 5 years
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b. r = 8%, t = 10years
c. r = 5%, t = 5years
d. r = 5%, t = 10 years
Answer Key
r t PV FV
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0.08 5 68.05832 146.9328
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0.05 10 61.39133 162.8895
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3. You deposit PHP1,000 in your bank account. If the bank pays 4% simple interest, how much interest will you accumulate in your account
after 10 years? What if the bank pays compound interest?
Answer Key
Simple Interest = 1000 x .04 x 10 = 400 ED
Compound Interest = 1000 x (1.0410) – 1000 = 480.24
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4. Mario will be making a lump sum payment of PHP1.6 million on the condominium he is buying two years from now. If he wants to set aside
funds from now and invest it that will earn interest of 3%, net of taxes every year and this amount is compounded annually, how much does
he need to invest today? What if the interest is compounded semi-annually, how much does he need to invest today?
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Answer Key
• PHP1,600,000/(1.03)2 = 1,508,153.45
• PHP1,600,000/(1.015)4 = 1,507,494.77
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5. What is the present value of the following cash flow stream if the interest is 6%?
1 300
2 400
3 500
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Answer Key
PV = 300/1.06 + 400/(1.062) + 500/(1.063) = 1,059.827
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6. What is the present value of a 3-year annuity of PHP100 if the discount rate is 6%?
Answer Key
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PVA = 100 x PVA factor(2.673) = 267.3
Answer Key
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7. What is the present value of a 5-year annuity payment of PHP1,000 with a discount rate of 5% if the
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He, however, has the following options:
• Get 8.1 million upfront
• Receive 1 million every year for 10 years
• Receive 1.8 million every year for 5 years
The current government bonds have a yield of 5% per annum. Which is the best option?
PY
Answer Key
Option 1 = PV is 8.1 million
Option 2 = PV = 1 million x PV factor (7.721) = 7.721 million
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Option 3 = PV = 1.8 million x PV factor (4.329) = 7.792 million
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ED
EP
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Appendix
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C
ED
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Appendix A
One day, the Master was going on a trip and decided to entrust his wealth to three of his most trusted servants. The wealth shall be given to
each servant based on the Master’s assessment of their talents. To his first servant, he entrusted PHP500,000. To his second servant, believing
that he can make wise choices as well, he also gave an amount of PHP500,000. Finally, he called on his third servant and gave him PHP500,000.
The Master then went on his journey and told the servants he will not be back for a long time. Since the first servant was a very smart person, he
decided to invest the PHP500,000 given to him. He was very pleased that he was quoted a long-term investment for 5 years at 8% per annum
PY
compounded annually, and decided to invest the money in that institution. The second servant saw what the first servant did and also decided
to invest the money. However, when given the choice by the investment firm, he did not understand simple and compound interest. In the end,
he accepted the quote at 8% per annum simple interest. The third servant saw them and thought that they were being too much of a risk-taker
and decided just to keep the money locked in a vault in his home.
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The Master returned after 5 years. He then called on the servants and asked them what has become of the wealth he had entrusted them. The
first servant presented his PHP500,000 plus the interest he earned worth PHP500,000 x (1.08)5 – 500,000 = 234,664.04 . The second servant
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presented his PHP500,000 along with the interest earned at 500,000 x .08 x 5 = 200,000 Lastly the third servant returned his PHP500,000.
ED
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Business Finance 70 MINS
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Connect to real-life situations; short scenario 20
Basic concepts of risk and return, and the time value of money.
relating the importance of interest and
compounding; scenario showing the use of
Performance Standards future value and present value
The learners shall be able: Instruction/ Discussion proper 50
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Delivery
• Distinguish simple and compound interest
• Solve exercises and problems in computing for time value of money with Materials projector, of available; if projector not
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the aid of present and future value tables available, board and markers will suffice;
scientific calculators; PV Tables
Learning Competencies Resources
The learners:
•
•
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Calculate future value and present value of money (ABM_BF12-IIIg-h-18)
Compute for the effective annual rate (ABM_BF12-IIIg-h-19)
(1) Fundamentals of Corporate Finance by Brealey, Marcus and Myers,
Management Advisory Services by Rodelio S. Roque, Principles of
Managerial Finance by Lawrence J. Gitman
(2) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City.
Rex Bookstore.
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Specific Learning Outcomes
At the end of the unit lesson, the learners shall be able to:
• Define the concepts regarding the time value of money;
• Compute the present value and future values with the aid of formulas and tables; and
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MOTIVATION (20 MINS)
Ask the learners which is more valuable to them, to receive P1,000 today, or receive P1,000 five months
from now.
• Possible answer: P1,000 today, because there is uncertainty with regard to the receipt of the P1000
five months from now. The student can be indifferent if he will be compensated by receiving more 5
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months from now, which is in the form of interest income.
• Recall the following saying:
Teacher Tip
If the learners are passive, be able to share
A bird in the hand is worth two in the bush–Miguel de Cervantes personal experiences in investing money.
Time deposits and bank savings can also be
O
Read the following story in class. a type of investment although it only has a
small yield. The objective is to show the
concept of interest in real-life scenarios
Consider the case of Lola Clara. When she was 24 years old, her Papa gave her PHP50,000. She was
C
very happy and was immediately planning on spending the money. However, before she could spend
the money, her Mama taught her the importance of saving. Not wanting to disappoint her Mama, she
invested her money in a bank time deposit with an interest rate of 5% at that time.
ED
Lola Clara became very successful career woman but she somehow forgot that she placed PHP50,000
in the bank. She suddenly remembered and was shocked at what had happened to her money after 50
years.
Teacher Tip
EP
It is now valued at 50,000 x (1.05)50 = 573,369.99. This story is based on the Parable of talents
from the Bible. It has been modified for the
purpose of discussion. In this story, the risk
This example is something of an exaggeration, of course. Nevertheless, it is important to note that of losing money due to the failure of a
money grows through time. financial institution is not taken into
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INSTRUCTION (50 MINS)
• Future value is the amount to which an investment will grow after earning interest. In our
previous examples, it is the principal plus total interest earned over a stated period. So the
future value of an investment of PHP500,000 yielding an interest of 8% for a 5-year period
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compounded annually is PHP734,664.04.
• In contrast, the present value is the amount you have to invest today if you want to have a
certain amount of cash flow in the future. Teacher tip:
Learners have the option to use calculators
• These definitions can better be illustrated in a timeline. or the present value and future value tables
O
provided at the end of this module
C
0 1 2 3 4 5
Ini$al'Investment'T=0'
(PV):'PHP500,000'
ED Value of investment at
T=5 (FV): PHP734,664.04
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Teacher tip:
• The time value of money analysis helps managers and investors compare cash flows today
¬ Usual compounding will make use
versus cash flow in the future. It answers questions such as what amount in the future is equal of annual compounding. This simplifies the
to PHP500,000 today or what amount today is equivalent to PHP734,664.04 in the future.
formula to:
The future value is computed using compounding while the present value is computed using
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discounting. In practice, when making investment decisions, investors usually adopt the Interest = P x (1+r) T – P
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• Single amount (Lump sum): a single cash outflow is made and the total receipts will be at a
single future date.
• Annuity: periodic stream of equal cash flow at equal time intervals (annually, monthly, etc.). For
example, payment for a certain item shall be for 12 equal monthly instalments of PHP1,000.
• Mixed stream: Unequal periodic cash flows that reflect no particular pattern. For example,
payments made by a customer are in 3 unequal instalments.
PY
Time Amount
Year 1 1,500
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Year 2 3,000
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Year 3 2,500
Ask the learners to compute for the amount they will receive (what is the future value?) if PHP150,000 is
Answer:
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invested at 6% per annum compounded semi-annually for 3 years.
Teacher tip:
Interest rates when quoted without any
qualification is assumed to be an annual
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Reminder: Future value is simply the principal multiplied by the FV factor. rate.
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• Illustration: You need PHP25,000 to buy a laptop when you enter college 2 years from now.
PY
How much must you invest now if the interest rate is at 6% per annum
PV = 25,000/(1.062) = PHP22,249.91
You need to invest PHP22,249.91 to have PHP25,000 by the end of 2 years.
O
• Illustrate how to calculate future value and present value of mixed streams of cash flows.
C
(Future Value) Suppose that you choose to put your savings annually in MRI bank at 8% per annum. For
the today, you put PHP1,200; second year PHP1,400, and PHP1,000 for the third year. How much will you
have available at the end of three years?
(1.08)3 = 1.2597
(1.08)2 = 1.1664
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Factor multiplied by the Amount Deposited
PHP1,200
PHP1,400
Future Value
1,511.65
1,632.96
Teacher tip:
Interest rates when quoted without any
qualification is assumed to be an annual
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rate.
(1.08)1 = 1.08 PHP1,000 1,080.00
Note that with more compounding, interest
Total FV P4,224.61
income can be higher as shown in the
illustrative example. Banks offer time
deposit products with different types of
D
• The FV factor can either be computed or looked up in the FV table. compounding, thus affecting the interest to
• This timeline illustrates the timing of cash flows: be earned.
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0 1 2 3
PY
• (Present Value) Suppose that you can buy a phone for PHP8,000 down payment with 4,000 for
each of the next two years or pay PHP15,500 cash today. Given an interest rate of 8%, which is a
cheaper alternative?
Present Value
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PHP8,000 8,000.00
C
PHP4,000/(1.081) 3,703.70
PHP4,000/(1.082) 3,429.36
Total PV PHP15,133.06
ED
EP
-8,000 -4,000 -4000
Teacher Tip
Walkthrough the process of getting each
EAR using the formula provided.
PV = 15, 133.06
D
It shows that the installment plan is cheaper. The present value of a stream of future cash flows is the
amount you have to invest today to generate the stream.
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Discuss how to compute for present value and future value of annuity payments. Illustrate how the
present and future values are used.
An annuity is a stream of equal periodic cash flows over a specified period. First, you have to
distinguish between ordinary annuity and annuity due. Ordinary annuity payments are made at the end
of each period (usually annually), while for annuity due, the cash flow occurs at the beginning of each
period. We shall first illustrate ordinary annuities.
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(Future Value of an Ordinary Annuity) The formula for computing the future value of an ordinary
annuity is as follows:
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Cash flow x {[(1+r)t - 1)]/r}
or
C
Cash flow multiplied by the FV factor seen on the table
To use the table provided, look for the rate of interest at the uppermost row and the number of periods
flow.
Illustration:
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on the on the first column (leftmost). The intersection will be the factor to be multiplied to the cash
EP
Mr. Mendoza wishes to determine how much will be the value of his savings in 5 years if he will put
PHP1,000 per year in a bank which provides 7% interest per annum.
Teacher Tip
FV = 1,000 x (FVA factor: 5.7507 period=5, rate=7%) = PHP5,750.70 Walkthrough the process of getting each
EAR using the formula provided.
D
(Present Value of an Ordinary Annuity). The formula for computing the present value of an ordinary
annuity is as follows:
'''''''''''''''''''''''''''''''''''Cash'flow'mul$plied'by'the'PV'factor'seen'on'the'table'
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Illustration:
Mr. Yusoph wants to buy a pair of shoes worth P10,500. He has the option of paying it today for
PHP10,500 or buying in instalment where he has to pay a down payment of PHP4,000 today, and the
balance will be paid in two equal payments of PHP4,000 each for the next two years. Given an interest
rate of 10%, which is the better option?
PY
PV = 4,000 + 4000 x (PVA factor: 1.7355 period=2, rate=10%) = PHP10,932.00 for buying on
installment vs. PV PHP10,500 for buying today.
The 4,000 down payment is not multiplied by the annuity factor because it is paid today.
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Since buying on instalment would be more expensive, Mr. Yusoph should buy the pair of shoes today.
C
ED
EP
Teacher Tip
Walkthrough the process of getting each
EAR using the formula provided.
