CORPORATE STOCKS 

The capital requirements of the firm may be  classified into three: (1) short-term; (2) intermediate term and (3) long-term.  
There are two primary sources of long-term  financing: the sale of stocks and bonds.
STOCK FINANCING 
Shares of stock are sold to raise funds for the long term  financing requirements of the firm. The objective of stock  financing is
to increase equity capital. 
CAPITAL STOCKS, DIVIDENDS AND RETAINED  EARNINGS 
Capital Stock – the interest of the owners of the  corporation. It is divided into shares, with each  
share representing a portion of the total ownership interest.  
- the portion of the authorized stock which has been issued is called issued stock. Those which are not yet issued are unissued
stock
Dividends – net income of a corporation that may be  distributed to the stockholders. 
Retained earnings – when profits are not declared as  dividends, instead, it is retained in the company’s coffers for use in some
of its capital financing requirements. This  account increases the actual and the  market value of the company’s shares of  stock. 
CLASSES OF CORPORATE STOCKS 
It may be classified into two major classes (1) common  stock and (2) preferred stock.
COMMON STOCK - The class of stock issued by all corporations and which  represents the real equity capital. It has a residual
claim  (after debts have been paid) to earnings and assets and  which carries the risk of business success or failure. 
VARIETIES OF COMMON STOCKS 
1. Classified common stock  
2. Deferred stock 
3. Voting trust certificates 
4. Guaranteed stocks; and 
5. Debenture stocks
1. CLASSIFIED COMMON STOCK  
Common stock may be classified to suit various requirements  of the issuing firm and investors. For instance a certain class of 
stock may differ from other stock in terms of dividend payments,  asset claims in case of liquidation, the right to vote and etc. 
2. DEFERRED STOCK 
- It is a minor type of issue which entitles the holder to receive dividends and in the event of dissolution, assets, after the common
stockholders have been paid.  
- this is generally issued to founders, promoters or  managers as a bonus for their efforts in getting the  corporation started. 
- In general, deferred stocks are characterized by a deferral of dividends until after payment of dividends to any other class of
stock. 
3. VOTING TRUST CERTIFICATE 
- Those which are given to trustees of a corporation when the  activities of the corporation are entrusted to them.  
- The certificates provide the trustee with the power to vote. 
4. GUARANTEED STOCKS 
- Stocks of a corporation wherein the payment of dividends is  guaranteed by another corporation. 
- Guarantees arise when a corporation purchases or leases the  property of another.  
- A holding company may also guarantee the stock issue of one of  its smaller subsidiaries to make the issue more attractive in
the  market. 
5. DEBENTURE STOCK 
- It is not a stock in the real sense, but a debt issue similar to debenture  bonds. 
- They are fixed interest securities issued by limited companies in return  for long term loans. 
- The redemption date of debentures falls between 10-40 years from the  date of the issue.  
- There are 2 main types of debentures : (1) fixed debentures (secured  by specific assets) and (2) floating debentures (generally
secured by a  charge on the assets of the firm). 
- Interest on debentures must be paid whether the company makes a  profit or not.  
- In the event of dissolution, debenture holders rank ahead of all the  shareholders in the claims on the company’s assets.  
- Convertible debenture carries an option at a fixed date to convert the  stock into common shares at a fixed price. 
the  stock. 
PREFERRED STOCK 
The class of stock which has a claim on assets  before common stock, in the event that the firm is  dissolved; and it also has a
prior claim to dividends up  to a specified amount or rate.
PROVISIONS OF PREFERRED STOCKS 
1. Claim to dividends 
2. Voting Rights 
3. Subscription rights 
4. Callability 
5. Convertibility 
6. Participation 
7. Classes
CLAIM TO DIVIDENDS 
- Preferred stockholders are entitled to a fixed dividend before common  stockholders receive their dividends. 
- Preferred stock may be classified into two: (1) cumulative and (2) non cumulative. 
- A cumulative preferred stock accumulates dividends even if it is not paid  for years. When dividends are declared, the
accumulated dividends  must be paid first before paying any common stockholder.  
- In contrast, a non-cumulative preferred stock doesn’t accumulate  dividends. When dividends are not declared for a given year,
the holders  of non-cumulative preferred stocks may not claim them later.
VOTING RIGHTS 
Preferred stockholders, in general, do not have the right to vote. There  are instances when preferred stockholders may vote.
These are the  following:  
1. If the corporation proposes to issue a debt security of a long term nature  or additional preferred stock of equal standing with
the outstanding  preferred stock; and 
2. If the corporation misses a dividend or fails to pay a specified number of  accumulated dividends, the preferred stockholders
can participate in  the annual election of the directors.
SUBSCRIPTION RIGHTS 
In case of additional issues of stock, some preferred stockholders  have the right to subscribe while others do not have the same
right. This  right to subscribe the additional issues is called pre-emptive right. In  effect, this makes preferred stocks come in 2
forms: 
1. those with pre-emptive right: and 
2. those without pre-emptive right
CALLABILITY 
Preferred stocks may also be classified as either (1) callable; or (2)  non-callable. 
Callable preferred stocks are those which may be bought back by the  issuing corporation as its option, but at a stated call price.
This is not a  feature of non-callable preferred shares. 
CONVERTIBILITY 
Some preferred stocks may also have the same feature of  convertibility, i.e., they can be converted into common shares within a 
certain period after the issuance of preferred stock.  
Convertibility is just another way of classifying preferred stocks. As  such, preferred stocks may either be: 
1. Convertible; or 
2, Non-convertible
PARTICIPATION 
Preferred stocks may also have the additional feature of  participating or sharing with the common stock in additional dividends 
after the preferred stock has been credited with its regular dividend.  Some preferred stocks do not have these characteristics. As
such,  preferred stocks may be further classified as follows: 
1. Participating: and 
2. Non-participating
CLASSES 
Preferred stock may also be issued in different classes for different  purposes. For instance, a preferred share may be identified as
class A or  B which could mean class. A has certain features that class B does not  have.  
Classification may also be based on dividend rates paid like Php  100, Php 150 and the like. 
OTHER STOCK FEATURES AND THEIR  CHARACTERISTICS 
1. Treasury Stock is one issued by the corporation, fully paid for,  reacquired by the corporation by purchase or other means,
and not  cancelled. It carries no voting rights, nor the right to dividends and is  excluded from computations concerned with
capital stock. It may be  sold for less than the legal par value whenever circumstances require. 
• Conversion of convertible securities including warrants
• Stock Options –right given by the corporation to an individual allowing him, at  his option, to buy a certain number of shares
of, usually common stock, from the  company within a certain time period.  
• Acquisitions – happens when a large firm takes control of a small firm.  Treasury stock may be used to facilitate the action. 
• Investments – refer to the purchase of any asset, or the undertaking of any  commitment, which involves an initial sacrifice
followed by subsequent benefits. 
• Stocks Split – refers to an issue of new shares to stockholders without  increasing total capital. 
• Stock Dividends – refer to dividends paid in the company’s own stock including  treasury stock- 
• Convertible securities – refer to preferred stock or bonds with option to  convert into common stock.  
• Warrants – a stock purchase warrant is an option or right exercisable by its  holder to purchase stock at a stated price during a
stipulated period of time. 
2. PAR VALUE STOCK 
The stated value in the shares of corporate stock is called par  value. A stock with stated value is called par value stock.  
The par value of a share of stock is equal to the minimum price,  specified in the corporate charter at which it may be sold in
order for the  stock to be fully paid and be non-assessable.  
Par value is important on two counts: (1) it establishes the amount  due to preferred stockholders in the event of liquidation and
(2) the  preferred dividend is frequently stated as percentage of the par value. 
NO PAR VALUE STOCK 
Those shares of stock without a face or nominal value. When  stocks have no par value, dividends are expressed in peso amounts 
rather than percentage.  
BOOK VALUE OF STOCK 
It is the stated value of a stock based on the accounting concepts  of recorded value as reflected in the balance sheet. This value is
subject  to limitations of historical accounting and is not designed to reflect  economic values at any one time. 
MARKET VALUE OF STOCK 
It is the value placed at any one time on a stock traded in a stock  exchange or over the counter, or even between parties in an
encumbered  transaction without duress. This value is subject to the whims of the  individuals involved, the psychology of the
stock market in general, economic  conditions, industry development, political conditions, and so forth.  
ECONOMIC VALUE OF STOCK 
It is the value of a stock as reflected by its current and future  earnings power, plus any potential recovery of all or part of the
investment. 

