CAPITAL AND THE FINANCING

OF THE COMPANIES
PART 2
Loan Capital

What is Loan Capital?

Loan capital refers to the amount of

money required to manage the
business’s operations raised from
external sources such as financial
institutions, issuing debentures, etc. It
is one option of raising funds as it only
includes long-term funds that the
company can utilize for business by
bearing some interest or charge.
Key characteristics of loan capital:
 Borrowed Funds
 Interest Payments
 Principal Repayment
 Fixed or Variable Rates
 Security and Collateral
 Debt Covenants
 Purpose and Terms
Debentures

These instruments are liabilities to the

company and must be repaid along with fixed
interest payments. The debenture-holders
will earn a fixed interest on the amount
advanced to the company, and they did not
have any decision-making right in the
company.
Debentures refer to long-
term debt instruments issued
by a government or
corporation to meet its
financial requirements. In
return, investors are
compensated with an interest
income for being a creditor
to the issuer.
They are usually an
unsecured form of borrowing
from the public and have a
lengthy tenure, usually
exceeding ten years.
Features of Debentures

1. Debentures are usually the unsecured form of bonds which

are not backed by any asset or collateral.
2. They have a fixed coupon rate, at which the investors
receive interest at specific intervals, i.e., monthly, quarterly,
half-yearly or yearly.
3. The issuing company pays off the interest as an expense
before paying the dividends.
4. Some companies issue debentures, which after a specified
period, can be changed into equity stocks.
5. Repayments can be attained either in installments payable
yearly or all at once.
6. They can be easily exchanged in the stock market, just like
other securities. Thus, they are a flexible debt instrument.
Types of Debentures

1. Secured and non-secured

2. Convertible or Non-convertible
3. Perpetual
4. Fixed Charge or Floating Charge
Advantages and Disadvantages

 Debentures are beneficial to the issuing

company as they don’t risk the issuer’s assets.
 The ownership is not diluted, unlike shares.
 Interest paid is also tax-deductible.
 Investors may encounter various uncertainties
like inflationary risk or earn lower than the
prevailing market when the interest rate is
fixed.
 floating rates could fall heavily, bringing down
the interest income.
Bank Overdraft

These are the agreements

entered into by the banks
and the person seeking such
a facility. After examining the
person’s or
entity’s creditworthiness, the
bank grants them a fixed
limit, and the person can use
such limit funds. In return,
they have to pay a fixed
interest on the amount they
have used from the
limitation.
Features of Bank Overdraft

1. Banks offer overdraft facilities

2. Can be done anytime up to the specified limit.
3. The bank charges an interest on the overdraft
amount which is calculated on a daily basis
and is billed monthly to the borrowers
account.
4. Banks do not charge prepayment penalty on
the borrowers in the event of loan repayment
before the tenure.
5. There can be joint borrowers of an overdraft
loan
Bank Loan

A bank loan is the most

commonly used type of
raising funds through
industry grants by taking
something valuable as
collateral. The funds are used
to cost the company some
fixed rate of interest, which
is usually lower than the
other two sources of raising
funds.
‍How do bank loans work?
1. submission of application
2. credit analysis
 financial statements
 cash flow
 business plan
 asset coverage ration
3. interest rate
4. collateral
Advantages of bank loans

1. Clear loan terms

2. No equity dilution
3. Relatively low interest rates
Disadvantages of bank loans
1. Complicated application procedures
2. Long turnaround time
3. Collateral required
4. Difficult to qualify
5. Rigid repayment schedule
6. Interests on outstanding balance
7. Restrictive covenants
Bank Loan VS Overdraft
Bank loan
 Long term borrowing
 a fixed some of money borrowed from the bank from

other parties.
 The borrowed amount is transferred to the business

bank.
 Usually to buy non-current assets or expand the

business.
 Amount borrowed is to be repaid within a fixed period of

time usually more than a year.

 Appears in long term liability section of balance sheet.
 The current portion (payable within a year) of the loan is

recorded in current liability.

Bank Overdraft
 Short term borrowing

 Amount borrowed is not fixed but is limited to

the amount agreed with the bank.

 No transfer are effected – the business is able

to withdraw more than it deposits in its bank

account.
 Help business to overcome a temporary cash

shortage.
 Repayment must be done within a few days or

months.
 Appears in current liability section of balance

sheet.
Capital maintenance, also known as capital
recovery, is an accounting concept based
on the principle that a company's income
should only be recognized after it has fully
recovered its costs or its capital has been
maintained. A company achieves capital
maintenance when the amount of its capital
at the end of a period is unchanged from
that at the beginning of the period. Any
excess amount above this represents the
company's profit.
Dividend Law
What are dividends?

Dividends are an important source of income

for shareholders of a company. In simple
terms, a dividend is a distribution of a
company’s profits to its shareholders.
Companies choose to pay dividends
for a number of reasons:
 Dividends attract more investors
 Dividends can be a sign of financial health
When investing in dividend stocks,
there are a few basic terms you
need to know:
Dividend yield
 Record date
 Ex-dividend date
 Declaration date
 Payment date
What are the different types of dividends?

 Cash dividends
 Stock dividends
 Scrip dividends
 Property dividends
 Liquidating dividends
How often are dividends paid?
What should you do with dividends?

