PUERTO GALERA ACADEMY, INC.

Poblacion, Puerto Galera, Oriental Mindoro

ABM 6: BUSINESS FINANCE
SHS CARESIAN REMOTE ADAPTIVE DYNAMIC LEARNING EXPERIENCE

WHERE TO TURN TO
FIRST QUARTER

CLAP 5
CARESian Learning
Activity Page
WHEN CRISIS STRIKES?

COMMENCEMENT
OPENING PRAYER
In the name (+) of the Father, and of the Son and of the Holy Spirit, amen. Grant me O Lord, my
God, a mind to know you, a heart to seek you and wisdom to find you, to act justly, to love and to walk humbly with
our God. Twin Hearts of Jesus and Mary, Reign in our hearts forever. In the name (+) of the Father, and of the
Son and of the Holy Spirit, amen.
OVERVIEW
On October 24, 2013, the article titled “Robinsons Retail’s IPO to Raise $650 Million, Largest
Ever in the Philippines” was published in Wall Street Journal. Robinsons Retail Holdings, Inc. (RRHI)
is the company behind Robinsons department stores supermarkets. Ministop, and True Value, among
others.
Also, on June 4, 2014, the article titled “SMIC Raises $350M from Offshore Bond Issue” was
published in Philippine Daily Inquirer. SMIC is the holding company behind SM Store, SM
Supermarket, BDO, China Bank, and Tagaytay Highlands, among others.
These two articles show two different types of fund raising activities conducted by two big
companies in the Philippines. The first one RRHI, raised funds through equity financing while SMIC
did it through debt financing. Both of these companies have the flexibility to raise funds through
different means but more of a challenge for small and medium enterprises (SMEs).
This module will discuss the different types of financing and their features. It will also discuss
financing sources that can be available to small and medium enterprises (SMEs).

CONTENT STANDARD
The learner demonstrate an understanding of the sources and uses of short term and long
term funds, and the requirements, procedures, obligation to creditor, and the reportorial necessities.

PERFORMANCE STANDARD
The learners are able to:
1. distinguish debt and equity financing and
2. identify the bank and nonbank institutions in the vicinity that are possible sources of funds, and
enumerate their requirements and processes for loan application.

MOST ESSENTIAL LEARNING COMPETENCY

The learners compare and contrast the loan requirements of the different banks and nonbanks
institution and cite these institutions in locality.

FORMATION STANDARD
To validate different banks and non-banks institution in the locality.

TIME FRAME
1 week

MY LEARNING TARGETS
At the end of the week, I can be able to complete the tasks and learn to:
 differentiate debt financing from equity financing;
 identify the different sources of short-term and long-term financing;
 enumerate the advantages and disadvantages of the different sources of financing.

where caring and learning begin 1

 PUERTO GALERA ACADEMY, INC.
Poblacion, Puerto Galera, Oriental Mindoro
ABM 6: BUSINESS FINANCE
SHS CARESIAN REMOTE ADAPTIVE DYNAMIC LEARNING EXPERIENCE

ACTIVATION
Where you get your allowance is not a question-unless you have a part-time job.
However, aside from the salaries of your parents or the money they earn from doing
business, do you know of any other source of funds that your parents tap in order to
support all of the family’s daily or short-term needs? Have you heard your parents say
that what they make is not enough? What about their long-term plans. What about
emergencies?

Are their salaries enough? Is there some excess? If their salaries are not
enough, then what other sources are available to them? Do they borrow money from a
private bank or from a government institution? What are some of the short- or long-
term loans offered by banks and other financial institutions?

We have the same scenario in the past. But the way a firm operates in terms of
sources and uses of funds is not much different from the way funds are sourced and
used in your own household which will be covered in this module. Hopefully, you will
find time to answer the questions to be raise in the LA’s such as: How do firms finance
their assets? What are the sources of funds needed to support a firm’s operations?
What about the firm’s expansion and growth plans? If it borrows money, how much or
what percentage of what the firm needs does it have to borrow? What percentage
comes from the investor?

Do not be bothered if most of the time our presentation is purely discussion or

reading. You need to equip yourselves with analysis since Business Finance is purely
analysis for the benefits of the business. So bear with it and once again be different
from now on.

where caring and learning begin 2

 PUERTO GALERA ACADEMY, INC.
Poblacion, Puerto Galera, Oriental Mindoro
ABM 6: BUSINESS FINANCE
SHS CARESIAN REMOTE ADAPTIVE DYNAMIC LEARNING EXPERIENCE
Name: ______________________________ Score: ____________
Grade and Section: ____________________ Date: _____________
Subject: _____________________________ Q1 CLAP 5

REFINEMENT
ACTIVITY TITLE: DEBT AND EQUITY FINANCING
LEARNING TARGET: The learners differentiate debt financing from equity financing
REFERENCE: Arthur S. Cayanan. et.el. Business Finance. Rex Bookstore, Inc. 2017. pp. 80-81.