D
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Business Finance 50 MINS
PY
Exercises regarding solving for the 25
Basic concepts of risk and return, and the time value of money.
present value.
Enrichment Short case regarding which payment 25
Performance Standards
methods to choose in optimizing
The learners shall be able:
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receipts using concepts learned in
• Distinguish simple and compound interest present value and future value
• Solve exercises and problems in computing for time value of money with
Materials
C
the aid of present and future value tables projector, of available; if projector not
available, board and markers will suffice;
scientific calculators; PV Tables
Learning Competencies
Resources
The learners:
•
•
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Calculate future value and present value of money (ABM_BF12-IIIg-h-18)
Compute for the effective annual rate (ABM_BF12-IIIg-h-19)
(1) Fundamentals of Corporate Finance by Brealey, Marcus and Myers,
Management Advisory Services by Rodelio S. Roque, Principles of
Managerial Finance by Lawrence J. Gitman
(2) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City.
Rex Bookstore.
Specific Learning Outcomes
EP
At the end of the unit lesson, the learners shall be able to:
• Define the concepts regarding the time value of money;
• Compute the present value and future values with the aid of formulas and tables; and
• Apply the concepts in real life scenarios.
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PRACTICE (25 MINS)
(EASY)
• You deposited PHP1,500 in a bank with an interest rate of 5% for 1 year. What is the future value
PY
of your deposit?
Answer:
FV = 1,500 x (1+0.05) = 1,575
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• You need to save up for P1,500 in 1 year. How much should you save now if the bank offers a
rate of 5%? (Find the present value)
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Answer:
PV = 1,500/(1+0.05) = 1,428.57
(AVERAGE TO DIFFICULT)
•
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FNB pays 6% interest compounded semi-annually. SNB pays 6% compounded monthly. Which bank
offers the higher effective annual rate?
EP
Answer:
FNB = (1+(0.06/2))2 - 1 = 6.090%
SNB = (1+(0.06/12))12 = 6.168% (Therefore, SNB offers the higher effective annual rate. For equal rates,
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• Compute the present value and future value of P100 cash flow for the following combination of
discount rates and times:
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A. r = 8%, t = 5 years
B. r = 8%, t = 10years
C. r = 5%, t = 5years
D. r = 5%, t = 10 years
Answer:
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r t PV FV
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0.08 10 46.31935 215.8925
C
0.05 10 61.39133 162.8895
• You deposit PHP1,000 in your bank account. If the bank pays 4% simple interest, how much interest
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will you accumulate in your account after 10 years? What if the bank pays compound interest?
Answer:
• Mario will be making a lump sum payment of PHP1.6 million on the condominium he is buying two
years from now. If he wants to set aside funds from now and invest it that will earn interest of 3%, net
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of taxes every year and this amount is compounded annually, how much does he need to invest
today? What if the interest is compounded semi-annually, how much does he need to invest today?
Answer:
i. PHP1,600,000/(1.03)2 = 1,508,153.45
ii. PHP1,600,000/(1.015)4 = 1,507,494.77
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• What is the present value of the following cash flow stream if the interest is 6%?
Time Amount
Year 1 300
Year 2 400
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Year 3 500
Answer:
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PV = 300/1.06 + 400/(1.062) + 500/(1.063) = 1,059.827
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• What is the present value of a 3 year annuity of P100 if the discount rate is 6 percent?
Answer:
Answer:
PVA = (1000 x PVA factor(4.329))/1.05 = 4122.87
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ENRICHMENT (25 MINS) (DIFFICULT) Teacher tip:
Give this exercise if the time permits. This
Discuss the following scenario: medium length problem shows the
importance of compounding and future
value. Have the learners answer in groups
Mr. Sotto won PHP10 million in the lottery. He was very excited to collect his winnings and had several on their best option. This will allow them to
discuss among them and develop their
plans for his PHP10 million. He would buy his dream house, car, and a lot more. However, he was very
understanding on time value.
disappointed when the officers from PCSO said that he will not get his PHP10 million pesos upfront. He,
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however, has the following options:
• Get 8.1 million upfront
• Receive 1 million every year for 10 years
• Receive 1.8 million every year for 5 years
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The current government bonds have a yield of 5% per annum. Which is the best option?
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Answer:
Option 1 = PV is 8.1 million
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Option 2 = PV = 1 million x PV factor (7.721) = 7.721 million
Option 3 = PV = 1.8 million x PV factor (4.329) = 7.792 million
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PY
O
C
ED
EP
D
http://www.accountingexplanation.com/present_value_ordinary_annuity_table.PNG
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PY
O
C
ED
EP
D
http://www.principlesofaccounting.com/ART/fv.pv.tables/futurevalueofordinaryannuity.PNG
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Business Finance 120 MINS
PY
The learners demonstrate an understanding of the basic concepts of risk and Motivation Sharing of an article regarding bond 10
return, and the time value of money. issuance; connecting to real-life situations
Instruction/ Discussion proper 50
Delivery
Performance Standard
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The learners shall be able to prepare loan/bond amortization tables Practice Research/Interview homework 30
Enrichment Quiz on preparation of amortization 20
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Learning Competency schedules
The learners compute loan amortization using mathematical concepts and the Materials projector, if available; if projector not
present value tables (ABM_BF12-IIIg-h-20) available, board and markers will suffice;
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INTRODUCTION (10 MINS) Teacher Tip
These terms will be relevant in loan/bond
pricing so it is best to recall the definitions
Communicate the learning objectives. and formulas of present and future value.
Recall the definition of present value, future value, and the importance of the time value of money from
the previous lesson. Have the learners define the terms mentioned. Give the learners a copy of the article.
PY
MOTIVATION (10 MINS)
Ask the learners read the following article: (APPENDIX A)
http://www.abs-cbnnews.com/business/08/19/15/ictsi-raise-450-m-bonds
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ICTSI to raise $450-M via bonds
Reuters
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Posted at 08/19/2015 10:05 AM
MANILA - Philippines port operator International Container Terminal Services Inc. (ICTSI) said on
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Wednesday it is raising $450 million through a bond issue.
In a disclosure to the local stock exchange, ICTSI said its board of directors approved on Tuesday night
the offering of new senior perpetual capital securities through subsidiary Royal Capital BV.
The corporate bonds would yield 5.5 percent per annum and would be guaranteed by ICTSI.
EP
Citigroup Global Markets Ltd, Credit Suisse Securities (Europe) Ltd and Standard Chartered Bank were
the joint lead managers and bookrunners.
ICTSI, owned by the Philippines' third richest man, Enrique Razon, is into 30 terminal concessions and
port development projects in 20 countries.
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Teacher tip
Ask the learners whether they have experienced applying for loan from a bank, or have witnessed someone Refer back to lessons on loan discussed
from their family apply for one. Inquire whether they have seen an amortization schedule and are familiar under Sources and Uses of Cash
with the features of the loan (interest rates, term of payment, etc.)
PY
Show the class a sample loan amortization (provided at the end of this teaching guide)
• Enumerate the contents of a loan agreement:
• Amount of principal
Teacher tip
• Maturity date and provision for repayment
Grace period is a provision in most loan and
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• Term of the loan (lump sum, monthly, etc.) insurance contracts which allows payment
to be received for a certain period of time
• Grace period, if applicable
after the actual due date. During this period
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• Interest rates no late fees will be charged, and the late
payment will not result in default or
• Loan/bond covenants (i.e. required ratios to be maintained)
cancellation of the loan.
• Penalties for default
•
ED
Collateral documents, if applicable
year 1, what amount should you invest today? If the investment earns 10%, then the
amount to be invested or the present value should be equal to PHP100,000 x (1/(1.101))
= PHP90,909.09
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• If this amount will be received in 2 years, then the present value is equal to P100,000
PY
x (1/(1.10)2) = P82,644.63. We may also use the present value table.
• Present Value of interest payments (annuities)
• In addition to receiving the face value at maturity, the investor/lender also receives
periodic interest payments over the life of the bond. These periodic payments, as
O
mentioned in the previous module, are called annuities. To illustrate, assume that you
will receive P10,000 annually for 3 years and the interest rate is 10%.
C
•
ED
From the table (or by using the formula provided in the earlier module), we get that
the present value of annuity factor for 3 periods using 10% interest is 2.4869.
Teacher tip
Take note of the frequency of
compounding. It matters for both the
interest payments and face value
Multiplying this factor by PHP10,000 provides a present value of interest payments of discounting.
EP
PHP24,868.6.
• Present Value of a bond
• To calculate the present value or the price of a bond, we need to combine both the
present values of the face value and the annuity payments. In our previous example,
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suppose that a bond with face value of PHP100,000 pays interest of 10% annually
and matures in 3 years. What is the price of the bond?
• First, we find the present value of the face value of the bond. That is equal to
PHP100,000 x (1/(1.10)3) = PHP75,131.40.
• Next we compute for the present value of annuity payments of P10,000 annual
interest (100,000 x .1). This was computed earlier in our example, PHP24,868.6.
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• Therefore, the price of the bond is:
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• Take note that interest payments may be made semi-annually, or even monthly. In
this case, we need to adjust the interest rates and time periods accordingly.
O
• Bonds issued at a discount
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• When bonds are issued below the face or par value, they are said to be issued at a
discount. A discount occurs when the required rate of return is greater than the
nominal rate of return. For example, let’s say we have a PHP100,000 bond with a
•
be issued?
ED
stated rate of 10% and effective rate (required rate of return) of 12%, that pays
interest semi-annually and has a maturity of 3 years. At what price should the bond
First, we need to compute for the amount of interest payment per semi-annual
period which is equal to 100,000 x 10% x 6/12 = 5,000. The total period is 6 (3 years
EP
x 2) and the discount rate to be used is 6% (12%/2).
• The price of the bond is as follows:
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• When bonds are issued above par, they are said to be issued at a premium. It occurs
when the required rate (effective rate) is below the stated or nominal rate. Let us
recall our previous example but use 8% effective rate instead of 12%. It will result in
the following bond price:
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Price of the Bond 105,242.13
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•
rate or the stated rate and effective rate or the market rate. When the bond is sold at
a discount, the effective rate is higher than the nominal rate. On the other hand,
C
when the bond is sold at a premium, the effective rate is lower than the nominal rate.
Using this method, the amortization of bond discount or premium results in periodic
interest expense equal to a constant percentage of the carrying amount of the
bonds.
•
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The following steps are required under the effective interest method.
1. Calculate the bond interest expense by multiplying the carrying amount of Teacher Tip:
the bonds at the beginning of the interest period by the effective interest Best to discuss by showing the amortization
EP
table and how it is computed line by line as
rate.
stated in the tip below.
2. Calculate the bond interest paid (or accrued) by multiplying the face value of
the bonds by the contractual interest rate.
3. Calculate the amortization amount by determining the difference of (1) and
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(2).
• Amortization of bonds issued at a discount
• Let us use the previous example of a bond issued at a discount.
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Period: 6 semi-annual periods (3 years)
Effective interest: 12%
Stated rate: 10%
Face Value: 100,000
Issue Price: 95,082.68
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Period Interest to be paid
Interest Expense
Amortization of Carrying Balance
=100,000 x 5% =carrying amount x 6% Discount
Teacher Tip:
=Int exp. - Int paid
Show the preparation of the amortization
95,082.68 schedules step by step, beginning with
taking note of the given data. Ensure that
O
1 5,000.00 5,704.96 704.96 95,787.64 the frequency of compounding is reflected
in both effective and nominal rates.