THE CAPITAL  MARKET

The capital market is that portion of the financial  market which deals with longer term loanable funds. The  money market, in
contrast, deals with short term funds

Components of Capital Market

The capital market is composed of three parts: 

1. The bond market; 

2. The mortgage market; and 
3. The stock market. 
The market for debt instrument of any kind is called the  bond market. Trading in the bond market is primarily done over the-
counter. Most bonds are owned by and traded among the  large financial institutions like life insurance companies, mutual  funds
and pension funds. 

The mortgage market is that portion of the capital  market which deals with loans on residential, commercial, and  industrial real
estate, and on farmland. 
The stock market is that portion of the capital market  where the common and preferred stocks issued by  corporations are traded.
It has two components: 
1. the organized exchanges; and 
2. the less formal over-the-counter markets.

In the Philippines, stocks are openly traded in the  Philippine Stock Exchange. The companies whose stocks are  traded in the
PSE are classified as follows: 

1. Banks 
2. Financial service 
3. Communication 
4. Power and energy 
5. Transportation services 
6. Construction and other related products 
7. Holding firms 
8. Food, beverages, and tobacco 
9. Manufacturing, distribution, and trading 
10.Hotel, recreation and other service 
11.Bonds, preferred and warrants
THE COST OF CAPITAL 

Additional capital is desirable only if additional benefits  will be derived from the exercise. The more desirable it becomes  when
the personal increase of benefits is higher than the  percent increase in capital investments. 

BASIC TERMS DEFINED AND DISCUSSED 

• Corporate Securities – refer to income yielding paper traded  on the stock exchange or secondary markets. A very essential 
characteristic of a security is saleability.  

Types of Security 

1. Fixed interest – consisting of debentures, preferred stocks,  and bonds, including all government securities; 

2. Variable interest – consisting of common stocks and bonds,  as well as preferred stocks with participating feature; and

3. Others – like bills of exchange and assurance policies

What constitutes securities? 

1. Bonds; 
2. Debentures; 
3. Notes; 
4. Evidences of indebtedness; 
5. Shares in a company; 
6. Pre-organization certificates of subscription; 7. Investment contracts; 
8. Certificates of interest or participation in a profit sharing  agreement; 
9. Collateral trust certificates; 
10.Voting trust certificates; 
11.Equipment trust certificates;
12. Certificates of deposit for a security; 13. Certificate of assignment; 
14. Repurchase agreements; 
15. Proprietary or non-proprietary membership  certificates; 
16. Commodity futures contract 
17. Transferable stock options; 
18. Pre-need plans 
19. Pension plan 
20. Life plans: 
21. Joint venture contracts; and 
22. Other similar contracts and investments
• Primary Market – when securities are issued and offered by  the corporation for the first time to the public, buyers of  such
issues are referred to as primary market. 

• Secondary market – refers to the market dealing with the  resale and purchase of securities or other titles to property  or
commodities. Examples are the secondary mortgage  markets, where holders of mortgages who need funds can  dispose of their
holdings before maturity. Another is the  secondary stock market involved in private placings and  dealings among brokers,
merchant banks, and other  persons and institutions. 

The secondary market actually provides liquidity to  investments made in the primary market. 

SECURITIES OFFERING IN THE  CAPITAL MARKET

THE MARKETING SECURITIES 

Corporate securities are distributed in two methods: (1)  by primary distribution; and (2) by secondary distribution. 

When the firm’s securities are sold for the first time to the  public, the activity is referred to as primary distribution.

Primary  distribution may be achieved through any of the following: 

1. Investment bankers 
2. Private placement 
3. Individual investors

When the first buyers of securities resell their interests to other  parties, the activity is referred to as secondary distribution. This 
may be achieved through the following: 

1. Stock exchanges; and 

2. Over-the-counter trading
The Investment Banker – any person engaged in the business  of underwriting securities issued by other persons or firms.  

