Thesis Group IV

THE IMPACTS OF FINANCIAL LEVERAGE AMONG SELECTED SMALL
BUSINESSES AT THE PUBLIC MARKET IN POBLACION, MUNTINLUPA CITY

S.Y.2020-2021
A Qualitative Research Paper
Presented to the NSTP Department
In Partial Fulfillment of the Requirements in

National Service Training Program (NSTP 2)
PAMANTASAN NG LUNGSOD NG MUNTINLUPA
COLLEGE OF BUSINESS ADMINISTRATION
University Road, Poblacion, Muntinlupa City
CHAPTER I
INTRODUCTION
A. CONTEXT OF THE STUDY
Finance is defined as the management of money and includes activities such as investing,
borrowing, lending, budgeting, saving, and forecasting.
Financial leverage refers to how much debt a company has used to finance their assets.
The reason why financial leverage is used differs between companies. According to the pecking
order theory (Myers, 1984), it is because of lack of cash flows for short-term debts or a need for
more capital to finance an investment.
Leverage is another way to refer to debt. In business, leverage often refers to borrowing
funds to finance the purchase of inventory, equipment, or other assets. Businesses use leverage
instead of using equity to finance those purchases. Financial leverage follows the straightforward
definition. It is the amount of debt in the accounts of the firm. The use of Financial leverage in
bankrolling a firm's operations can improve the returns to shareholders without diluting the firm's
ownership through equity financing. Too much financial leverage, however, can lead to the risk
of default and bankruptcy.
One of the financial ratios used in determining the amount of financial leverage a
business has is the debt/equity, ratio, which shows the proportion of debt a firm has compared to
the equity of its shareholders. This leverage works like any other form of debt. The business
borrows money with the promise to pay it back, just like a credit card or personal loan. Debt
increases the company's risk of bankruptcy. For instance, when a company is not sufficient with
funds. Therefore, some of the businesses would acquire financial leverage to have funds (Debt
specifically). They can use it for their businesses, e.g. production, investing, administrative, etc.
Consequently, they have to pay the amount of money back except for the profit that they have
gained from leverage.
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Small business is a privately owned corporation, partnership, or sole proprietorship that
has fewer employees and less annual revenue than a corporation or regular-sized business. Every
small business needs financial stability. Cash flow is important, but not at the risk of losing
control over finances.
One of the most problems for any business, monthly expenses, but entrepreneurs often
forget the many hidden costs of running a business. There are employee wages and bonuses,
licenses, insurance premiums, equipment purchase/maintenance and of course, regular utility
bills to pay
This study is focused on determining the impacts of financial leverage. The researchers
aim to study the impacts of financial leverage among selected small businesses at the public
market in Poblacion, Muntinlupa City. Upon conducting this research, the researchers would like
to determine what is the qualification and criteria to be one of the beneficiaries of financial
leverage.
Given the above mentioned, the researchers aim to determine how financial leverage
helps the selected small business at the public market in Poblacion Muntinlupa City.
B. REVIEW OF RELATED LITERATURE
This chapter shows the related literature for the researcher to bring out more information
about the impacts of financial leverage among selected small businesses at the public market in
Poblacion Muntinlupa City.
LOCAL AND FOREIGN STUDIES
According to Brealey, Myers and Allen, (2017) Linnaeus University Sweden there are
both ADVANTAGES AND DISADVANTAGES with financial leverage. An advantage which is
supported from both the trade-off theory and the pecking order theory is that debt can increase
the business possibilities for a company. This advantage is associated with positive cash flows,
which can be used to finance both the company’s operating business and investments. While the
disadvantage of financial leverage can occur if the company’s operating business is unprofitable
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and therefore is not able to pay back the debt or the interest rate the debt is associated with. This
could lead to bankruptcy, which is a disadvantage mentioned in the trade-off theory.
According to Myers, The pecking order theory takes this reasoning one step further and
claims that financial leverage just is the symptom for a company with a lower financial
performance and the company therefore has to loan capital. The reasoning from the pecking
order theory is also supported from a research made by Edim, Atseye and Eke (2014), which
claim that financial leverage is used by a company because of the need of capital to run the
business. The authors of the research claim that the importance of capital cannot be stressed
enough, and without capital it is impossible for a company to grow.
According to Kokemuller, (2021) Small Business Chron Financial leverage refers to the
portion of a company's operations financed with debt. Being highly leveraged means that you
have a significant amount of debt in use. While debts used to generate revenue can boost revenue
and profit over time, unproductive or excessive debt can inhibit profitability. One of the most
direct ways leverage negatively affects ongoing profit is payment of interest. When you owe
money, you pay the lender interest over time. Every dollar in interest reduces your profit by the
same amount.
If you get a low interest rate on a particular loan, the cost of the interest may make a
reasonable investment. Trade buyers often purchase inventory on account and pay interest to
carry the debt. The inventory flexibility is a positive tradeoff. To launch or grow a business, you
have two basic ways to finance the move. You can seek out investment money or get a loan. If
you prefer to maintain greater control with debt financing, you accept the repayment obligations
as part of the deal. In the long run, a business may generate greater profit through business
expansion. Plus, each owner gets a greater share of the profit in that scenario if you borrowed
money instead of inviting more owner-investors.
According to the study of Machfiro, Sukoharsomo, and Nuzula, (2017 ) Effect of