2 5,000.00 5,747.26 747.26 96,534.90
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3 5,000.00 5,792.09 792.09 97,326.99
6
5,000.00
5,000.00 ED5,890.00
5,943.40
890.00
943.40
99,056.61
100,000.00
Effective interest: 8%
Stated rate: 10%
Face Value: 100,000
Issue Price: 105,242.14
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Period Interest to be paid
Interest Expense
Amortization of Carrying Balance
=100,000 x 5% =carrying amount x 4% Premium
=Int exp. - Int paid
105,242.14
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3 5,000.00 4,145.20 (854.80) 102,775.09
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6 5,000.00 4,038.46 (961.54) 100,000.00
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Teacher Tip:
• Amortization of the discount or premium brings the carrying value/balance to equal the face Emphasize that the amortization of the
value of the bond upon maturity. discount or premium brings the carrying
• Bond issue costs (direct loan expenses) are either added to the carrying value of the bond/ value/balance to equal the face value of the
a discount.
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PRACTICE (30 MINS)
(EASY)
1. Ms. Rodriguez invested in a PHP2,000 bond with a coupon rate and effective rate of 5%. How much
PY
is the issue price?
2. You have a one year PHP1,000 bond with a coupon rate of 5% and was offered at an effective rate
of 6%. How much is the issue price?
3. Mr. Garcia invested in a P1,000 bond for one year with a coupon rate of 7% and was offered at an
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effective rate of 5%. How much should he pay upfront? (Issue price)
(DIFFICULT)
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4. On January 1, 2015, Mac Inc. issued 3,000,000 bonds with a coupon rate of 8% maturing in 4 years.
The interest is paid annually, and the market interest rate at the date of issue was 11%. What is the
issue price of the bond? Prepare the 4 year amortization schedule for the bond.
ED
5. On January 1, 2014, Sonic Co. issued 4,000,000 12% bonds maturing in 5 years. The bonds pay
interest semi-annually. The market rate of interest as of the date of issuance is 10%. What is the
issue price of the bond? Prepare the 5 year amortization schedule for the bond.
Answer Key:
EP
1. Since the coupon and effective rate are the same, the issue price stays at PHP2,000.
2. Issue price = (1,000 + 50 coupon)/1.06 = 990.56
3. Issue price = (1000 + 70 coupon)/1.05 = 1,019.05
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Period Interest to be paid
Interest Expense
Amortization of Discount
Carrying Balance
=3M x 8% =carrying amount x 11% =Int exp. - Int paid
2,720,779.89
PY
4 240,000.00 321,081.08 81,081.08 3,000,000.00
5. Issue price: PHP4,308,869.40
Principal 2,455,653.01
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Interest 1,853,216.39
4,308,869.40
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Period Interest to be paid
Interest Expense
Amortization of Discount
Carrying Balance
=4M x 6% =carrying amount x 5% =Int exp. - Int paid
2
240,000.00
240,000.00
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215,443.47
214,215.64
(24,556.53)
(25,784.36)
4,308,869.40
4,284,312.87
4,258,528.51
those who are in the business of selling apartments/condominiums. Have them discuss the specifics of Give the learners ample time beforehand to
the loan in class, and have them validate the accuracy of the amortization schedules provided to them be able to collect the necessary information.
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by showing their own solutions. The purpose of this activity is to show the
learners of the actual use of amortization
schedules.
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C
ED
EP
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APPENDIX A
MANILA - Philippines port operator International Container Terminal Services Inc. (ICTSI) said on Wednesday it is raising $450 million through a
PY
bond issue.
In a disclosure to the local stock exchange, ICTSI said its board of directors approved on Tuesday night the offering of new senior perpetual
capital securities through subsidiary Royal Capital BV.
The corporate bonds would yield 5.5 percent per annum and would be guaranteed by ICTSI.
O
Citigroup Global Markets Ltd, Credit Suisse Securities (Europe) Ltd and Standard Chartered Bank were the joint lead managers and
bookrunners.
C
ICTSI, owned by the Philippines' third richest man, Enrique Razon, is into 30 terminal concessions and port development projects in 20
countries.
ED
EP
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APPENDIX B
Sample Loan Amortization Schedule
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C
ED
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Business Finance 180 MINS
Basic Long-term
Financial Concepts Introduction
LESSON OUTLINE
Communicate the learning objectives. 15
Pt. 5
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Motivation Share an article related to capital 15
Content Standards expenditure or business expansion; ask the
The learners demonstrate an understanding of the basic concepts of risk and learners of possible means to evaluate the
O
viability of projects.
return, and the time value of money.
Instruction/ Discussion proper 75
Performance Standards Delivery
C
The learners shall be able:
Practice Exercise on investment problems. 30
• Compute for the net present value of a project with a conventional cash-
flow pattern. Enrichment Short case on making investment decisions 45
• Describe the risk-return trade-off.
Learning Competencies
The learners:
•
ED
Apply mathematical concepts and tools in computing for finance and
Materials
Resources
projector, of available; if projector not
available, board and markers will suffice;
calculators; PV Tables
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INTRODUCTION (15 MINS)
• Introduce the concept of risk. Ask the learners to identify the considerations taken and the risks
involved in venturing into a new business (e.g. restaurant business).
PY
Teacher Tip
• What are the considerations in entering a new business? If the product/service is a basic necessity
• Is there a market for the product/services you want to offer? demand will inelastic which means that
whatever the economic conditions will be,
• Are the products/services you plan to offer basic necessities or not? there will be a minimum demand for the
• Can you identify the players in the industry? product/service.
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• What are the salient features/competitive edge of the product/services your plan to offer?
• Do you have the managerial competence and technical expertise to run the business?
C
• Do you have distribution channels by which you can sell you products/services?
• Do you have the financial resources to start and operate the business?
• In entering a business or making expansion decisions, the question that stands to be answered shall
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be, “Will the profits earned from the business for a given amount of time be enough to cover or
even be greater than the amount of capital invested?” The main objective is, of course, to maximize
shareholder’s wealth. This also applies to questions regarding business expansion.
• Ask the learners to read the following scenario to further introduce the topic.
EP
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Eli Lilly and Company Teacher Tip
The main takeaway from this short story is
Riding the Pipeline
payoff. Provide the class a copy of the story.
by Lawrence J. Gitman
Companies spend money on new investments if they believe that those investments will later generate
enough cash flow to justify the up-front cost. For pharmaceutical companies like Eli Lilly, the average
length of time from the discovery of a new drug until delivery to a patient is 10 to 15 years. After R&D
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produces a promising lead, a drug is still a long way from being ready for human testing. Researchers
must probe further to determine what dosage will be required and at what level it might be toxic to the
patient. They also must explore practical issues such as whether Lilly will be able to manufacture the
compound on a large scale. The clinical trials themselves can take years. To help recoup its investment,
a drug manufacturer can get a 20-year patent that grants the company exclusive rights to the new
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drug. However, with the lengthy research and approval process, companies may have fewer than 10
years to sell the drug while the patent is in force. Once patent protection expires, generic drug
C
manufacturers enter the market with low-priced alternatives to the name-brand drug.
For Eli Lilly, the cost of bringing a new drug to market runs from $800 million to $1.2 billion. To keep its
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drug pipeline full, Eli Lilly plows some 20 percent of sales back into the R&D programs on which its
future depends. With large cash expenditures occurring years before any cash return, the time value of
money is an important factor in calculating the economic viability of a new drug.
Teacher Tip
You may opt to use a different article as
long as it shows expansion or capital
expenditure. The reading can be shared in
advance and be given as homework.
EP
MOTIVATION (15 MINS)
1. Share an article related to capital expenditure or business expansion. (APPENDIX B)
• Agcaoili, L. (2015). Cebu Pacific buying 16 ATR planes for $673 M. philstar.com. Retrieved
11 April 2016, from http://www.philstar.com:8080/business/2015/06/17/1466623/cebu-
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INSTRUCTION/PRACTICE (75 MINS)
Long-term investments need significant capital outlay thus careful analysis should be done. A company
needs tools that can be used in evaluating which investments to take, and which to forego. This introduces
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us to our topic on Capital Budgeting.
Teacher tip
Define Capital Budgeting “Shareholder’s wealth” is applicable to
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Corporations and “Owner’s wealth” is
• It is the process of evaluating and selecting long-term investments that are consistent with the firm’s
applicable to Single Proprietorships and
goal of maximizing owners’ wealth. Partnerships.
• ED
Differentiate long-term investment from operating expenses.
Long-term investment results in benefits to accrue to the company in excess of one year while
operating expenses benefits the company only within the operating period.
Capital expenditure pertains to long-term
investments.
EP
Enumerate examples of capital expenditure.
• Expand or enter into a new line of business
• Replace or renew fixed assets
• Construct new premises
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Discuss the steps in Capital Budgeting.
1. Investment Proposal. Proposals for capital expenditure come from different levels within a business
organization. These are submitted to the finance team for thorough analysis.
2. Review and Analysis. Financial personnel perform formal review and analysis to assess the benefits
and cost of the investment proposals. These personnel make use of several financial tools which they
see fit in evaluating the project.
3. Decision Making. Companies usually delegate capital expenditure decisions on the basis of value
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limits. The analysis is presented to the proper approving body who will in turn make the decision on
whether to push through with the project or not.
4. Implementation. Release of funds and start of the project occurs after approval. Large expenditures
are usually released in phases.
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5. Monitoring. Results are monitored and actual cost and benefits are compared with those that were
expected. Action may be required if deviations from the plan are significant in amount.
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Teacher tip
Explain the risk and return trade-off. You may share cases in investment scams
(i.e. pyramiding) showing that high short
• In making investment decisions, financial managers take note of the risk and returns of the projects
term profit is usually accompanied by high
they are entering.
•
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Recall the story of Jack and the Beanstalk. In the story, Jack trades his cow for three magic beans. This
is a very risky move for Jack since these beans may be fake and therefore, worthless. Luckily those
magic beans grew into beanstalk that gave Jack the opportunity to gather riches beyond his wildest
dreams, while fighting with a giant along the way. Jack gambled in this transaction. Should Jack
risks. Whereas long term, hard-earned
income is less susceptible to loss.
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decide not to sell the cow for magic beans and instead sold it at the current market value, the story
would be different. As we can see, the higher the risk, the higher the returns, but of course, if turned
sour, the higher the losses as well.
• This situation is also true for making financial decisions. Taking a higher risk gives you the opportunity
to earn higher returns. Low risk investments like treasury notes, also called risk-free instruments, earn a
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low and steady income flow. In making investment decisions, financial managers ensure that the
proposed business will earn more than the risk-free rate since they need to compensate for the risk
the investment will entail. This introduces us to the Required Rate of Return. It is the minimum
expected yield investors require in order to select a particular investment.
Ask learners on how the risk and return trade-off can be applied in real life.
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• Sample Answers
• Fixed income vs. commission based income
• Earning interest from time deposits vs. earning from stocks
• Entering in a business with steady income vs. entering into seasonal high profit business
• Investing in preferred vs. common stock
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• Independent vs. Mutually Exclusive Investments Teacher Tip
Example of an independent project: Refer
• Independent Projects are those whose cash flows are independent of one another. The
to the PHP 8 million new restaurant outlet. If
acceptance of one project does not eliminate the others from further consideration. opportunities arise and financial resources
Mutually exclusive projects, on the other hand, are projects which serve the same function permit, the company can open more outlets
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and therefore compete with one another. The acceptance of one eliminates all other in other geographical areas. All of these
new outlets can be considered independent
proposals that serve a similar function from further consideration.
projects.
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• Unlimited Funds vs. Capital Rationing
Example of a mutually exclusive projects: A
• The amount and availability of funds affects the company’s decisions in capital outlays. If the
big manufacturing company is
company has unlimited funds, then all projects which pass the risk-return criteria will be contemplating on providing its own energy
The Accept-Reject approach is usually done for mutually exclusive projects where one
requirements. They are evaluating two
investment proposals: 1) Oil-fired power
generation plant or 2) Solar panels. Only
one alternative can be considered because
both plans will perform the same function.
project is favoured over the others. The approach accepts projects which pass a certain
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criteria. Ranking is done when there are several projects passing the criteria and the
company is only able to fund so much. The highest ranking projects will be selected for
implementation.