The term underwriting refers to the act or process of  guaranteeing the distribution and sale of securities of any  kind issued by
another corporation. 
The investment banker is expected to perform the following  functions: 

1. To investigate the corporation’s financial condition and  needs; 

2. To advise the corporation considering new issues of  securities; 
3. To originate new issues; 
4. To arrange for syndicate distribution; 
5. 4o underwrite securities; and 
6. To market securities
Private Placement – refers to the selling of securities by private negotiation directly to insurance companies, commercial  banks,
pension funds, large-scale corporate investors, and  wealthy individual investors. 

Individual Investors – individuals who either have excess funds,  or willing to forego or postpone a part of his ability to spend, 
constitute a portion of the capital market. These individuals  have the option of depositing their money in banks, or they  may
look for suitable investments in securities become more  attractive when interests paid on bank deposits are low.  

Stock Exchange and Over-the-Counter Trading 

The secondary marketing of securities is done through  the stock exchange or over-the-counter. 

UNDERWRITING AND SELLING THE FIRM’S  SECURITIES 

The underwriting of securities may be done using any of the  following methods: 

1. Negotiated underwriting; 
2. Competitive underwriting; 
3. Commission sales; 
4. Direct sales; and 
5. Firm commitment basis.
NEGOTIATED UNDERWRITING 

- the issuing firm and the investment banker meet and  agree on the terms and conditions of the underwriting. 

Several steps are required in the use of this method. These are  the following: 
1. The firm decides that additional funds are needed and a  suitable investment banker is identified. 
2. A pre-underwriting conference is made between the firm  and the investment banker. The following items are  discussed:  
a. The appropriate amount of funds to be raised; b. The receptiveness of the capital market to different  types of long-term
securities; 
c. The appropriate timing of such an issue; and d. The terms of the underwriting agreement between the investment banker and
the firm. 
3. An underwriting syndicate is formed by the one who initiates  the underwriting. The syndicate is a temporary association of 
several investment bankers, with the number of participants  varying from one, when the initiating underwriter handles the  whole
issue, to a few dozens if the amount to be raised is large.  

COMPETITIVE UNDERWRITING – similar to the negotiated  underwriting except that the underwriting group bids  against
other underwriting groups for the initial purchase of  the securities at a public auction. 

COMMISSION BEST EFFORTS BASIS – when the investment  banker acts as a selling agent for the issuer and not as an 
underwriter, he is paid a commission. The investment banker  agrees to try his “best efforts” to sell the security. No  guarantee is
made on the successful sale of the entire  amount. Whatever is left over is returned to the issuing  corporation. 
DIRECT SALE – there are instances when the issuer sells directly  to the public, bypassing the underwriter entirely.  

FIRM COMMITMENT BASIS – an underwriting agreement wherein  the investment house agrees to purchase the issue from
the  issuing corporation. 

THE SECURITIES  MARKET

The securities market is the conduit for distribution of outstanding  issues and the role it plays is very important.  

THE COMPONENTS OF THE SECURITIES MARKET 

The securities market may be classified into the following: 

1. auction-type markets, such as the international and national  stock exchanges; and 

2. negotiation-type markets, such as the over-the-counter  market. 

THE STOCK EXCHANGE 

The stock exchange is a market in which securities are  brought and sold. There are stock exchanges in most capital  cities of
the world, as well as in the largest provincial cities. The  most notable of these exchanges are the New York Stock  Exchange,
and the London Stock Exchange.  

The stock exchanges are primarily organized to serve their  own local stock markets. The larger stock exchanges include in 
their trading the stock issues of the corporations from foreign  countries, qualifying them into the category of international  stock
exchanges. 

THE PHILIPPINE STOCK MARKET 

The PSE is reported to be the world’s smallest, with the  exception of Indonesia. The market is served by the PSE. It has a 
total of 235 listed companies.  

Stocks listed at the PSE are classified into five sectors, namely: 
1. Banks and financial services –banking, investments and  finance; 
2. Commercial and industrial – holding firms,  telecommunications, food, beverage and tobacco,  construction,power, energy
and other utilities,  transportation services, manufacturing, distribution and  trading, hotel, recreation and other services;
3. Property – land and property development 
4. Mining – mineral extraction; and 
5. Oil – exploration, extraction and production 
A membership seat may be acquired by purchase if an  interested party is not a member. A seat entitles the holder to  participate
in the trading floor of the exchange. 

Over-the-Counter (OTC) Market 

Securities traded outside of the organized exchanges take place in the over-the-counter or off-board market. The  OTC market is
provided by dealers who are ready to buy or  sell particular securities at certain prices. OTC transactions  are carried out by
direct inquiries and negotiations among  the dealers through the use of mail, telephone, telegraph,  teletype, or other forms of
communication. 

THE MIDDLEMEN OF SECURITIES 

When buying or selling securities, the services of the following  middlemen will, most often, be required:  
1. Broker; 
2. Dealer; 
3. Salesmen; and 
4. Associated person of a broker or dealer. 
The foregoing middlemen of securities are defined under the  Securities Regulation Code (R.A. No. 8799) as follows: 

1. Broker – a person engaged in the business of buying and  selling securities for the account of others. 
2. Dealer – any person who buys and sells securities for  his/her own account in the ordinary course of business. 
3. Salesman – a natural person, employed as such or as an  agent, by a dealer, issuer or broker to buy and sell  securities.  
4. Associated person of a broker or dealer – an employee thereof who, directly exercises control of supervisory  authority, but
does not include a salesman, or an agent or  a person whose functions are solely clerical or ministerial. 

TRADING IN THE SECURITIES  MARKET 

The exchanges and the OTC markets differ in the way the  securities are traded. Trading in the exchange market are  generally
characterized by the following: 

PRICES OF STOCK AND VOLUME OF  TRADING 

The prices of stocks and the volume of trading in the securities  market vary from day-to-day depending on supply and  demand.
Although the issuer will set a certain price for his stocks,  the willingness of the investor to buy at a certain price and  volume will
have to be reckoned with. 