Moderating Variables: Financial Leverage and Dividend Payout of Publicly-Listed
Property Sector of the Philippines found that leverage has an insignificant effect on dividend
3
policy and vice versa, regardless of company classification. These findings contradicted the debt
covenant theory and monitoring hypothesis. This study attributed this anomaly to other
determinants of dividend policy, causing it to overshadow the impact of financial leverage. Asif,
Rasoof, and Kamal (2010) examined the relationship between dividend policy and financial
leverage and concluded that change in earnings has no significant impact on dividend policy in
the case of Pakistani firms. The fixed effect model supports only the significant effect of
dividend yield on dividend per share.
According to Rodolfo Q. Aquino, UP College of Business Administration Discussion Paper

(2010) Degrees of Operating and Financial Leverage of Philippine Firms The issue examined
in this paper is whether the degree of operating leverage (DOL) and the degree of financial
Leverage DFL) are useful as external measures of the riskiness of a firm's business Operations,
as they are applied to Philippine firm data. Two popular methods of estimating DOL and OFL.
are applied to published financial data from 1999 to 2008. The first was introduced by
Mandelker and Rhee in 1984 which is denoted herein as the MR method.
The second was a modification of the MR method for growing firms by O'Brien and
Vanderheiden (1987) denoted here as the ov method. The next section discusses the two
measures of leverage and reviews selected literature. The succeeding section then discusses the
data and methodology used, followed by sections presenting the empirical results. The last
section is a concluding section. Finance textbooks (er Brigham and Houston, 1996) define
business risk as the riskiness of the firm's operations assuming no dabit. On the other hand,
financial risk is the additional risk placed on the equity holders as a result of debt. Alternatively,
business risk is defined as the certainty inherent in expected returns on assets and is claimed to
be the single most important determinant of capital structure.
Business risk is often measured by the firm's operating leverage, ie, the extent to which
costs are fixed. A common measure of operating leverage, the break even chart was developed in
the early 1900s by Professor Walter Ratenstrauch of the Industrial Engineering Department of
Columbia University Mansfield, 1966, p. 93). The reasoning is that the higher the level of fixed
4
cost and the higher is the degree of operating leverage, a relatively small change in revenues will
result in a relatively large change in operating income or earnings before interest and taxes
(EBIT). This also means that the firm's break even point is relatively high.
C. RESEARCH QUESTIONS
● Can selected small businesses at the public market in Poblacion, Muntinlupa City be
successful through financial leverage?
● What are the possible limitations of Financial Leverage that affect the possible risks of
selected small businesses at the public market in Poblacion, Muntinlupa City?
● What are the impacts of financial leverage on profitability of selected small businesses at
the public market in Poblacion, Muntinlupa City?
5
CHAPTER II
METHODOLOGY
A. Philosophical Underpinning
The present study used a qualitative method to determine the authentic task/s that the
small businesses perform in different content/s. In order to gather data needed or information, the
researchers used purposive sampling technique of research since the researchers will evaluate or
assess the data of small businesses among selected small businesses at the public market in
Poblacion, Muntinlupa City, this research study only has limited numbers of people and selected
members of the population.
B. Selection of Participants
The participants are 30 business men/women among selected small businesses at the
public market in Poblacion, Muntinlupa City to be the respondents of this study, These
participants range from 18 years old and above however only 30 participants are purposely
selected and are composed of 15 females and 15 males.
C. Ways of Gathering the Narratives