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Teacher Tip:
Draw the timelines on the board to better
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(72,000) 17,000 17,000 17,000 17,000 17,000
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explain the concept. Show the learners the
solutions to the problems.
Terminal value is the expected value of the
asset/project at the end of its economic
useful life.
(80,000) (21,000) ED
(21,000) (21,000) (21,000) (21,000)
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• Payback Method
• This is the simplest method used in capital budgeting. It measures the amount of time,
usually in years, to recover the initial investment. To illustrate this method, let us use our Teacher Tip:
previous examples for relevant cash flows. Computation of the PHP 4,000
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remaining amount (4,000)* and divide it by the cash flow for year 5. We get .24, so the total
payback period for Project A is 4 + .24 = 4.24 years. Conversely, if the cash flows are equal,
you may derive the answer by dividing the initial cash flow by the annuity, 72,000/17,000 =
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4.24 years. Using this method for Project B, we get the payback period of 80,000/21,000 =
3.81 years.
• Let us also illustrate an example of computing the payback period for uneven cash flows.
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Year 2 = 4,000
Year 3 = 6,000
Year 4 = 3,000
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For years 1 and 2, we have already recovered 11,000 of our investment. We need 4,000 more to
reach 15,000 thus for the third year, we have 4,000/6,000 = 0.67. The payback period is 2.67 years.
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Notice that the cash flow for year 4 is already ignored.
• Managers usually set an acceptable payback period for projects. For making accept-reject
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decisions, projects which meet the set acceptable payback period shall be accepted and
those which not are discarded. It is a popular method used especially for small projects due
to its simplicity and consideration for the timing of cash flows. The criticism of this method,
however, it that it does not consider the time value of money. Also, it fails to consider the
cash flows after the payback period. For instance, in our previous example, we can see that
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Project B is better compared to Project A due to the quick recovery of the investment. If
Project A has a cash flow of, let’s say PHP50,000 at year 5, we can easily deduce that Project Teacher Tip:
A is more profitable. However, the payback method only recognizes the gains during the
payback period. Ask the learners recall their lessons in
computing the present value since the NPV
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• This method is more sophisticated than the payback method since it considers the time
value of money and it considers all the cash flows during the life of the project including the
terminal value. The NPV can be computed by comparing the present value of cash inflows
against the present value of cash outflows. Cash flows are discounted using the firm’s cost of
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capital (cost of acquiring funding needs) to get the present values.
• If the NPV of a project is zero or positive, it should be accepted. In finance, if these projected cash flows are realized, the NPV of the
project should be equivalent to the increase in total shareholder’s value.
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• Assuming that the cost of capital is 8%, let us compute the NPV for our previous example.
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Ask the learners to compute for the NPV of Project B.
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Project B = 21,000 x PVAF(3.993) – 80,000 = 83,853 – 80,000 = 3,853
We can see that Project A’s NPV is negative and Project B’s NPV is positive, thus, we only accept project B.
• For example, you are planning to build a branch for your business at PHP350,000 and expect to receive PHP400,000 in 1 year. First,
compute for the rate of return (profit/investment).
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• We compute for the rate of return because the NPV of a project with cost of capital equal to
the rate of return is equal to zero. To illustrate:
• The IRR can easily be computed using MS Excel using the IRR function.
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• The NPV and IRR are interrelated techniques. An IRR greater than the cost of capital equates
to a positive NPV and vice versa. On a purely theoretical view, NPV is the better measure
since it measures the actual cash value a project creates for shareholders. However, IRR is
also a widely used tool since financial managers usually like to think in terms of ratios and
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percentages.
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PRACTICE (30 MINS)
Ask the learners to answer the following exercise. This can be given as a short quiz at your discretion.
(EASY)
Year
ED Project Pizza
Teacher tip
Notice that Payback period does not
change even if cash flows are added.
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0 (100,000)
1 50,000
2 50,000
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1. Given the cash flows above and a discount rate of 5%, compute the payback period and NPV of
Project Pizza.
2. If PHP50,000 is earned on the 3rd year of the project, what is the new NPV of the project? What is
the payback period?
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Answers Key:
1. NPV = (100,000) + 50,000/(1.05) + 50,000/(1.052) = PHP (7,029.48; Payback Period = 2 years
2. NPV = (100,000) + 50,000/(1.05) + 50,000/(1.052) + 50,000/(1.053) = PHP36,162.40; Payback Period =
2 years
(AVERAGE TO DIFFICULT)
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Year Project A Project B
0 (200,000) (200,000)
1 80,000 100,000
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2 80,000 100,000
3 80,000 100,000
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4 80,000
3. If the opportunity cost of capital is 11%, which of these projects is worth pursuing? Find the NPV of both
projects.
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4. Suppose that you can only choose one of these projects. Which is more favourable to the firm given that
the discount rate remains at 11%? (Which has the higher NPV)
5. Which project would you choose if the opportunity cost of capital were 16%? (NPV/IRR)
6. What is the payback period for each project?
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Answers Key:
3. Both. NPV is computed as follows.
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Year Project A NPV Project B NPV
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4 80,000 52,698.48
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4. Project A, since it has a higher NPV.
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5. Project B. NPV is computed as follows.
2
(200,000)
80,000
80,000
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(200,000.00)
68,965.52
59,453.03
(200,000)
100,000
100,000
(200,000.00)
86,206.90
74,316.29
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3 80,000 51,252.61 100,000 64,065.77
4 80,000 44,183.29
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6. Payback is computed as follows: Teacher Tip:
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3 80,000 40,000.00 100,000 100,000.00
4 80,000 120,000.00
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Project A = 2 years + 40,000/80,000 = 2.5 years or 200,000/80,000
Project B = 2 years or 200,000/100,000
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ENRICHMENT (45 MIN) (DIFFICULT)
Divide the class into groups with not more than six people each. Let them read and discuss the
You are the investment manager of an appliance company. The industry is currently in the expansion
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face and the CEO would like to capture as much of the market share as possible. You asked your
analysts to submit project proposals as summarized below.
Project Discount Rate Investment Annual Cash Flow Project Life (Years)
A 10 3M 1M 5
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B 12 4M 1M 8
C 8 5M 2M 4
D 8 3M 1.5M 3
E 12 3M 1M 6
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Which projects should the manager choose? If you were given unlimited capital, which projects should be implemented?
Answer key:
Project Life
Project Discount Rate Investment Annual Cash Flow NPV Rank
(Years)
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A 10% 3,000,000 1,000,000 5 790,786.77 5
B 12% 4,000,000 1,000,000 8 967,639.77 3
C 8% 5,000,000 2,000,000 4 1,624,253.68 1
D 8% 3,000,000 1,500,000 3 865,645.48 4
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E 12% 3,000,000 1,000,000 6 1,111,407.32 2
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If there is no budget constraint, all projects can push through since the NPV of all projects is positive. However, if there are budget constraints,
projects will be chosen based on the highest NPVs in which case Projects C & E should be considered if you’re asked to choose two.
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APPENDIX A
Companies spend money on new investments if they believe that those investments will later generate enough cash flow to justify the up-front
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cost. For pharmaceutical companies like Eli Lilly, the average length of time from the discovery of a new drug until delivery to a patient is 10 to
15 years. After R&D produces a promising lead, a drug is still a long way from being ready for human testing. Researchers must probe further to
determine what dosage will be required and at what level it might be toxic to the patient. They also must explore practical issues such as
whether Lilly will be able to manufacture the compound on a large scale. The clinical trials themselves can take years. To help recoup its
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investment, a drug manufacturer can get a 20-year patent that grants the company exclusive rights to the new drug. However, with the lengthy
research and approval process, companies may have fewer than 10 years to sell the drug while the patent is in force. Once patent protection
expires, generic drug manufacturers enter the market with low-priced alternatives to the name-brand drug.
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For Eli Lilly, the cost of bringing a new drug to market runs from $800 million to $1.2 billion. To keep its drug pipeline full, Eli Lilly plows some
20 percent of sales back into the R&D programs on which its future depends. With large cash expenditures occurring years before any cash
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return, the time value of money is an important factor in calculating the economic viability of a new drug.
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APPENDIX B
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MANILA, Philippines - Budget airline Cebu Air Inc. (Cebu Pacific) of taipan John Gokongwei is spending $673 million to acquire 16 more brand
new aircraft from Toulouse-based turboprop aircraft maker ATR to meet the growing demand for inter-island services in the Philippines.
Lance Gokongwei, president and chief executive officer of Cebu Pacific, said the acquisition of 16 ATR72-600 is in line with the low cost carrier’s
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vision of providing affordable air travel.
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”This order is an affirmation of our commitment to extend the convenience of affordable air travel to even more communities. We are very
pleased to be the launch customer of this new configuration of the ATR 72-600, as this will allow us to offer our customers more seats at even
lower fares,” he said.
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He pointed out Cebu Pacific has been operating ATR aircraft since 2008 enabling the budget airline to bring safe, reliable, and affordable air
transport to smaller cities and islands throughout the Philippines.
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According to Cebu Pacific, the transaction would double the airline’s turboprop fleet size. It currently operates a fleet of eight ATR 72-500
aircraft that would be retired as the new aircraft enter service.
Gokongwei said the entry into service of the ATR 72-600 would see Cebu Pacific with new generation aircraft to meet a growing demand in the
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The aircraft were ordered from European turboprop aircraft maker ATR at the Paris Air Show.
The deal also includes options to acquire an additional 10 ATR72-600. The aircraft is equipped with the high density Armonia cabin, the widest
cabin in the turboprop market.
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The aircraft features 78 slim-line seats and wider overhead bins with 30 percent more stowage space. These new technological innovations
further enhance space and comfort for passengers.
ATR aircraft enjoy a high reputation not only for versatility, but also for their ability to operate on short runways allowing Cebu Pacific to expand
its operations not only on main airports but also to several other airports around the country.
About 330 ATRs are currently operated by 55 airlines in the Asia-Pacific region. The ATR 72-600 has the lowest cost per seat mile in the 70-seat
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segment, with significantly lower fuel and maintenance costs compared to similar class aircraft.
ATR chief executive officer Patrick de Castelbajac said the aircraft manufacturer is ”very happy to continue our partnership with one of the
leading airlines in Southeast Asia and to contribute to the expansion of its network throughout the islands of the archipelago.
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”Cebu Pacific will also be able to benefit from the vast support network for ATR operators in Asia. When their first ATR 72-600 arrives, there will
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be five ATR pilot training centers in the region,” he said.
Cebu Pacific is undertaking a $4-billion fleet renewal program. It is scheduled to take delivery of seven more Airbus A320 and 30 A321neo
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between this year and 2021. It has a fleet of 55 aircraft composed of 10 A319, 31 A320, six Airbus A330, and eight ATR-72 500 aircraft.
Meanwhile, the low cost carrier arm of national flag carrier Philippine Airlines Inc. (PAL) of taipan Lucio Tan is set to fly to Saipan in Northern
Marianas two times a week using the 156-seater Airbus A320 aircraft.
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PAL Express said it intends to attract Saipan residents to fly to Manila and interconnect to any of the PAL Group;s domestic and international
destinations. There are about 19,000 Filipinos living and working in Saipan.
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”Our goal is to address the clamor for new routes in order to best serve the needs of the market. As we tap new markets and build on existing
ones, we aim to ensure connectivity across the route network of the PAL Group by providing the required flight frequencies and schedules,” the
airline said.
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Business Finance 240MINS
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advantages and disadvantages, and the risks of investment. 15
communicate learning competencies
and objectives.