THE SECURITIES AND EXCHANGE  COMMISSION (SEC) 

The SEC was established on October 26, 1936 by virtue of the  Commonwealth Act No. 83 or the Securities Act. Its
establishment was  prompted by the need to safeguard public interest in view of the local  stock market boom at that time. Its
major functions included registration  of securities, analysis of every registered security issue, screening of  applications for
broker’s or dealer’s license and supervision of stock and  bond brokers as well as the stock exchanges.  

The agency was organized on September 29, 1975 as a collegial  body with 3 commissioners and was given quasi-judicial powers
under PD  902-A. 

In 1981, the Commission was expanded to include 2 additional  commissioners and 2 departments, one for prosecution and
enforcement  and the other for supervision and monitoring. Then on December 1, 2000,  the SEC was reorganized as mandated
by RA 8799 also known as the  Securities Regulation Code. 

TRAINING SCHEDULE AT THE PSE 

• Trading in the PSE is in one continuous session daily except  Saturdays, Sundays, legal holidays and days when Bangko 
Sentral ng Pilipinas (BSP) Clearing Office is closed. Trading of  Equities begins at 9:30 am, and ends at12pm, with a 10  minute
extension. The exchange has two trading centers:  one in Pasig City and another one in Makati City.

UNIT OF TRADING 
Trading of shares shall be in terms of fixed minimum  amounts called board lots. Depending on the price range of a  particular
stock, the unit of trading ranges from 10 to 1 million  shares. Cost of transaction varies from company to company  since prices
of each company differ according to its par value.  

Prices of stock move through a scale of minimum price  fluctuations. Prices are thus adjusted by only one minimum  fluctuations
at a time. Transactions that are beyond the  prescribed number of minimum fluctuations from the last sale  price are not allowed.
In case of cross sales, transactions may  be made through 2 minimum fluctuations provided the price is  within the best bid and
offer. 

For purposes of easy trading, the PSE shall fix the board  lot for each listed issue. The PSE shall set the table of board lots  and
make amendments as the situation warrants. Bond lots  shall be automatically updated every end of the day based on  the closing
price of that particular issue and in relation to the  existing schedule of board lots to be made effective the  following trading day.
Whenever board lots are updated, it  shall be the responsibility of the brokers to update their  affected Good Till-Cancelled(GTC)
orders.  

METHOD OF TRADING 

The method of transaction is a double auction market  between a buyer and a seller who are represented by  stockholders. Stock
trading is fully automated and scripless. 

THE SECURITIES REGULATION CODE 

The legal framework used in the implementation of state  policy regarding the buying and selling of securities is RA 8799, 
otherwise known as the Securities Regulation Code (SRC). This  set of laws was passed by the Senate and the House of 
Representatives on July 17, 2000 and July 18, 2000, respectively.  It was approved by the President on July 19, 2000.  

Section 2 of the SRC enumerates the purposes of the  Code which are as follows: 
1. To establish a socially conscious, free market that regulates  itself; 
2. To encourage the widest participation of ownership in  enterprises;
3. To ensure the democratization of wealth; 
4. To promote the development of the capital market; 5. To protect investors; 
6. To ensure full and fair disclosure about securities; 7. To minimize if not totally eliminate insider trading and other  fraudulent
or manipulative devices and practices which create  distortions in the free market. 
The SRC covers the following general topics: 
1. Title and Definitions 
2. Securities and Exchange Commission 
3. Registration of Securities 
4. Registration of Pre-Need Plans 
5. Reportorial Requirements 
6. Protection of Shareholder Interests 
7. Prohibitions on Fraud, Manipulations, and Insider Trading 8. Regulation of Securities Market Professional 
9. Exchanges and Other Securities Trading Markets 10. Registration, Responsibilities, and Oversight of Self-Regulatory 
Organizations 
11. Acquisition and Transfer of Securities and Settlement of  Transaction in Securities 
12. Margin and Credit 
13. General Provisions

THREE LEASING COMPANIES

• Ford Credit 

It is the largest company in the world dedicated to automotive finance. In  2001, it financed the sale or lease of more than 5
million new and used vehicles around  the world. Ford Credit is a division of PRIMUS Finance and Leasing, Inc. which is 
currently operating in the Philippines.  

• PCI Leasing and Finance, Inc.  

It is an 84%-owned subsidiary of Equitable PCI Bank. Its principal business  is to provide leasing and financing products to
commercial clients. Its leasing products  include direct leases, sale and leaseback arrangements and dollar denominated leases. 

• Japan PNB Leasing and Financing Corporation 

This company is a joint venture between PNB and IBJ Leasing Co., Ltd.  Japan of the Misuho Financial Group.  

A lease is a negotiated contract between the owner (lessor)  of the property allowing the firm (the lessee) the use of that
property for  a specific period of time for a specific rental.  

A contract of lease according to the Philippine Civil Code,  “may be of things, or of work of service. In the lease of things, one
of the  parties bind himself to give to another the enjoyment or use of a thing for  a certain price, and for a period which may be
definite or indefinite. In  the lease of work of service, one of the parties binds himself to execute a  piece of work or to render to
the other some service for a certain price,  but the relation of the principal and agent does not exist between them.” 

The lessee is the party that uses, rather than the one who owns,  the leased property. The lessor is the owner of the leased
property. 

TYPE OF LEASES 

Leases may be classified into four general categories: 

1. The financial lease; 
2. The operating lease; 
3. The sale and leaseback agreement; and
4. Net and gross leases

1. Financial Lease 
It is a non-cancelable document that obligates the lessee to  provide periodic rental payments during the basic lease term. The 
payments are calculated to repay the original amount invested by the  lessor with a pre-determined rate of return, all within the
period of one  lease.  

Also known as a fully pay-out lease, financial lease is further  characterized by the lessee’s option to purchased the leased asset. 

The non-cancelability of financial leases obligates the lessee to  continue the contractual payments even if it abandons the asset
and no  longer has any use for it.  

Under the financial lease, the firm (lessee) agrees to maintain the  asset even though ownership of the asset remains with the
lessor. 

2. Operating Lease 

Also sometimes called service lease, is a kind of lease usually  cancelable by the lessee with proper notice and that the lessor
usually  maintains the asset. It is a short-term lease used to finance equipment such  as computers, railroad cars, or tankers. The
term of an operating lease  generally covers only a fraction of the economic life of asset.  
Some leased offices are operating leases. The tenant can cancel  the leases under certain conditions and with a specified number
of days  notice, while repairs to the building housing the offices are usually handled  by the landlord (lessor). 