Concept Digest:

Debt financing can be in the form of borrowing from banks or other lending
institutions or issuance of debt securities like commercial papers and bonds. For some
companies, it can also be in the form of advances from stockholders to expedite the
process of raising funds.

Equity financing refers to issuance of new shares of stocks and retained earnings
plowed back into the operations of the company. The latter is also called internally
generated funds. Equity financing is the safest source of financing for a company
because it does not require any mandatory payment of dividends. If you own enough
shares of a company, you can end up controlling its operating and financing decisions.
Controlling stockholders defines the direction of the company because they can
choose who will manage the company.
(For more discussions, please proceed to the attachment found in the google classroom.)

Learning Activity 1

Directions: Answer the following questions

1. Differentiate debt financing from equity financing based on their advantages and
disadvantages.
2. Reason out why equity is more expensive than debt financing.

where caring and learning begin 3

 PUERTO GALERA ACADEMY, INC.
Poblacion, Puerto Galera, Oriental Mindoro
ABM 6: BUSINESS FINANCE
SHS CARESIAN REMOTE ADAPTIVE DYNAMIC LEARNING EXPERIENCE
Name: ______________________________ Score: ____________
Grade and Section: ____________________ Date: _____________
Subject: _____________________________ Q1 CLAP 5

EVALUATION
ACTIVITY TITLE: SOURCES AND USES OF SHORT AND LONG-TERM FUNDS
LEARNING TARGET: The learners:
1. identify the different bank or nonbanks in the vicinity that are possible
sources of short-term and long-term financing; and
2. state the advantages and disadvantages of the different sources

REFERENCE: Arthur S. Cayanan. et.el. Business Finance. Rex Bookstore, Inc. 2017. pp. 81-86.

Short-term funds are normally used to finance day-to-day operations of them

company. It is used for working capital requirements such as accounts receivable and
inventories. It can be also used from bridge financing where a company has some
maturing obligations and does not have enough cash to pay such maturing obligations.

Long-term funds are used for long-term investments or sometimes called capital
investments. This include expansion, buying new equipment, or buying a piece of land
which will be the site of future expansion. Long-term funds can also be used to finance
permanent working capital requirements.

Learning Activity 2

Directions: Do the following:

1. Lay down some bank or nonbank institution in your vicinity that are possible
sources of funds being tapped by your parent in order to support all of the
family’s daily needs during the family’s shortcomings and the requirements
involved in order for the loan to be processed. (10 pts.)

2. Enumerate at least 2 advantages and 2 disadvantages of tapping those sources

in times of financial crisis. (5 pts.)

CLOSING PRAYER
In the name (+) of the father, and of the son and of the Holy Spirit, amen. I give you thanks and
praise oh Lord for guiding me along this module. May the learnings that I’ve got, help me to be a good
steward of the blessings we received in order to avoid a luxurious life that might bring our family into
crisis. All of this I ask through Christ our Lord with the intercession of mother Mary, amen. In the
name (+) of the Father, and of the Son and of the Holy Spirit, amen.

LUISITO G. PELIÑO FB account: E-mail add:

where caring and learning begin 4

 PUERTO GALERA ACADEMY, INC.
Poblacion, Puerto Galera, Oriental Mindoro
ABM 6: BUSINESS FINANCE
SHS CARESIAN REMOTE ADAPTIVE DYNAMIC LEARNING EXPERIENCE
ATTACHMENT A
DEBT and EQUITY FINANCING

Debit financing creates a contractual obligation for the borrower to pay the interest and the
principal. Payments have to be made on time because unpaid interest and principal lead to penalties
and more interest, despite these disadvantages, companies still resort to borrowing to fund their
working capital requirements and expansions. If managed properly and if taken into reasonable
amounts, debt financing can help the company grow. Among the benefits of debt financing are as
follows:
1. Interest expense is tax-deductible. Unlike cash dividends for shares of stocks, interest expense
provides a tax shield. For example, if the income before taxes is 1 million and the company
has ₱100,000 interest expense, taxable income is ₱900,000. If the tax rate is 30%, this will
lead to an income tax expense of ₱270,000 (₱900,000 x 30%). Without the interest expense,
the income tax would have been ₱300,000 (₱1,000,000 x 30%). This difference in income tax
expense of ₱30,000 (₱300,000 - ₱270,000) is called a tax shield.
2. Debt financing allows the company to grow without diluting the interest of the controlling
stockholders.
3. Creditors generally do not intervene in the decisions of management.
These benefits from debt financing can be realized if the level of debt incurred by the company
is manageable. Too much debt can expose the company to brankruptcy risk and this may disrupt the
operations of the company. Suppliers may decide to stop delivering merchandise, and managers’
executive time will be spent more on how to fix the debt problem rather than concentrating on the
operations of a company.

Equity financing also provides the company financial flexibility. This means that if a company is
100% financed by equity or its leverage ratio is very low, it will be attractive to creditors. Therefore,
when this company is in need of financing, it can have more options as regards financing. It can be
easily raise funds through debt financing or equity financing or a combination of both.