Performance Standards
Motivation Present historical returns of different types of 15
The learners shall be able to:
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investments and how much the learners’
• Identify the types of investments particularly bank deposits, insurance, real
savings could have become
estate, hard assets, mutual funds, and stocks and bonds.
• Indicate the advantages and disadvantages of each type of investment. Instruction/ Give a lecture on the different types of 120
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Delivery
• Explain the risks inherent in each type of investment. investments and their advantages/
disadvantages
Practice Group portfolio management exercise 30
Learning Competencies
The learners will be able to:
•
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Compare and contrast the different types of investments. (ABM_BF12-
IVm-n-23)
Enrichment Tell stories of people who became rich
Evaluation
through investing
Quiz
30
30
• Classify investments according to its type, features, and advantages and
Materials
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disadvantages. (ABM_BF12-IVm-n-24) projector, of available; if projector not
available, board and markers will suffice;
scientific calculators; PV Tables
Specific Learning Outcomes Resources
At the end of the unit lesson, the learners shall be able to: (1) Finance Websites
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• Describe how they want to allocate their savings on different types of (2) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City.
investments. Rex Bookstore.
• Explain why they want such investment allocation based on the advantages
and disadvantages of each chosen investment type.
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INTRODUCTION (15 MINS)
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perspective of a lender or investor.
• Are they aware of alternative investment options (stocks, bonds, mutual funds, etc.)?
• On the essential questions, try to get as
• Are they familiar with investment scams (double-your-money, high-yield investments, etc.)? many insights from the learners as
possible.
2. Transition by saying that these questions will be answered by meeting the following objectives
• On question 6, say that investment scams
throughout the discussion.
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normally offer returns too good to be
3. Communicate learning competencies and objectives true.
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• Identify the types of investments particularly bank deposits, insurance, real estate,
hard assets, mutual funds, and stocks and bonds.
• Indicate the advantages and disadvantages of each type of investment.
•
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• Explain the risks inherent in each type of investment.
Enumerate the specific learning outcomes.
• Describe how they want to allocate their savings on different types of investments.
• Explain why they want such investment allocation based on the advantages and
disadvantages of each chosen investment type.
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Teacher Tip
Make the students appreciate the difference
between investing in assets that appreciate
versus things that depreciate in value over
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time.
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MOTIVATION (15 MINS)
Investment Type Holding Value of PHP 10,000 % Return
Period Today
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Stocks (DMCI Holdings, Inc. “DMC”) 12 years PHP3,204,878 31,949%
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1. Show how the learners’ savings (i.e. PHP10,000) could have grown under different types of investments.
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Table 1: Comparison of Investment Types Over Time with Sample Results
ED Sources:
(1) Funds, M. & Tour, A. (2016). Philpad - Your pad on anything Filipino.... Philpad. Retrieved 2 May 2016, from http://philpad.com; (2) Home |
Thomson Reuters. (2016). Thomsonreuters.com. Retrieved 2 May 2016, from http://thomsonreuters.com/en.html; (3) Welcome to the Bangko
Sentral ng Pilipinas Website!. (2010). Banko Sentral ng Pilipinas. Retrieved 2 May 2016, from http://www.bsp.gov.ph/; (4) Writer Estimates
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Bank (Time Deposit)
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Stocks (Universal Robina Corporation “URC”)
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Stocks (DMCI Holdings, Inc. “DMC”)
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Mutual funds (Philequity PSE Index Fund and Sunlife Prosperity Philippine Equity Fund)
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Teacher Tip
If you are successful in motivating them, you
should get more students raising their
hands to volunteer their answers for assets
that grow their money over those which
lose their value.
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2. Describe how money loses value in buying material things such as toys, gadgets, etc.
iPhone 4 32gb PHP29,200 (October 2011) 3.5 years PHP8,900 -70% return
Toyota Vios PHP850,000 (December 2007) 7.5 years PHP300,000 -65% return
Definitions:
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Table 2: The Decline of the Monetary Value of Material Items Settlement Risk – risk that the bank may
not be able to give back their deposit.
Sources:
Philippine banks are normally insured by the
(1) Business 2 Community - Top Trends, News & Expert Analysis. (2016). Business 2 Community. Philippine Deposit Insurance Corporation
Retrieved 2 May 2016, from http://www.business2community.com/#MBqWp2Ki7czkuqWl.97; (2) (PDIC). Depositors may recover up to
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PHP500,000 per depositor from PDIC in
GSMArena.com - GSM phone reviews, news, opinions, votes, manuals and more.... (2016).
case of bank default/bankruptcy.
Gsmarena.com. Retrieved 2 May 2016, from http://gsmarena.com ; (3) OS X Daily - News and Tips for
Mac, iPhone, iPad, and Everything Apple. (2016). Osxdaily.com. Retrieved 2 May 2016, from http://
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osxdaily.com; (4) Writer Interviews Misconceptions:
Emphasize to the students that it is a
common misconception that all of these
3. Ask the learners which would they prefer, those which grow their money or those which lose value?
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Survey the students by asking them to raise their hands on the option they prefer.
investments will earn for certain. Clarify that
each investment type has inherent risks
involved, which nevertheless can be
mitigated.
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2. Fixed Income and Equities
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Bank Deposits (Fixed Income) • Known income based on • Lower interest income vs. bonds
“Money placed into a banking outstanding principal • Settlement risk if the bank closes
institution for safekeeping” and current interest rate
• Shorter, if any, holding
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period vs. bonds
Bonds (Fixed iIcome) • Known periodic • If not held until maturity and pre-
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“Debt investments where an investor payments for a certain terminated, investor can gain or lose
loans money to an entity which period of time depending on the prevailing interest
borrows the funds for a defined • Can’t lose money if rates at the time of pre-termination. If
period of time at a variable or bond investment is held interest rates are higher, investor in
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commonly, fixed interest rate” until maturity bonds can lose in the pre-termination
Sources:
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(1) Investopedia - Sharper Insight. Smarter Investing.. (2016). Investopedia. Retrieved 2 May 2016, from http://investopedia.com;
(2) Writer Inputs
• Ask the learners which would they prefer, equity or fixed income?
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• Supposing they have PHP1 million, how will they allocate it?
• Explain how they can access these investment assets through the following:
• Stocks
• Go to a stock brokerage firm (i.e. COL Financial, AB Capital Securities, etc.) or a bank with a stock brokerage arm (i.e. BPI Trade, First
Metro Securities, etc.) and open a stock market account by signing the necessary account opening forms.
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• Minimum capital amount, depending on the broker, will be required to be deposited to
successfully open the account (i.e. PHP5,000 for BPI Trade, PHP10,000 for AB Capital Securities,
etc.).
• Most of these stock brokerage firms now provide online access to their client’s stocks account
(i.e. www.colfinancial.com, www.bpitrade.com, www.abcapitalsecurities.com.ph, etc.).
• Bank Deposits
• Go to a bank (BDO, BPI, Metrobank, etc.) and open a bank account (savings, time deposit, etc.)
by signing the necessary account opening forms.
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• Minimum amounts will also be required depending on which bank and the type of bank deposit
they want to open.
• Some banks also now offer online access to their client’s bank accounts (i.e.
www.bpiexpressonline.com, www.bdo.com.ph, www.lbpiacces.com, etc.) where they can
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monitor their account, pay bills, transfer funds, etc. via internet.
• Bonds
• Same as bank deposits, go to a bank and sign the necessary bond acquisition forms.
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• Minimum purchase of bonds is normally higher relative to stocks and bank deposits.
• Clients may also view their bond’s performance online depending from which bank they bought
it from.
Investment Type
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3. Alternatives to fixed income and equities (25 minutes)
Advantages Disadvantages
Definitions:
• Management Fee – the amount clients
pay to the professionals who manage their
mutual funds, normally a certain
Mutual funds “Give small investors access to professionally • Pay management
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percentage of portfolio value.
“An investment that is made up managed, diversified portfolios of equities, fees
• Dividends – distribution of the company’s
of a pool of funds collected from bonds and other securities, which would be • Values can also income to its shareholders.
many investors for the purpose of quite difficult (if not impossible) to create with a fluctuate just like the • Voting Rights – right to be heard on
investing in stocks, bonds, and small amount of capital” stock market certain policies that the company wants to
similar assets” implement.
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Unit investment trust fund (UITF) • Same as mutual funds. No shareholder rights
Similar to a mutual fund but is • Easier access because clients can open an for investors such as
managed by banks. account in any branch of the bank near them. dividends and voting
• No entry and management fees. rights.
• Ask the learners if they would prefer these alternatives over equity or fixed income and why.
• Would they prefer experts managing their money for them for a fee over investing on their own?
• Explain how they can access these investment assets through the following:
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• Mutual funds
• Go to an insurance company or a financial institution that offers mutual funds (i.e. Philequity, Sunlife, Manulife, etc.) and sign the necessary
account opening forms.
• As with stocks, minimum amounts will be required to successfully open the account.
• Some of these financial institutions also provide online access to monitor their mutual fund performance.
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• Unit Investment Trust Fund
• Same procedures as a mutual fund except that UITF’s are accessed through banks.
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4. Other investment assets
MUST READ FIRST
Investment Type Advantages Disadvantages Definitions:
Currencies • Largest market in the world in terms of • Volatile and trades 24-hours a day • Liquidity – ability to be converted into
cash, the higher the liquidity the better.
“Generally accepted form of trading volume, so much liquidity (must be closely monitored)
• Margin Trading – allows clients to trade
money, including coins and • Unlike stocks, commodities, etc., • Generally uses margin trading more than their capital. It can magnify
paper notes, which is issued currency asset itself is a medium of which allows clients to bet more both earnings and losses.
by a government and exchange which people can use to than their capital (may also be an • Inflation – general increase in prices.
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circulated within an economy” transact advantage) • Hedge – investment that reduces the risk
(i.e. USD, EUR, JPY) of adverse price movements in an asset.
• Diversification – process of investing in
Commodities • Natural hedge against inflation • Same as currencies different kinds of assets to lessen
“A basic good used in • Negatively correlated with equities • Impractical to invest directly exposure in market/price volatility.
• Geopolitical risks – “risks of one
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commerce that is and bonds (may be used for considering storage, transportation
country's foreign policy influencing or
interchangeable with other diversification) and insurance costs involved
upsetting domestic, political, and social
commodities of the same • Hedge against geopolitical risks policy in another country or
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type” (i.e. gold, nickel, oil) region” (Source: Columbia Threadneedle
Blog. (2016). Columbia Threadneedle
Real Estate • Generally appreciates over time • Huge capital needed, financing Blog. Retrieved 2 May 2016, from http://
“Land and any improvements because land gets scarce can be difficult blog.columbiathreadneedleus.com)
on it” (i.e. land, house and lot,
condominiums)
diversification)
ED
• Have relatively low correlations with
other asset classes (may be used for
“A contract (policy) in which cash/capital to deal with unforeseen • On some of traditional insurance
in return for the insurance/protection
an individual or entity receives adverse financial consequences plans, no sickness/death until a
provided.
financial protection or • May provide certain tax benefits (i.e. certain age may mean not getting • VUL – Variable Universal Life insurance or
reimbursement against losses tax deductibility, tax-free provisions) any benefits at all (that’s why VUL’s a life insurance that offers both death
from an insurance are now very prevalent) benefit and investment features.
company” (i.e. life insurance, • Some insurance companies can go
educational plans, VUL) bankrupt (i.e. College Assurance
Plan) if companies fail to factor
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significantly adverse unforeseen
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circumstances
Table 5: Advantages and Disadvantages of Other Investment Types
Sources:
(1) Gateway Financial | Gateway Financial. (2016). Gatewayfinancial.biz. Retrieved 2 May 2016, from
http://gatewayfinancial.biz; (2) Home Guides | SF Gate. (2016). Homeguides.sfgate.com. Retrieved 2
May 2016, from http://homeguides.sfgate.com; (3) Investopedia - Sharper Insight. Smarter Investing..