3. Sale and Leaseback 

It is a special type of lease in which a firm owns an asset, sells it  to another then uses the same asset on a lease agreement with
the new  owner. It is more commonly used for real estate.  

An example is the firm which owns land and a building, but is in  need of additional working capital to support expansion. The
firm can sell  the land and building to an investor and simultaneously enter into a lease  agreement to use the property. The
proceeds from the sale provide  working capital and the firm has still the use of the land and the building. 

4. Net and Gross Leases  

Leases can either be net or gross. Under the net lease agreement,  the lessee bears the expenses associated with the asset, such
as taxes,  repairs and maintenance and insurance. The expenses are borne by the  lessor in a gross lease. 

BASIC LEASE PROVISIONS 

A typical lease agreement contains some or all of the following  provisions: 

1. The period over which the asset is to be leased. 
2. The rental payments and the payment dates.  
3. The assignment of responsibility to one of the parties for such  associated costs as taxes and maintenance. 
4. Security provisions like prohibitions against the lessee incurring  additional debt, paying dividends, or reacquiring common
stock.
5. Excellent clauses allowing the lessor to raise the periodic rental  payments at some pre-determined dates over the life of the
lease, or  in response to increases in costs. 
6. Options allowing the lessee to renew the lease or purchase. 

ADVANTAGES OF LEASING 
Leasing provides certain benefits to the lessee. These are the  following: 
1. The risks inherent to ownership of the property under lease are borne  by the lessor; 
2. Flexibility; 
3. Piecemeal financing; 
4. Avoidance of restrictions accompanying debt; 
5. Evasion of budgetary restrictions; 
6. Cash is fixed for more profitable investment; 
7. Possible tax advantages over ownership; and 
8. Lease financing does not appear as debt in the company’s balance  sheet. 
1. Lessor Bears Ownership Risks 

If the firm decides to buy the property it needs, it must be ready  to bear the risks accompanying such ownership. Among the
risks that  must be reckoned with are the following: 

• The risk of obsolescence; 

• The risk of acquiring a defective title to the property; and • The risk of losing the property due to some unforeseen events. 

2. Flexibility 

If the leased asset proves to be unprofitable, the lessee is free to  abandon the use of the asset after the expiry of the lease. 

3. Piecemeal Financing 

Companies growing at a modest rate may find bond financing very  costly. As bond financing is economical when bigger
amounts of bond  issues are involved, a company requiring additional funds in small amounts  may be penalized unnecessarily by
the cost of floating small but varying  amounts of bond issues. The burden brought about by such costs are not  associated with
lease financing.  
4. Avoidance of Restrictions Accompanying Debt 

Bond issues at times, restrict the borrower from acts of further  borrowing. If the firm needs additional funds to finance its
operations, it has  no choice but to wait until the bond issues are redeemed. Under a lease  agreement, such restrictions are seldom
incorporated. 

5. Evasion of Budgetary Restrictions 

In companies operating under a capital budgeting system, certain  requirements must be complied with before expenditures on
capital assets  are made. It may even turn out that certain requests could not be approved  due to some restrictions imposed by the
system. Lease agreements are not  covered by budgetary restrictions and the use of required assets is possible. 

6. Cash Made Available for More Profitable Investment 

In a lease agreement, the company’s cash is freed and could be  used for more profitable activities. For instance, a firm may elect
to use  office spaces under a lease agreement, instead of utilizing precious cash for  the construction of building.

7. Tax advantages Over Ownership 

Leasing provides an alternative to the firm. This alternative, in  return, makes it possible for the firm to reduce its tax burden.
The  expenses related to leasing are called rental payments, while those  applicable to ownership of assets refer to depreciation,
finance charges,  and interest. 

8. Lease Does Not Appear as Debt 

When capital assets are required, the firm may opt to borrow to  finance the need, or a lease agreement may be arranged with
another  party. When the firm elects to borrow, the resulting obligation is shown  on the sheet. When capital assets are financed
by a lease agreement, no  liabilities are recorded in the balance sheet as a result of such agreement. 

DISADVANTAGES OF LEASING 

1. It is more costly than if the firm has purchased the asset;

2. The benefits of depreciation, investment, tax credits, and salvage  value are not availed by the lessee, and 
3. Even if the firm can abandon unprofitable operations, it cannot  abandon the lease payments. 
WHEN LEASE FINANCING MAY BE  UTILIZED 

It must be utilized only when it is financially defensible. It  must offer any of the following: 
1. There must be cost savings over borrowing; 
2. It must be available where an equivalent amount of debt financing  is not available; or 
3. Some offsetting advantage which in the opinion of management  justifies its high cost.

.  
Financial Analysis is the process of interpreting the  past, present, and future financial condition of the company.  The
purpose of this is to diagnose the current and past financial  condition of the firm to give some clues about its future  condition.
The output of financial analysis is a useful tool in  decision-making. 

TYPES OF ANALYSIS 

In the analysis of the financial standing of the firm, procedures may  be categorized as follows: 

1. Single-Period Analysis 

- it refers to comparison and measurements based upon financial  data of a single period. It reveals financial position and
relationship as of a  given point or period of time. Examples of this analysis are the current and the  equity ratios.  

2. Comparative or Trend Analysis 

-it compares and measures items on the financial statements of two  or more fiscal periods. The improvement or lack of
improvement in financial  position and in the results of operation is determined. 

FINANCIAL RATIOS 
Financial ratio may be defined as a relationship between two  quantities on a firm’s financial statement or statements, which is 
derived by dividing one quantity by another.  

Functions of Financial Ratios 

1. As a starting point for detailed financial analysis; 2. To help diagnose a situation; 

3. To monitor performance; 

4. To help plan forward; 

5. To reduce the amount of data to workable form and to make the  data more meaningful.

CLASSES OF FINANCIAL RATIOS 

Financial ratios may be classified as follows: 

1. Liquidity 

2. Activity 

3. Profitability; and 

4. Solvency

❖ Liquidity Ratios 

this measures the ability of the firm to pay its bills on time or to  meet its current obligations.  