Disadvantages of Equity Financing:

1. Cash dividends are not tax-deductible.
2. Offering new shares to other investors may dilute the ownership stake in terms of percentage
of the existing stockholders.
3. It is the expensive source of financing. At the onset, it does not appear to be expensive
because there are no mandatory payments for dividends. Following are the reasons to figure
out that equity is more expensive than debt financing.
a. Most companies opt to have debt financing.
b. Under Philippine laws, a company which is in the process li liquidation cannot distribute
anything to the stockholders unless the claim of the creditors have been satisfied first.
This provision in law implies that the stockholders are taking the biggest risk in the
company. In finance, there is there popular statement “high risk, high return” which
means that for somebody to take more risk, he has to be compensated by an expected
higher return. If this is not the case, then why take additional risk?
c. Unlike loans where interest and principal payments by borrowers are more assured,
cash dividends are not assured.
d. If a company does not perform well, the stockholders absorb the losses which become
the basis why they can demand for higher return.

ATTACHMENT B
Sources of Short-term Funds:
1. Suppliers’ credit-Suppliers of raw materials and merchandise are the best sources of short-
term working capital, the reason why good relationship has to be established with them.
2. Advances from stockholders- If you have personal assets and you control the company,
advancing funds to the company when there are financial requirements is an easy way for the
company to raise funds. Interest on these advances can be charge by the stockholder.
where caring and learning begin 5
 PUERTO GALERA ACADEMY, INC.
Poblacion, Puerto Galera, Oriental Mindoro
ABM 6: BUSINESS FINANCE
SHS CARESIAN REMOTE ADAPTIVE DYNAMIC LEARNING EXPERIENCE
3. Credit cooperatives- It can lend as much as five times of one’s equity or contribution if you are
a member. If you own a company which is in need of funds and you are at the same time a
member of this cooperative, then you can borrow in your personal capacity from the
cooperative and advance the proceeds from the loan to your company. This practice, however,
should not be encouraged because your company must be able to raise money on its own
merit.
4. Bank Loans- Banks can provide both short-term and long-term loans. Some banks also
provide credit facilities not just to big corporations, but also to small and medium enterprises.
Government banks, the Development Bank of the Philippines (DBP) and Land Bank of the
Philippines (LBP), offer short-term credit facilities to small and medium enterprises and other
private banks such as BDO and BPI with collateral. Among collaterals are real estate,
transportation vehicles, and even inventories. The mortgage properties like house and lot may
have to be insured as well.
5. Lending companies- These are small lending companies which cater normally to small and
medium enterprises. The lending process is much faster as compared to banks but they
charge higher interests than the banks, but lowered compared to a more informal lending,
popularly known as “5-6.”
6. Informal lending sources such as “5-6” is very expensive source of financing and should be
avoided because for every ₱5 that you have borrow, you to return ₱6 which comprises a 20%
in just one month.

Sources and Uses of long-term Funds

Long-term investments have to be financed by long-term sources of funds to minimize default
risk that you may not be able to pay maturing obligations.
1. Equity investors- This is the most patient source of capital by issuing common stocks. As far as
the company is concerned, this is the safest source of financing but unfortunately not always
available when the company needs it. You have to wait for the correct timing or opportunity for
them to issue more shares.
2. Internally generated funds- Instead of declaring cash dividends, the company can use
internally generated funds for expansion or to finance other types of capital investments.
Based on the Corporation Code of the Philippines, there is a limit regarding the amount of
retained earnings that the company can keep in its statement of financial position. Retained
earnings cannot exceed 100% of the value of common stocks or sometimes called paid-in
capital. However if the board can make a resolution, setting aside a specific amount of retained
earnings for expansion, then it is acceptable.
3. Banks- They are sources of different types of financing from short-term to long-term and
provide lower interest rates as compared to other institutions but have a lot of requirements
and borrower goes to a process, normally taking a month to three months before a loan gets
approved.
4. Bond market- This market is gaining more popularity among our big publicly listed companies
for their fund raising activities. Philippine bonds are now traded through the electronic platform
provided by the Philippine Dealing System Holdings Corporation (PDS Group) with the
Securities and Exchange Commission and they have to be credit rated. Moody’s and
PhilRatings are among the credit rating agencies in the Philippines. The credit rating given by
these credit rating agencies is important because it will dictate the interest rate that the bond
issuer can afford to charge lower interest rates which in turn will minimize its financing cost.
Just like in an IPO, roadshows are also conducted in a bond offering to have a feel of the
market’s perception of the issue and the interest rate bond investors are willing to take
To issue bonds, the services of an investment bank are also needed to underwrite the issue.
The bonds that will be issued have to be registered
5. Lending companies. This are the same companies previously discussed. Some of them also
provide long-term loans ranging from two to five years. These lending companies can process
loans faster but they charge higher interest rates.

where caring and learning begin 6