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(2016). Investopedia. Retrieved 2 May 2016, from http://investopedia.com; (4) Saad, Y. & Slachevsky, A.
(2016). From The Markets - eToro Blog. eToro Blog. Retrieved 2 May 2016, from http://etoro.com/blog/
markets; (5) Writer Inputs
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• Ask the learners which among these investment assets would they consider and why.
• Explain how they can access these investment assets through the following:
• Currencies and Commodities
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• Open a foreign currency/forex account (i.e. oanda, fxcm, cboe, etc.) online.
• Minimum amount required for forex accounts vary and are usually higher vs. stocks and usually in
USD.
• Investments may also be monitored online.
• Real Estate ED
• Contact/visit real estate companies directly (i.e. Ayala Land, Megaworld, SM Prime, etc.).
• Contact real estate brokers.
Teacher Tip:
Emphasize the importance of contacting
licensed real estate brokers and insurance
agents.
• Insurance
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• Contact/visit insurance companies directly (i.e. Sunlife, Prulife, Manulife, etc.).
• Contact insurance agents.
Teacher Tip:
5. Investment Scams (10 minutes)
Show samples of investment scams like e-
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• Tell the learners the following characteristics of investment scams (Source: financialmentor.com): mail scam or even text scams. You may visit
• Unexpected and unsolicited phone calls, emails, letters, or personal visits from strangers who are this website for an example: > http://
offering investments www.motherjones.com/politics/2014/03/
what-i-learned-from-nigerian-scammers.
• Above market returns
• Low risk, no risk, or a guarantee
• Giving custody and possession of invested capital to the investment manager
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• Aggregating assets into a pool with other investors
• Investing on the spot
• Special connections, secrets, or inside information not available to the public
• Invitations to join exclusive investment organizations
• Opportunities for the “next big thing” or a “once in a lifetime” deal
• Sophisticated terminologies
• Investments offered from overseas
• No prospectus/offering memorandum
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• Investments that cannot be verified
• Sold by unlicensed/unregistered people
• Troubles cashing out of the investment
• Salespeople discouraging second opinion
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• Salespeople encouraging investing on the basis of trust
• Salespeople asking potential clients to put their life savings into a single investment
• Salespeople encouraging potential clients to borrow money for it
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• Salespeople requesting for the client’s bank account details
• Ask how they can prevent themselves from becoming victims to investment scams
3. Ask each group to allocate a fund of PHP1,000,000 among the different investment options
provided and why.
4. (Optional) Tell the students that each group’s fund will be evaluated after 2-3 weeks based on the
funds’ updated market value.
5. (Optional) Give a prize or grade incentive to the team with the highest portfolio value.
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Sample Investment Options Sheet
Instructions: Allocate your PHP1,000,000 among the following investment alternatives (in multiples of 10% i.e. 10%, 20%, 30%, etc.). Allocations
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___% DMC (Stocks) PHP12.9 36.1%
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___% Gold (Commodity) $1,118.6 -59.3%
should total 100%. Below the table, justify your chosen allocations.
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Source:
(1) Home | Thomson Reuters. (2016). Thomsonreuters.com. Retrieved 2 May 2016, from http://thomsonreuters.com/en.html; (2) Kitco: Live Gold
ED
Prices | Gold News | Gold Market Insights. (2016). Kitco.com. Retrieved 2 May 2016, from http://kitco.com; (3) THE PHILIPPINE STOCK
EXCHANGE, INC.. (2016). Pse.com.ph. Retrieved 2 May 2016, from http://pse.com.ph; (4) Welcome to the Bangko Sentral ng Pilipinas
Website!. (2010). Banko Sentral ng Pilipinas. Retrieved 2 May 2016, from http://www.bsp.gov.ph/
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ENRICHMENT (30 MINUTES)
1. Share the story of Warren Buffett through a biography video (Warren Buffett: Bio of the World's Greatest Businessman. (2016). YouTube.
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EVALUATION (30 MINUTES)
QUIZ
Teacher Tip
Depending on the reception of the students
1. (EASY) Match the investment asset in column A with its description in column B by writing the capital of the lesson, essay questions may be given
letter on the left side of column A. instead of multiple choice.
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Sample Matching Type Quiz
Answer Key
(A) Investment Asset (B) Description If Matching Type
Part 1: C, E, A, B, D
___1 Stocks (Equity) A. An investment that is made up of a pool of funds collected from Part 2: D, B, E, C, A
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many investors for the purpose of investing in stocks, bonds, and
similar assets.
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___2 Bank Deposits (Fixed B. Land and any improvements on it.
Income)
___3 Mutual Funds C. Type of security that signifies ownership in a corporation and
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2. (EASY) Match the investment asset in column A with its advantage/disadvantage in column B by
Answer Key
writing the capital letter on the left side of column A.
If Essay (Suggested Answers)
1. Equities are the riskiest of all assets
Sample Matching Type Quiz because of their price volatility. In the
Philippine Stocks Exchange, clients can lose
(A) Investment Asset (B) Advantage/Disadvantage as much as 50% on a stock in one day.
Reasons why stock prices are volatile
___1 Stocks (Equity) A. Disadvantage: On some of traditional plans, no sickness/death until include uncertainties in company’s earnings,
negative or positive market sentiment of
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a certain age may mean not getting any benefits at all
investors, etc. And with these great risks
___2 Bank Deposits (Fixed B. Advantage: Shorter, if any, holding period vs. bonds comes the potential for great upside for the
Income) risk-taker investor.
___3 Mutual Funds C. Advantage: Can be a source of recurring rental income 2. Fixed income assets are low-risk
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investments. Even if potential returns are
___4 Real Estate D. Disadvantage: Riskiest of all assets (can lose as much as 50% of low relative to equities, it gives the risk-
their money in one day) averse investor known income/periodic
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payments. Note however that this is only
___5 Insurance E. Disadvantage: Pay management fees true if the security is held until maturity.
Default risk, which is the risk of the
counterparty not fulfilling his obligation is
3. (Optional) Essay also present in fixed income assets.
(DIFFICULT)
ED Therefore, an investor must carefully analyze
the issuer and must be convinced about its
financial stability before buying its debt
security.
4. If let’s say you have PHP1,000,000 today which you can invest for the next 10 years, where will you investors with shareholder rights such as
dividends and voting rights. Since the
put it and why?
underlying asset of mutual funds can also
be equity, returns are not guaranteed and
an investor can also lose.
Introduction to Investment
Content Standards
The learners demonstrate an understanding of the definition, purpose, kinds, LESSON OUTLINE
advantages and disadvantages, and the risks of investment. Introduction Identify essential questions and
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10
communicate learning competencies and
Performance Standards objectives
The learners will be able to: Motivation Present how volatile some investments can 10
• Identify the types of investments particularly bank deposits, insurance, real become and ask learners if they are willing to
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estate, hard assets, mutual funds, and stocks and bonds. take such risk on their money
• Indicate the advantages and disadvantages of each type of investment. Instruction/ Give a lecture on the different ways on 60
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• Explain the risks inherent in each type of investment. Delivery
quantifying investment risk and how to
reduce it
ED
The learners shall be able to measure and list ways to minimize or reduce
investment risks in simple exercises. (ABM_BF12-IVm-n-25)
Materials
risks and how terrible the effects can be
Quiz 30
• LCD projector
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At the end of this lesson, the learners will be able to:
• Laptop with Microsoft Office Powerpoint or
• Measure the risk of different types of investments • Overhead Projector
• Identify ways on how to reduce investment risk and define how risk is • Acetates
lessened Resources
(1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon
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INTRODUCTION (10 MINS) Teacher Tips:
On the essential questions, try to get as
1. Identify the essential questions much insights from the learners as possible
• Ask the learners what are the different types of investments that they have learned (this will also
The previous module recognized the
serve as a review).
rewards/returns of the various investments.
• Do they understand the risks of each investment? Emphasize that this module will focus on
• Do they know how to measure these risks? the risks particularly on equity investments.
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• Which will they choose, a stock which they can expect to go up by 25% in one year, or a 1-year
treasury bill which will give them 1.5% return? Note that if the economy turns bad, they can lose
10% on the stock.
• If there is a way to minimize these risks, will that help them in investing?
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2. Transition by saying that these questions will be answered by meeting the following objectives
throughout the discussion.
C
3. Communicate learning competencies and objectives.
• Explain that the learning competencies will be the same as the previous module but this module
will focus more on the quantification of risks in each investment.
• Enumerate the specific learning outcomes.
ED
- Measure the risks of different types of investments.
- Identify ways on how to reduce investment risks and define how risk is lessened.
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MOTIVATION (10 MINUTES) Teacher Tips:
Let the students appreciate the difference
1. Show how the learners’ savings (i.e. PHP10,000) could have changed value over time if placed in a between low-risk low-return investments
and high-risk high-return investments.
bank time deposit and an equity investment.
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Bank (Time Deposit)
1. Ayala Corp. (AC)
2. Aboitiz Equity Ventures, Inc. (AEV)
3. Alliance Global Group, Inc. (AGI)
4. Ayala Land, Inc. (ALI)
5. Aboitiz Power Corp. (AP)
6. BDO Unibank, Inc. (BDO)
7. Bloomberry Resorts Corp. (BLOOM)
8. Bank of the Philippine Islands (BPI)
9. DMCI Holdings, Inc. (DMC)
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10. Energy Development Corp. (EDC)
11. Emperador Inc. (EMP)
12. First Gen Corp. (FGEN)
13. Globe Telecom, Inc. (GLO)
14. GT Capital Holdings, Inc. (GTCAP)
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15. International Container Terminal
Services, Inc. (ICT)
16. Jollibee Foods Corp. (JFC)
17. JG Summit Holdings, Inc. (JGS)
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18. LT Group, Inc. (LTG)
Table 1: Sample Performance of PHP 10,000 in Time Deposit 19. Metropolitan Bank & Trust Company
(MBT)
Stocks/Equities (Philippine Stock Exchange Index “PSEi”) 20. Megaworld Corp. (MEG)
• The value of a bank investment on the other hand, follows a relatively straight upward line, but only
gives low returns (CAGR of 3.4% for the period 2004-2014) due to the low risk taken by the investor.
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3. Discuss that some will choose bank time deposit and others will prefer stocks. Emphasize that there
is no right or wrong answer because the choice of an investor depends not just on returns but also
on his/her risk appetite.
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4. Ask the learners: If they have savings, would they put it in stocks or in a time deposit? Survey the
students by asking them to raise their hands on the option they prefer.
C
5. Ask the learners: If there is a way to measure the risk, will it help them decide whether to place their
money in an investment or not?
ED
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Company description: JFC is a multinational
chain of fast food restaurants famous for its
Chickenjoy, Jolly Spaghetti, and Peach
Mango Pie. PX on the other hand, is the
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2. Systematic and Non-Systematic Risk (10 minutes)
Teacher Tips:
Emphasize that systematic risk is non-
Risk Definition Also Known As Examples Measurement
diversifiable while non-systematic risk is
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Systematic Uncertainty inherent Market risk, Changes in interest Beta (β) diversifiable.
to the entire market undiversifiable risk rates, recession,
Note that total risk = systematic + non-
wars systematic risk.
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Non-systematic Uncertainty that Specific risk, Rumors of a Standard deviation
comes with the diversifiable risk, potential default, (σ) less beta
company or industry residual risk labor strikes,
ED landslide in a mining
company that
disrupted the
operations
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Table 3: Differentiating Risks
Source: Investment Strategies, Education & News | InvestingAnswers. (2016). Investinganswers.com.