Those classified as liquidity ratios are the following: 

1. Current ratio; 

2. Acid test ratio; 

3. Sales to receivable ratio; 

4. Sales to inventory ratio; and 

5. Inventory to net working capital ratio

1. Current Ratio  

- this ratio indicates the margin of by which a firm can  meet its obligations falling due within the year from such assets easily 
convertible into cash within the year

2. Acid Test Ratio 

The acid test ratio, also called as quick ratio, is the ratio of cash  assets to current liabilities. It is calculated by deducting
inventories from  current assets and dividing the remainder by current liabilities. 

3. Sales to Receivable Ratio  

This may be computed in two ways: 

1. In terms of annual turnover 

2. In terms of collection period – average length of time for which credit  is being extended by the business to its customers 
4. Sales to Inventory Ratio 

This ratio is a measure of inventory turnover. Firms with  excessive inventories will show a low ratio. 

5. Inventory to Net Working Capital Ratio 

This ratio shows the proportion of net current assets tied up in  inventory, indicating the potential loss to the company in the event
of  a decline in inventory values. It is calculated by dividing net working  capital into the inventory figure. 

❖Activity Ratios 

These are the ratios that are used to measure how effectively the  firm employs the resources as its command. 

1. Sales to receivable ratio; 

2. Sales to inventory ratio; 
3. Inventory to net working capital ratio; and 
4. Sales to net worth ratio. 
It will be noticed that the first three types of activity ratios are  also classified as liquidity ratios.

Sales to Net Worth ratio – ratio of net sales to owner’s equity  represents the turnover of owner’s equity. 

❖Profitability Ratios 

Those which measure management’s effectiveness as shown  by the returns generated on sales and investment. 

1. sales to inventory ratio: 

2. profit to net sales; 
3. profit to net worth; and 
4. profit to assets. 
Since the first ratio is also classified under the liquidity and activity  ratios, only the last three ratios on profitability will be
discussed. 

Profit to Net Sales – also called as profit margin on sales, is  computed by dividing net income after taxes  

by sales.  

Profit to Net Worth – also referred to as a return on net worth  ratio, measures the rate of return on the  

owner’s investment. 

Profit to Assets – also called return on total assets ratio. It measures  the return on total investment in the firm. 

❖ Solvency Ratios 

Those which measures the ability of the firm to pay its debt  eventually, if it is not paid on time. 
1. Current ratio; (liquidity ratios)  
2. Sales to inventory ratio; (liquidity ratios)  
3. Inventory to net working capital ratio; (activity ratios) 4. Debt to net worth ratio; 
5. Net worth to fixed assets ratio; and 
6. Sales to net worth ratio. (activity ratios)
Debt to Net Worth Ratio – this ratio shows the relative  proportion of debt to equity. In effect,  it measures the debt exposure
of the  firm.  

Net Worth to Fixed Assets – indicates to what extent fixed assets  have been financed by the  contribution of the stockholders.  

COMPARATIVE RATIO ANALYSIS 

Financial ratios may be made more useful y comparing them to  the financial ratios of other firms in the industry. If the firm’s
ratio is  different from that of the industry, the cause of deviation should be  investigated. 

Comparisons may be made either with those of selected firms  or with averages for the industry. The data that will be used in the 
comparisons may be gathered from annual surveys, such as those made  for the top 1,000 Philippine corporations. In addition, the
publication  requirements imposed on financial intermediaries also provide the  analyst with ready materials. 

BUSINESS RISKS
RISK may be defined in two ways: 
1. It may be viewed as the variability in possible outcomes of an  event based on chance. 
2. Uncertainty associated with an exposure of loss.

METHODS OF HANDLING RISK 

1. Risk may be avoided; 
2. Risk may be retained; 
3. Hazard may be reduced; 
4. Risk may be shifted; and 
5. Risk may be reduced. 
Hedging, subcontracting, the use of surety bonds, incorporation and insurance are examples of shifting risks to another  party.  
Effective managerial control tends to reduce risk. Examples are  material control systems, audits and other accounting controls,
and  process and product inspection plans. 

INSURANCE AS A DEVICE FOR HANDLING  RISK 

The most common device used in handling risk is insurance. Insurance may be defined in various ways.  
From the legal point of view, a contract of insurance is an  agreement whereby one undertakes for a consideration, to indemnify
another against loss, damage, or liability arising from an unknown or  contingent event.  
From the viewpoint of business economics, insurance is an  economic device used to reducing risk by combining a sufficient 
number of exposure units to make their individual lossescollectively  predictable. THE INSURANCE POLICY
The insurance  policy is the written  instrument in which a  contract of insurance is set  forth. It contains the  following: 
1. Declarations; 
2. Insuring agreements; 
3. Exclusions; and 
4. Conditions  

1. Declarations 
The nature of the risk is described in here which are  usually found on the first page of n insurance policy,
2. Insuring Agreements 
It is the part of the policy which states what the insurer  agrees to do and the major conditions under which it agrees. The  insurer
promises to compensate the insured if a loss under the  insured peril occurs and if the insured meets the conditions of the 
contract. The insurer has no obligation to pay if the conditions are not  met. 
3. CONDITIONS 
Conditions may be general or specific. The general  conditions usually cover the following: 
• Conditions or payment of premium 
• Notices required 
• Evidence of loss 
• Cancellation 
• Short-period scale 
• Arbitration clause 
• Agreement on the effect of legal provision on extra ordinary  inflation 
• Omnibus clause 
• Important notice 
• Action or suit clause 
• Settlement clause
4. EXCLUSIONS 
An exclusion is a provision or part of the insurance contract  limiting the scope of coverage. Exclusions comprise certain
causes  and conditions listed in the policy which are not covered. 
TYPE OF INSURANCE COVERAGES 
Insurance contracts may be classified as either life or non-life.  
Life coverages are those relating directly to the individual.  The risk covered is the possibility that some peril may interrupt the 
income that is earned by an individual.
The perils relating to life  coverages consist of the following: 
1. Death 
2. Accidents and sickness 
3. Unemployment 
4. Old age
Non- Life Coverages 
A non-life coverage refers to insurance other than life.  Included in non-life coverages are: 
1. Fire and allied risks 
2. Marine 
3. Casualty 
4. Surety 
5. Liability 
Non-life insurance is distinguished from life insurance in that  life insurance covers peril that may prevent one from earning
money  with which to accumulate property in the future, while non-life  insurance covers property that is already accumulated.
Non-life  insurances is also referred to as general insurance. 