Firstly, before conducting the survey the researchers will ask the participants if they are
agree and willing to participate and promise them that their answer and identity will not spread
and will keep confidentially. The participants were informed also that this survey meant to gather
the data and they need to answer with whole honesty.
Secondly, during the survey the researchers will give the questionnaires and will
interview. The researchers will announce short information on how they are going to answer the
questionnaires and the interview for them to be able to know what they need to the researchers
questions.
Lastly, after the survey the researchers will get the questionnaire and check if the answers
of the respondents are complete. The researchers will also say thank you to the respondents for
participating through answering surveys and interviews.
6
D. Process of Reflective Analysis
In this process of reflective analysis, the researchers first determine what is finance,
financial leverage and small businesses to be able to easily understand what will be the process
of the whole research. The information gathered is crucial to have a deep understanding about
this study.
The researchers conducted a survey and interviews to determine the impacts of financial
leverage among selected small businesses at the public market in Poblacion, Muntinlupa City for
them to know how the financial leverage affects the selected small businesses. In this matter, we
conducted a survey and interview wherein it will analyze the business if it has sufficient amount
or income to provide for the needs of the business. However, this research will help, if the
business is capable of financial leverage and what might be the advantages, the possibilities of
disadvantages and risks for their business.
In this chapter, the researchers first made a question to be asked in the survey
questionnaire. They had struggles in making survey questions since some questions had
incomplete thoughts. Also, the researchers brainstormed about their target selection of
participants and the ways of gathering the narratives that researchers will use all throughout the
survey. Researchers also shared their ideas on how this research will be done.
E. Ethical Consideration
Since pandemic, the researchers have conducted an online survey and interviewed for the
safety of the researchers and respondents. It is essential to ask for the permission of the
respondents for their participation in the research study. In this matter, the privacy and all
information we gathered from the respondents are only intended for this research.
The researchers want to complete the study heeding ethical consideration particularly on
asking permission to the respondents. The respondents need to willingly participate in the
research study and have utmost trust for the confidentiality of their information. However, if the
respondents want to withdraw from the study they may do so.
7
May 8, 2021
UNIVERSITY ROAD,
PUTATAN, MUNTINLUPA CITY
DEAR MRS. ROMAGUERA,

Good Day! We are the researchers from Bachelor of Science Business Administration 1B,
We would like to ask for your permission to conduct the survey among our respondents at the
public market in Poblacion, Muntinlupa City. which aims to respond our research titled, “THE
IMPACTS OF FINANCIAL LEVERAGE AMONG SELECTED SMALL BUSINESSES AT
THE PUBLIC MARKET IN POBLACION, MUNTINLUPA CITY S.Y.2020-2021’’
. We are looking forward to your positive response, Thank You!
Cordially yours,
Trisha M. Aguilar Joy Cristy L. Daganio Daguio, Casey Kate A.

Printed name & Signature Printed name & Signature Printed name & Signature
Mr. John Ezekiel Ergina Esguerra, Nathalia T. Espeleta, Sharmaine D.
Gumilin, Kyra D. Naorbe, Daniel James E. Napatotan, Kim Nicole E.
Prezidente, Phoenix Immanuel C. Reyes, Christian Joshua L. Severino, Alvin V.
MS. CHINE JOI ROMAGUERA