Retrieved 8 May 2016, from http://investinganswers.com; Investopedia - Sharper Insight. Smarter
Investing. | Investopedia. (2016). Investopedia. Retrieved 8 May 2016, from http://investopedia.com
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3. Measuring Systematic and Non-Systematic Risk (40 minutes)
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than the PSEi
returns to respond to swings
in the market. Example: A company with a β of 1.3 means
that if the PSEi goes up by 10%, this
Standard deviation (σ) Total risk • Sum of systematic and non-
company’s stock price, on the average, will
systematic risk. go up by 13%. The reverse is true which
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• Total volatility of an means that if the PSEi goes down by 10%,
investment. this company’s stock price, on the average,
will go down by 13%.
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Based on the example, it is illustrated that a
company with higher beta is more volatile
and a company with lower beta is less
ED
Table 4: Measuring Risks
Source: Investopedia. (2016). Investopedia. Retrieved 8 May 2016, from http://investopedia.com
• Explain that the formula for beta is the covariance of the investment asset’s returns with the returns of
volatile.
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spreadsheet included in this pack.
30/4/2014 172.00 30/4/2014 1,657.00
Company Description: Globe Telecoms
30/5/2014 179.10 30/5/2014 1,690.00 (“GLO”) is the telecommunications
company of the Ayala group with products
30/6/2014 176.00 30/6/2014 1,600.00
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such as Globe Tattoo and promos such as
31/7/2014 176.80 31/7/2014 1,735.00 Unli-text and Unli-surf. Universal Robina
Corporation (“URC”) is the retail/consumer
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29/8/2014 180.00 29/8/2014 1,800.00 goods company of the Gokongwei group,
famous for Jack and Jill chips and C2 green
30/9/2014 196.00 30/9/2014 1,623.00 tea. DMCI Holdings (“DMC”) is the largest
construction company in the Philippines
31/10/2014 196.00 31/10/2014 1,685.00 owned by the Consunji family. It also has
28/11/2014
29/12/2014
σ
207.00
215.00
ED 28/11/2014
29/12/2014
σ
1,750.00
1,730.00
businesses in coal mining and power
generation, property development, and
nickel mining. Petron Corporation (“PCOR”)
is the biggest oil refinery in the country
owned by the Ang group. Some of its
gasoline products include Petron Blaze and
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Petron Diesel Max.
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30/4/2014 145.000 30/4/2014 14.129
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31/7/2014 161.000 31/7/2014 14.375
C
29/8/2014 161.000 29/8/2014 15.743
28/11/2014
29/12/2014
σ
194.000
195.000
ED 28/11/2014
29/12/2014
σ
16.038
15.447
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PCOR
Teacher Tips:
Year Stock Return xi x̄ (xi-x̄) 2 Alternative Presentation: Show the 3 sample
Price portfolios and ask the learners to compare
σ and allow them to discuss what it means.
30/1/2014 13.98 Emphasize the effect of diversification.
28/2/2014 13.74
31/3/2014 11.74
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30/4/2014 12.28
30/5/2014 11.98
30/6/2014 12.74
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31/7/2014 12.32
C
29/8/2014 11.66
30/9/2014 11.78
31/10/2014 11.82
28/11/2014
29/12/2014
σ
ED
11.10
10.60
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portfolio depends on the risk appetite of the investor. A more conservative investor (i.e. investor
who has less appetite for risk) may have a portfolio which is more skewed to fixed income
instruments like time deposits. On the other hand, an investor who has a higher appetite for risk
(i.e. an investor who is more willing to take risk) may have a portfolio which is more skewed to
equity investments.
• Define diversification.
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Diversification is a risk management technique that combines a wide variety of investments within a portfolio to reduce risk. A well-
diversified portfolio can eliminate non-systematic risk.
• Cite examples of how a more diversified portfolio can reduce the standard deviation of the portfolio:
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Value xi Value xi
28/2/2014 11,427.60 14.3% 2.9% 1.3% 28/2/2014 10,921.56 9.2% 2.9% 0.4%
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31/3/2014 11,477.74 0.4% 2.9% 0.1% 31/3/2014 10,647.87 -2.5% 2.9% 0.3%
30/4/2014 11,661.04 1.6% 2.9% 0.0% 30/4/2014 10,859.22 2.0% 2.9% 0.0%
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30/5/2014 11,848.70 1.6% 2.9% 0.0% 30/5/2014 10,981.69 1.1% 2.9% 0.0%
30/6/2014 11,976.59 1.1% 2.9% 0.0% 30/6/2014 11,122.52 1.3% 2.9% 0.0%
31/7/2014
29/8/2014
30/9/2014
11,923.45
12,609.95
13,048.32
-0.4%
5.8%
3.5%
2.9%
2.9%
2.9%
ED0.1%
0.1%
0.0%
31/7/2014
29/8/2014
30/9/2014
11,337.00
11,593.20
12,009.73
1.9%
2.3%
3.6%
2.9%
2.9%
2.9%
0.0%
0.0%
0.0%
31/10/2014 13,219.55 1.3% 2.9% 0.0% 31/10/2014 12,139.22 1.1% 2.9% 0.0%
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28/11/2014 13,623.45 3.1% 2.9% 0.0% 28/11/2014 12,428.98 2.4% 2.9% 0.0%
29/12/2014 13,635.51 0.1% 2.9% 0.1% 29/12/2014 12,356.12 -0.6% 2.9% 0.1%
1.7% 0.9%
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σ 4.2% σ 3.1%
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PSEi-invested PHP 10,000 Portfolio
30/1/2014 10,000.00
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30/4/2014 11,103.62 4.3% 1.7% 0.1%
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31/7/2014 11,363.36 0.3% 1.7% 0.0%
C
29/8/2014 11,671.36 2.7% 1.7% 0.0%
ED
28/11/2014
29/12/2014
12,074.41
11,968.78
1.1%
-0.9%
1.7%
1.7%
0.0%
0.1%
0.6%
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σ 2.4%
• Show that the standard deviation computed for a portfolio goes down as the component stocks increase in number. Notice that the PSEi has
the least volatility because it is composed of 30 stocks.
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Quiz: Compute the standard deviation of the following stocks and the PSEi. Teacher Tips:
(EASY) For xi and x̄ (AVERAGE) for (xi-x̄)2 (DIFFICULT) for σ Solutions are given in a separate
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spreadsheet included in this pack.
Sample Quiz
The list can be modified depending on the
preference of the teacher. Historical stock
prices can be found on www.pse.com.ph.
AC JGS
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Year Stock Return xi x̄ (xi-x̄)2 Year Stock Return xi x̄ (xi-x̄)2
Price Price
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30/1/2014 524.00 30/1/2014 39.400
31/3/2014
30/4/2014
30/5/2014
578.00
624.00
618.00
ED 31/3/2014
30/4/2014
30/5/2014
49.500
50.600
49.300
σ σ 311
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AGI SM
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30/4/2014 31.150 30/4/2014 725.000
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31/7/2014 26.350 31/7/2014 797.000
C
29/8/2014 24.600 29/8/2014 772.000
28/11/2014
29/12/2014
24.800
22.550
ED 28/11/2014
29/12/2014
804.500
815.000
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σ σ
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PSEi
30/1/2014 6,041.19
28/2/2014 6,424.99
31/3/2014 6,428.71
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30/4/2014 6,707.91
30/5/2014 6,647.65
30/6/2014 6,844.31
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31/7/2014 6,864.82
C
29/8/2014 7,050.89
30/9/2014 7,283.07
31/10/2014 7,215.73
28/11/2014
29/12/2014
7,294.38
7,230.57
ED
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σ
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Business Finance 120MINS
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personal finance. 10
communicate learning competencies
and objectives.
Performance Standards
Motivation Present how famous personalities became 10
The learners will be able to:
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bankrupt because of overspending.
• Identify money management philosophy
• Apply basic personal finance principles and practices in earning, spending, Instruction/ Give a lecture on personal finance, the 60
Delivery
saving, and investing money personal financial planning process, and its
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six key areas.
Enrichment Share the four simple habits for personal 10
Learning Competencies
The learners shall be able to enumerate money management philosophies. finance success.
(ABM_BF12-IVo-p-26)
Materials
Quiz
• LCD Projector
30
At the end of the unit lesson, the learners will be able to: • Laptop with Microsoft Office Powerpoint
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OR
• Define personal finance
• Overhead Projector
• Enumerate and define the personal financial planning process
• Acetates
• Describe the six key areas of personal financial planning
Resources
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INTRODUCTION (10 MINS) Teacher Tip
On the essential questions, try to get as
1. Identify the essential questions: much insights from the learners as possible.
• Ask the learners how much they spend every day. Ask them also what do they spend it for.
• How much is their daily allowance from parents?
• Make them compute: daily allowance from parents less daily expenses
• Are they able to save from their allowance?
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• If yes, what do they do with their savings? Which investments can they put
their savings into?
• If no, how do they address the deficit? Do they ask from their parents? Is this
a good practice?
O
2. Transition by saying that these questions will be answered by meeting the following objectives
throughout the discussion.
C
3. Communicate learning competencies and objectives
• Enumerate the learning competencies.
•
• Define personal finance
ED
• Enumerate money management philosophies.
Enumerate the specific learning outcomes.
1. Share the story of top celebrities who went broke through a video: Top 10 Celebrities Who Went Teacher Tip
Broke. (2015). YouTube. Retrieved 8 May 2016, from https://www.youtube.com/watch? Let the learners appreciate that even some
of the biggest and richest celebrities can
v=eh3TgZ_V_S8 still go bankrupt if they have poor money
management practices.
2. Emphasize to the learners that these people have successfully reached career peaks accompanied If you can’t access the video, refer to the list
below:
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by huge fortune. However, because of poor personal financial planning, they still went broke due to 1. Toni Braxton – earned approximately
USD170 million. He was a shopaholic,
overspending practices and lack of appropriate investments.
diagnosed with Angina and Lupus, and
filed for bankruptcy twice.
2. Nicolas Cage – one of the highest paid
3. Ask them if they want to be like these celebrities.
actors in Hollywood, made bizarre
purchases such as castles, islands, and
dinosaur skulls. He ended up with a
4. Encourage them to appreciate the value of financial planning as early as now so they are able to
USD14 million debt to the Internal
internalize it and make it part of their system so that, when it’s their turn to reach fame and fortune, Revenue Service (IRS).
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they will know how to manage their finances well and not go broke. 3. Mike Tyson – earned approximately
USD300 million over his entire boxing
career but got into a divorce and various
addictions, squandered his money on
homes, cars, parties, and tigers, and
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filed for bankruptcy in 2003.
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personal finance is.
1. Personal Finance.
ED
• Define Personal Finance. (Source: Investopedia - Sharper Insight. Smarter Investing. | Investopedia.
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(2016). Investopedia. Retrieved 8 May 2016, from http://investopedia.com)
• Personal finance includes all financial decisions and activities of an individual including budgeting,
insurance, mortgage planning, savings, and retirement planning.
• It involves analyzing current financial positions, projecting short-term and long-term funding needs,
and executing a plan to fulfil those needs considering individual financial constraints.
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• It is primarily dependent on one’s earnings, cost of living, and personal goals and wants.
• Encourage participation through posing the following questions to the learners:
• Who of them has done or does personal budgeting? How did/do they do it?
• What are their personal goals and wants at their age? Do they have the financial capacity to fulfil
them?
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2. Personal financial planning process.
• Show the chart below. (Source: Private Financial Design. (2016). Privatefinancialdesign.com. Retrieved
8 May 2016, from http://privatefinancialdesign.com)
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Teacher Tips:
A. Objective Setting
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• Explain each step of the personal financial planning process. (Source: Private Financial Design. (2016).
Privatefinancialdesign.com. Retrieved 8 May 2016, from http://privatefinancialdesign.com)
Examples:
• Objective Setting – A mom wants to have
PHP1 million after 10 years for her
daughter’s education.
• Data Gathering – Interview the mom to
• Quantify monetary objectives with definite time frames. know how much savings she has and her
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• Prioritize objectives. current sources of income.