BASIC TYPES OF LIFE INSURANCE  CONTRACTS 

There are quite a number of life insurance policies  which are offered for sale in the market to meet the varying  needs of
individuals and business firms. All are either whole  life, term, or endowment, or a combination of one or more of  these. Such
combinations include annuities, since they form  part of the life insurance business. This condition makes life  insurance contracts
into four basic types: 
1. Whole life 
2. Term 
3. Endowment 
4. Annuities
 WHOLE LIFE INSURANCE 
It is a kind of life insurance which is kept in force until death  so long as a premium are paid, regardless of age and the time 
period. It is a permanent form of insurance and covers the insured for  life. The phrase covers the insured for his whole life is the
basis for  naming this particular kind of insurance contract. 
Classes of Whole Life Insurance Policies 
1. Single-premium whole life policies – those for which, in exchange  for one premium, the insurer promises to pay the claim
whenever  death occurs. 
2. Continuous-premium whole life policies – those for which the  insured pays the same premium amount continuously as long
as  he is alive. 
3. Limited-payment whole life policies – belong to the type of  insurance plan under which the premiums are paid for a limited 
period of years, after which no further premium payments need to  be made. 
 TERM INSURANCE 
A term insurance policy is a contract between the  insured and insurer whereby the insurer promises to pay the face  amount of
the policy to a third party (the beneficiary) if the  insured dies within a specific time period. 
Term insurance as it name implies, is insurance for a  term, or temporary period. At the end of the specific period,  whether for
one year or five years, the coverage is terminated,  and the policy no longer has value. 
TYPES OF TERM POLICIES 
1. Straight term policies which are written for a specific number  of years and then automatically terminated.
2. Long-term policies written to terminate at some specified age of  the insured, commonly 65; 
3. Renewable term insurance which may be renewed by the insured  before expiry date, without again proving insurability; 
4. Convertible term policies which may be converted into whole life  or endowment insurance within specified period, without
evidence or  insurability; 
5. Increasing term insurance, the policy amount of which increases  monthly or yearly; and 
6. Decreasing term insurance, the face value of which reduces  periodically, either monthly or yearly.
ENDOWMENT INSURANCE 
It is a contract under which the insurer promises to pay  the beneficiary a stated sum if the insured dies during the policy  term, or
to the insured if the policy term is survived. The policy  term is also referred to as the “endowment period”.  
TYPES OF ENDOWMENT INSURANCE 
1. The term for which they are written may vary from 5 to 40  years 
2. The designated age of maturity to which they are written,  such as 60 to 65 years; and 
3. The period of premium payment, such as the limited  payment endowment where the endowment is payable at  death or at the
end of the endowment period. 
ANNUITIES  
An annuity is a series of payments made at a certain  specified intervals. Annuities are written either (1) as separate  contracts,
on an individual or group basis; or (2) as supplementary  contracts, using the proceeds of a life insurance contract to  purchase an
annuity benefit. 
BUSINESS AND THE USE OF LIFE  INSURANCE
The employees of a firm constitute a very important  investment. Possible liabilities of the company may arise  when employees
are injured or killed in work -related  accidents. The moral obligation of the employer is to provide  for such type of needs. If
these are not provided for through  insurance, the funds of the firm which are earmarked for other  uses, may be jeopardized. The
various types of life insurance  contracts available provide solution to such possible  difficulties.  
❖ FIRE INSURANCE 
Perils Covered 
A fire insurance contract covers all direct losses and damages  by fire or lightning and by removal from premises endangered
by fire. In  the attempt to rescue property, losses due to theft may occur. Such  losses are also covered by a fire policy.  
Other allied perils may be covered in  
a fire insurance contract, provided they are  
specifically named in the policy. The allied  
perils refer to the following: 
1. Earthquake fire; 
2. Earthquake shock; 
3. Windstorm, typhoons and flood; 
4. Riot and strike damage and riot fire; and 
5. Explosions 
WHAT MAY BE INSURED 
Fire insurance contracts are designed to cover any of the  following: 
1. Building; 
2. Contents of the building like machinery, appliances, furniture  and fixtures, stock-in-trade, and others or 
3. Both buildings and contents 
❖ MOTOR CAR INSURANCE 
Most business firms cannot avoid the ownership of motor  vehicles. Conveyances are needed by the firm for transporting goods 
and persons. Owning a vehicle , however, entails some risks inherent to  such undertaking. These risks include possible injuries
to persons or  damage to properties. Fortunately, insurance policies may be bought to  cover such risks.  
❖ MARINE INSURANCE 
Business firms involved in  transporting commodities from one  seaport to another require protection  from possible losses
such as  commodities. This is the type of  insurance coverage for this matter. 
GENERAL LIABILITY INSURANCE 
Business firms may at times be subjected to liability  claims by other parties. Damages paid to claimants are  sometimes enough
to cause bankruptcy to the firm. To protect  the firm from such adverse financial difficulties, some sort of  insurance cover is
required. Such need is covered by li ability  insurancepolicies.  
BUSINESS LIABILITY FORMS 
General Liability exposures may be classified into three  broad areas: (1) business liability: (2) professional liability; and (3) 
personal liability. The first class concerns business and it may be  covered by business liability forms. 
SURETY BONDS 
The firm may also be exposed to possible losses  involving the following: 
1. The mishandling or misappropriation of goods or funds by  employees; and 
2. The non-performance of a party who has entered into an  agreement with the firm.  
The first type of exposure to loss may be covered by  fidelity bonds, while the second type may be covered by surety  bonds.
FIDELITY BOND 
It is one that covers an employee or employees in position/s  of probate trust and it guarantees the employer against loss up to the 
penalty of the bonds should the employee or employees bonded be  proven dishonest.  
SURETY BOND 
This guarantees to the obligee that the principal named in the  bond will perform a certain obligation and if he fails to do so, the 
surety will perform the obligation or pay the damages up to the  amount of the bond. 
MISCELLANEOUS INSURANCE LINES 
There are other types of insurance coverages which may  protect the firm from possible financial losses. These are the 
following: 
1. Crime Insurance – protects owners of property against losses  due to its being wrongfully taken by someone else. Crime 
coverages include possible losses from burglary, robbery,  larceny, theft, forgery, embezzlement, and other dishonest  acts.  
2. Glass Insurance – large amounts of cash outlay invested in  glass used for light, display and ornamentation exposes the 
owner to losses which may be substantial, the comprehensive  glass policy insures against breakage or damage to the glass. 
3. Boiler and Machinery Insurance – a type of insurance contract  which provides protection against loss resulting from the
accidental  bursting or breaking of a great variety of apparatus.  
4. Credit Insurance – contract whereby the insurer promises, in  consideration of a premium paid, and subject to specified
conditions  as to the persons whom credit is to be extended, indemnify the  insured, wholly or in part, against loss that may result
from the  insolvency of persons to whom he may extend credit within the term of  insurance. 
It may be classified into five types namely:  
• Credit life and credit accident and sickness insurance; • Accounts receivable insurance; 
• Domestic merchandise credit insurance; 
• Governmental credit insurance; 
• Export credit insurance