Printed name & Signature
8
Good day! We are the researchers from Pamantasan ng Lungsod ng Muntinlupa. Our
group wants to conduct an online survey that can help our study titled “THE IMPACTS
OF FINANCIAL LEVERAGE AMONG SELECTED SMALL BUSINESSES AT THE
PUBLIC MARKET IN POBLACION, MUNTINLUPA CITY S.Y.2020-2021’’ This
questionnaire is for research purposes only. We can assure you that all the information
provided here will not be used for any other purposes. (Leverage is another way to refer to
debt. In business, leverage often refers to borrowing funds to finance the purchase of
inventory, equipment, or other assets).
Name:_______________________ Age: _______________________
Sex: _______________________
Part I: Check the square that corresponds to your answer
1. What kind of Business do you have?
❏ Eatery
❏ Meat shop
❏ Vegetable shop
❏ School Supplies shop
❏ Groceries shop
❏ Tailor shop
❏ Flowers shop
❏ DVD’s shop
❏ Sari- sari store
❏ Others(Specify):__________________
2. How much is your estimated income every day?
3. How much is your estimated income every month?
4. How much is your estimated cost for your business every day?
5. How much is your estimated cost for your business every day month?
Part II: Please choose the best answer for each question below. Whether if it is a Yes or No
9
1. Are there times that your business is experiencing loss?
a. YES b. NO
2. Does your income everyday/week/month are sufficient for business needs?
a. YES b. NO
3. Do you want to use financial leverage for your business?
a. YES b. NO
4. Do you think that using a financial leverage can be a help to sustain your business?
a. YES b. NO
5. Is there a negative relation between your company's profitability and financial leverage?
a. YES b. NO
Interview:
1. What do you think are the possibilities of advantages of financial leverage to your
business?
2. How about the possibilities of disadvantages or risks of financial leverage to your
business?
3. How does your company manage the relationship between financial leverage and your
company's profitability and financial performance?
Chapter III
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RESULTS
TABLE 1
NUMBER OF THE RESPONDENTS OF AMONG SELECTED SMALL BUSINESSES

AT THE PUBLIC MARKET IN POBLACION, MUNTINLUPA CITY ,
Gender Number
Girl 15
Boy 15
TOTAL 30
This research study has twenty (30) participants from small businesses at the public
market in Poblacion, Muntinlupa City are purposely selected. These participants range from 18
above years old and these 30 participants are composed of 15 females and 15 males. Which is
equivalent to 100%.
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CHAPTER IV
RESULT & DISCUSSION
12
REFERENCES
Sons, W.C.(2012).Financial|Definition of Financial.Retrieved from
https://www.dictionary.com/browse/financial
Averkamp, H.(2021).What is financial Leverage?.Retrieved from
https://www.accountingcoach.com/blog/what-is-financial-leverage
Merriam Webster Dictionary.(2021).Definition of debt.Retrieved from
https://www.merriam-webster.com/dictionary/debt
n/a.(2021).What is a small business?.Retrieved from
https://asq.org/quality-resources/small-business
n/a.(2015).What is a shareholder?.Retrieved from
https://corporatefinanceinstitute.com/resources/knowledge/finance/shareholder/
n/a.(2015).Financial leverage.Retrieved from
https://corporatefinanceinstitute.com/resources/knowledge/finance/
what-is-finance-definition/
Sturesson, H. & Källum, K.(2017).What is finance?.Retrieved from
https://www.diva-portal.org/smash/get/diva2:1136627/FULLTEXT01.pdf
n/a.(2019).10 Financial Concerns Every Small Business Owner Must Prepare For.
Retrieved from.https://www.hdfcbank.com/personal/resources/learning-centre/save/
small-business-financial-problems
13

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Thesis Group IV

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THE IMPACTS OF FINANCIAL LEVERAGE AMONG SELECTED SMALL

BUSINESSES AT THE PUBLIC MARKET IN POBLACION, MUNTINLUPA CITY

In Partial Fulfillment of the Requirements in

B. REVIEW OF RELATED LITERATURE

According to the study of Machfiro, Sukoharsomo, and Nuzula, (2017 ) Effect of

According to Rodolfo Q. Aquino, UP College of Business Administration Discussion Paper

C. Ways of Gathering the Narratives

DEAR MRS. ROMAGUERA,

. We are looking forward to your positive response, Thank You!

Trisha M. Aguilar Joy Cristy L. Daganio Daguio, Casey Kate A.

MS. CHINE JOI ROMAGUERA

NUMBER OF THE RESPONDENTS OF AMONG SELECTED SMALL BUSINESSES

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