• Data Analysis – Map the mom’s net cash
• Examine these objectives with an individual’s resources and limitations.
flows and compute her required return to
reach her target of PHP1 million after 10
B. Data gathering years.
• Use surveys, questionnaires, and interviews to gather quantitative and qualitative information from • Financial Plan Recommendation – Identify
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E. Plan Implementation
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• Assist the individual in the execution of the recommended financial plan.
• Implementation may involve other entities so assist the individual in dealing with the parties involved in the execution of the financial plan.
F. Plan Monitoring
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• Review the financial plan periodically to evaluate changing market conditions (i.e. economic conditions, taxes, interest rates, etc.).
• Evaluate the financial plan regularly to see if it effectively meets the individual’s goals and objectives.
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3. Six Key Areas of Personal Financial Planning.
• Show chart below (Source: World’s Largest Professional Network | LinkedIn. (2016). Linkedin.com. Retrieved 8 May 2016, from https://
www.linkedin.com/)
(a) Financial
Position
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(b) Adequate
Protection
(c) Tax Planning
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(d) Investment
(e) Retirement
and Accumulation (f) Estate Planning
Planning
Goals
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• Explain each key area of personal financial planning (Source: AdvisorNet Financial — Index. (2016). Advisornet.com. Retrieved 8 May 2016,
from http://www.advisornet.com/; World’s Largest Professional Network | LinkedIn. (2016). Linkedin.com. Retrieved 8 May 2016, from https://
www.linkedin.com/)
A. Financial Position
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• Understanding of personal resources by checking an individual’s net worth and cash flow.
• Net worth = assets less liabilities at a point in time
• Cash flow = expected sources of income less expected expenses within a period (i.e. year)
• Helps in determining the time frame to which personal goals can realistically be met.
• May need to answer the following questions:
• Do they have a clear understanding of their goals?
• How do they track their income, expenses, and net worth?
• What financial benefits do they get from their employer?
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B. Adequate Protection
• Analysis of protection needed for unforeseen risks.
• Includes risks of liability, property, death, disability, health, and long-term care.
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• Some insurance plans enjoy some tax benefits.
• May need to answer the following questions:
• What things can they not afford to lose?
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• How will they take care of their dependents?
• How have they planned for financial risks such as disability, illness, long-term care, and death?
C. Tax Planning
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• Management of when and how much taxes will be paid.
• Understanding possible tax incentives, deductions, rebates, etc. can have a significant impact on managing personal finances given the
magnitude of taxes paid by an individual.
• May need to answer the following questions:
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• How do they manage their taxes?
• How do they plan the timing of income and deductions for tax purposes?
• Are they comfortable with the tax environment applicable to them?
• Planning on wealth accumulation for large purchases such as house, educational expenses, investments for retirement, etc.
• May need to answer the following questions:
• What are their goals for wealth accumulation? (i.e. education, home, business, retirement comfort, etc.)
• How are their current investments performing to meet their goals?
• How much will they need? When will they need it?
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E. Retirement Planning
• Understanding the cost of retirement.
• Analysis of cash flows to come up with investment plans that will meet the costs of retirement in the
future.
• May need to answer the following questions:
• How are they preparing for their retirement?
• How are their liabilities affecting their retirement objectives?
• Do they think they can maintain their standard of living during their retirement?
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F. Estate Planning
• Planning for disposition of one’s assets after death.
• Estate taxes paid to the government are huge, so avoiding these taxes can significantly impact
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one’s personal finances.
• May need to answer the following questions:
• How should their assets be distributed upon death?
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• How will their intentions be carried out? (i.e. will, trust, power of attorney, etc.)
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EVALUATION (30 MINUTES)
Answer Key:
QUIZ
Part 1: C, E, A, B, D
Part 2: D, B, E, C, A
1. (EASY) Match the step in the personal financial planning process in column A with its description in
column B by writing the capital letter on the left side of column A (Source: Private Financial Design.
(2016). Privatefinancialdesign.com. Retrieved 8 May 2016, from http://privatefinancialdesign.com.)
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(A) Personal Financial Planning Process Step (B) Description
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conditions, taxes, interest rates, etc.).
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time frames. Prioritizing objectives.
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2. (AVERAGE) Match the key area of personal financial planning in column A with its description in column B by writing the capital letter on the
left side of column A (Source: World’s Largest Professional Network | LinkedIn. (2016). Linkedin.com. Retrieved 8 May 2016, from https://
www.linkedin.com/).
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investments for retirement, etc.
___2 Tax Planning B. Management of when and how much taxes will
be paid.
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___3 Retirement Planning C. Analysis of protection needed for unforeseen
risks.
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___4 Adequate Protection D. Understanding of personal resources by checking
an individual’s net worth and cash flow.
___5 Investment and Accumulation Goals E. Understanding the cost of retirement. Analysis of
3. Essay: (DIFFICULT) Assume you are 18 years old and you were able to save PHP50,000. Given what you’ve learned on portfolio
diversification, how will you allocate your savings to bank time deposit and stocks (i.e. 100%-0%, 50%-50%, etc.)? Explain your answer.
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Biographical Notes
ARTHUR S. CAYANAN, PH.D JERELLEEN A. RODRIGUEZ
Team Leader Writer
Dr. Arthur Cayanan is presently a Professor at the Virata Ms. Rodriguez is an Instructor IV at the Virata School of
School of Business, University of the Philippines - Diliman. He is Business in the University of the Philippines - Diliman, teaching
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also designed as an Investment Officer under the UP Business Public Accounting Practice and Advanced Accounting. She
Research Foundation, Inc. He received his doctorate degree in graduated cum laude with a degree in Bachelor of Science in
Business Administration and master’s degree in Economics at UP Business Administration and Accountancy from UP Diliman and is
Diliman, in addition to completing his bachelor’s degree (cum an awardee of the Ester Tanco Scholarship. Ms. Rodriguez
laude) in BS Business Administration and Accountancy. He also garnered 6th place in the October 2013 CPA Licensure
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garnered 7th place in the licensure examination for Certified Examination given by the Professional Regulation Commission.
Public Accountants. He has been teaching Accounting for Non- Prior to her teaching position, she was a Tax Associate for Sycip,
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Accountants, Capital Budgeting, and Financial Statement Gorres, Velayo, and Co, primarily responsible for handling tax
Analysis for many years. engagements involving various industries as part of the Global
Compliance and Reporting group of the largest auditing firm.
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Dr. Cayanan has provided lectures to multiple institutions
in the Philippines. He is a lecturer, course developer, and
program designer for both public and private companies around
the country such as the Security and Exchange Commission
(SEC), L’oreal Philippines, Inc., Nestle Philippine, San Miguel
ARTHUR P. BARRIDO, JR.
Writer
Prof. Arthur Barrido works as a professor of Accounting
and Finance at the College of Management in the University of
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Corporation, Petron Corporation, and Bank of the Philippine the Philippines Visayas. His areas of expertise include Financial
Islands, to name a few. Furthermore, he has accomplished Accounting/Management Accounting, and Financial
various research works and projects such as The Impact of Management/Investment Management. Prof. Barrido graduated
Deregulation on the Financial Performance of PLDT (2012), from UP Visayas with a Bachelor of Science in Business
Pricing in Regulated Industries: The Telecommunications Sector, Administration major in Accounting and Master of Management
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2012-13 (with Dr. Ivy Suan), and Analysis and Review of Financial Business Management. In addition, he became a Certificate
Statements of Public Corporations, Securities and Exchange Public Accountant in 1988. He has been an integral member of
Commission (July 2002 – 2009). UP Visayas as a Faculty since 1993, Investment Officer since
2001, and Chairperson (Department of Accounting) since 2009.
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AL-HABBYEL YUSOPH DIOGENES C. DY
Writer Writer
Mr. Al-Habbyel Yusoph is an instructor for Financial Mr. Diogenes Dy currently teaches Accounting and
Accounting and Business Feasibility courses at the Virata School Finance courses at the Virata School of Business in the University
of Business in the University of the Philippines - Diliman. Aside of the Philippines - Diliman. Aside from the instructor role, he is
from his position as an instructor, he is presently a part-time also the designated coach of the UP Diliman team for the
associate for Future Value Consulting and a Business Analyst for Chartered Financial Analyst Institute (CFA) Global Investment
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Mitchell Madison Group Management Consulting. He graduated Research Challenge competition. Mr. Dy graduated Magna Cum
Magna Cum Laude in BS Business Administration and Laude in BS Business Administration and Accountancy at UP
Accountancy in UP Diliman. In addition, he also ranked 12th in Diliman. After graduation, he passed the Board Licensure
the Board Licensure Examination for Certified Public Accountants Examination for Certified Public Accountants on October 2011.
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(October 2014) and Champion in the 15th FINEX-JP Morgan Prior to his current work, he was a Financial Analyst for Philex
Chase Inter-Collegiate Finance Competition. Mining Corporation and Analyst for Credit Suisse.
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RACHELLEEN RODRIGUEZ PAMELA LLOREN
Writer Technical Editor
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Ms. Racheleen Rodriguez is a part-time instructor in
teaching Fundamentals of Derivative Securities in the University
of the Philippines Diliman. She is also a full-time Supervision and
Examination Specialist II for Bangko Sentral of the Philippines.
Ms. Pamela Lloren is a lecturer handling Auditing and Accounting
subjects in the undergraduate level of the UP Cesar E.A. Virata
School of Business at the University of the Philippines - Diliman.
She is also Treasurer for Gandang Kalikasan, Inc., a social
Ms. Rodriguez graduated Cum Laude in BS Business enterprise that promotes the Human Nature product line, a
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Administration and Accountancy from UP Diliman. In addition, personal care brand that is pro-Philippines, pro-poor, and pro-
she was a consistent university and college scholar, being an environment. Ms. Lloren graduated Cum Laude in BS Business
awardee of Posco Asia Foundation Scholarship which grants Administration and Accountancy at UP Diliman. She then passed
tuition privileges. Her other achievements include having passed the Board Licensure Examination for Certified Public Accountants
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the RA 1080 Philippine CPA Boards, awarded the Certified on October 2005.
Internal Auditor (CIA) designation, and passed the CFA Level 1
examination.
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MA. ANDREA ANTONINO-BALCE
Technical Editor
Ms. Andrea Balce currently works as an Instructor VII
under the Cesar E.A. Virata School of Business Finance at the
University of the Philippines - Diliman. She also works an
Associate Director for FTI Consulting Administrative Services, Inc.
Ms. Balce graduated Magna Cum Laude from UP Diliman with a
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degree in BS Business Administration and Accountancy. She is
also awarded a Gold Medal for Excellence in Finance, awarded
by the Institute of the Philippines, and a University Scholarship by
the Bank of Tokyo-Mitsubishi. Apart from her academic
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achievements, she has attended multiple training workshops and
seminars regarding Merger Modeling, Financial Modeling,
Advanced Microsoft Excel, and Microsoft Access.
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PATRICIA CARMELA I. LUMANLAN
Copyreader
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Ms. Patricia Lumanlan primarily works as a copywriter for
Campaigns & Grey Inc., handling multiple clients such as Sun
Cellular, Rockwell Land, Universal Robina Corporation, and
Lamoiyan in planning, developing, and executing various
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marketing and advertising campaigns. Through her primary
occupation, she has garnered an Award for Excellence and an
Award for Merit presented at the Philippine Quill Awards 2014
for exemplary and notable work under Sun Cellular’s Project
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Evolver. Moreover, she has been a freelance for almost ten years,
acting as art director, graphic designer, and copywriter in
developing creative materials for various independent clients.
Ms. Lumanlan graduated with a degree in Bachelor of Fine Arts,
Major in Information Design and Minor in Japanese Studies, at
the Ateneo de Manila University.
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