Business failure refers to the following:

1. All industrial and commercial enterprises that arepetitioned for bankruptcy in the courts;
2. Concerns which are forced out of business through such actions in the courts as foreclosure, execution and attachments with
insufficient assets to cover all claims;
3. Concerns involved in actions in courts and other government agencies (like SEC and the Central Bank)
such as receivership, reorganization or arrangement;

4. Voluntary discontinuance with known loss to creditors and

5. Voluntary compromises with creditors out of court

CLASSES OF FAILURES
1. Recession – phase in the business cycle characterized by slowing down of the rate of growth of business in general.
2. Changes in government regulation – example of this is the “log ban”. This prohibition was enough to force lumber and
furniture firms to cease operations.
3. Burdensome taxes or tariffs – jack up the final selling price of the products or affected industries.
4. Court decisions – it forces a business to cease operations
5. Labor strikes – force firms to temporarily cease operations
6. Labor cost – when they become prohibitive, some firms consider permanent closure
7. Dishonest employees – when assets are continuously misappropriated
8. Disasters or “acts of God” – like drought, typhoons, floods and earthquake may sometimes inflict losses to the firms

INTERNAL CAUSES OF FAILURE

1. Overcapitalization in debt – (too much borrowing) due to rising interest payments and it may seriously deplete funds
2. Undercapitalization in equity – (little investments) disability to refinance its maturing obligations
3. Inefficient management of income – jeopardizes the earning power of the firm
4. Inferior merchandise – an inferior product may lose out in the market
5. Improper costing with excessive expenditures – doesn’t reflect actual costs
6. Errors of judgement concerning problems or expansion – any error in judgement could cause serious flaws
7. Inefficient pricing decisions- products and services may be priced out of the market
8. Inability to improve a weak competitive position- when this happens, funds are continuously drained, forcing the firm into
bankruptcy

SYMPTOMS OF FAILURE

Statistical data are sometimes useful identifying indications of impending business failure. In this regard,
financial ratios play an important role.

1. Cash Flow to Total Debt – viable firms have higher cash flow to total debt ratio. When this ratio gets lower, the financial
standing of the firm weakens and it gets even lower.
2. Market Price- it is indicated by a declining market price of the firm’s stocks. This is the result of the decreasing
confidence of the investors in the survival of the firm.
3. Working Capital to Total Assets – the decline reflects the inadequacy of the working capital
4. Retained Earnings to Total Assets – retained earnings provide a source of funding for unexpected costs, delays or credit
crunches. A decline in this ratio indicates an approaching failure.

5. Earnings before Interest and Taxes to Total Assets – this ratio reflects the adequacy of cash flow in relation to the firm’s
liabilities. A lower ratio means a lesser chance of settling debts

6. Market Value of Equity to Book Value of Debt – when debts are used excessively, the market value of the stock goes
down because of increased financial risk. This is indicated by a lowering down of the ratio.

7. Sales to Total Assets – this reflects a shrinking market for the product. As the ratio gets lower, the firm approaches failure.

REMEDIAL ACTIONS FOR BUSINESS FAILURES

Rehabilitation is an attempt to keep the firm going. It may be achieved through any of the following:
1. formal processing called reorganization; or
2. voluntary agreement
1. Reorganization – refers to a formal proceeding under the supervision of a court, including short-term liabilities, long- term
debt and stockholder’s equity in order to correct gradually the firm’s immediate inability to meet its current payments
It may call for:
a. Refinancing
b. RecapitalizatioN

A. Refinancing – refers to the replacement of outstandingsecurities by the sale of new securities. Refinancing may be classified
as:
✓ Refunding – sale of a new bond issue tore place an existing bond issue
✓ Funding – retirement of a preferred stock with the proceeds of borrowing
✓ Reverse funding- issuance of common stocks as a means of paying off outstanding bond issue
B. Recapitalization – undertaken when a group of existing security holders accepts a new issue in voluntary exchange for the
issue it now holds.
2. Voluntary Agreement

When creditors and stockholders agree to give the firm a chance to get back on the right track under a mutually accepted plan. It
may fall under the following:

A. Extension – payment dates are postponed on at least a portion of the firm’s short term liabilities

including maturing long-term debt.

B. Composition – creditors accept partial payment in full settlement of their claims, thereby releasing the debtor firm from its
obligations to them.

C. Creditor management – committee of the creditors takes over the firm then tries to get the business back on its feet.

LIQUIDATION

It occurs when a firm dissolves and ceases go exist and its assets are sold. Liquidation may be accomplished throughany of the
following:

1. A voluntary agreement called assignment; or

2. A formal proceeding called liquidation under bankruptcy
ASSIGNMENT – is an out-of-court settlement where the creditors select a trustee to sell the assets

and distribute the proceeds. All creditors agree to the terms of assignment. Only cash payments are made and the absolute priority
rule is usually followed.

BANKRUPTCY – a legal process by which a person or business that is unable to meet financial obligations is relieved of those
debts by the court. The court divides whatever is left of the assets of the person or a firm among creditors, allowing creditors at
least part of their money and freeing the debtor to begin anew.