 Pocket the money

 Reinvest the funds
Objectives Of Dividend Policy

 A dividend policy indicates a company’s current

and future profitability in the market.
 The policy must also consider the company’s plans
for the future, such as growth and debt
repayment.
 To maintain investor confidence and market
reputation, companies frequently pursue a stable
dividend policy despite fluctuating profits.
Investors may feel safer when dividends are stable,
especially when the market is volatile.
 Different investors have different investment
preferences.
Types Of Dividend Policy

 Stable Dividend Policy:

 Constant Dividend Policy
 Residual Dividend Policy
Importance Of Dividend Policy

 A consistent dividend distribution improves

the company’s standing in the financial
markets.
 A company’s dividend policy is essential to its

financial planning.
 A stable dividend policy provides investors

with a sense of assurance, particularly in

volatile market conditions.
Factors Affecting A Dividend Policy

 Liquidity Constraints
 Shareholder Preferences
 Market Conditions
Dividend Law
Section 3 Definition of terms
SECTION 1. Declaration of Policy. – It is hereby
declared the policy of the State that in order
for the National Government to realize
additional revenues, government-owned or -
controlled corporations, without impairing
their viability and the purposes for which they
have been established, shall share a
substantial amount of their net earnings to
the National Government.
SEC. 2. Definition of Terms. – As
used in this Act, the term:
(b) “Government-owned or controlled corporations”
refers to corporations organized as a stock or non-
stock corporation vested with functions relating to
public needs, whether governmental or proprietary in
nature, and owned by the Government directly or
through its instrumentalities either wholly or, where
applicable as in the case of stock corporations, to the
extent of at least fifty one percent (51%) of its capital
stock. This term shall also include financial
institutions, owned or controlled by the National
Government, but shall exclude acquired asset
corporations, as defined in the next paragraphs, state
universities, and colleges.
(c) “Acquired asset corporation” refers to a corporation:
(1) which is under private ownership, the voting or
outstanding shares of which were: (i) conveyed to the
Government or to a government agency,
instrumentality or corporation in satisfaction of debts
whether by foreclosure of otherwise, or (ii) duly
acquired by the Government through final judgment in
a sequestration proceeding; or (2) which is a subsidiary
of a government corporation organized exclusively to
own and manage, or lease, or operate specific physical
assets acquired by a government financial institution in
satisfaction of debts incurred therewith, and which in
any case by law or by enunciated policy is required to
be disposed of to private ownership within a specified
period of time.
 (d) “Net earnings” shall mean income derived
from whatever source, whether exempt or
subject to tax, net of deductions allowed
under Section 29 of the National Internal
Revenue Code, as amended, and income tax
and other taxes paid thereon, but in no case
shall any reserve for whatever purpose be
allowed as a deduction from net earnings.
SEC. 3. Dividends. – All government-owned or -
controlled corporations shall declare and remit
at least fifty percent (50%) of their annual net
earnings as cash, stock or property dividends to
the National Government. This section shall also
apply to those government-owned or -
controlled corporations whose profit distribution
is provided by their respective charters or by
special law, but shall exclude those enumerated
in Section 4 hereof: Provided, That such
dividends accruing to the National Government
shall be received by the National Treasury and
recorded as income of the General Fund.
 SEC. 4. Exemptions. – The provisions of the
preceding section notwithstanding,
government-owned or -controlled
corporations created or organized by law to
administer real or personal properties or
funds held in trust for the use and the benefit
of its members, shall not be covered by this
Act such as, but not limited to: the
Government Service Insurance System, the
Home Development Mutual Fund, the
Employees Compensation Commission, the
Overseas Workers Welfare Administration,
and the Philippine Medical Care Commission.
 SEC. 5. Flexible Clause. – In the interest of
national economy and general welfare, the
percentage of annual net earnings that shall
be declared by a government-owned or -
controlled corporation may be adjusted by
the President of the Philippines upon
recommendation by the Secretary of Finance.
 SEC. 6. Penalty. – Any member of the
governing board, the chief executive officer
and the chief financial officer of a
government-owned or -controlled corporation
who violates any provision of this Act or any of
the implementing rules and regulations
promulgated thereunder, in addition to other
sanctions provided by law, upon conviction
thereof, shall suffer the penalty of a fine not
less than Ten thousand pesos (P10,000.00)
but not more than Fifty thousand pesos
(P50,000.00) or imprisonment of not less than
one (1) year but not more than three (3) years,
or both, at the discretion of the court.
 SEC. 42. Power to Declare Dividends. – The board of
directors of a stock corporation may declare dividends
out of the unrestricted retained earnings which shall
be payable in cash, property, or in stock to all
stockholders on the basis of outstanding stock held by
them: Provided, That any cash dividends due on
delinquent stock shall first be applied to the unpaid
balance on the subscription plus costs and expenses,
while stock dividends shall be withheld from the
delinquent stockholders until their unpaid subscription
is fully paid: Provided, further, That no stock dividend
shall be issued without the approval of stockholders
representing at least two-thirds (2/3) of the
outstanding capital stock at a regular or special
meeting duly called for the purpose.
CORPORATE BOOKS AND RECORDS
SEC. 73. Books to be Kept; Stock Transfer
Agent. – Every corporation shall keep and
carefully preserve at its principal office all
information relating to the corporation
SEC. 177. Reportorial Requirements
of Corporations
–Except as otherwise provided in this Code or in the rules
issued by the Commission, every corporation, domestic or
foreign, doing business in the Philippines shall submit to
the Commission: (a) Annual financial statements audited by
an independent certified public accountant: Provided, That
if the total assets or total liabilities of the corporation are
less than Six hundred thousand pesos (P600,000.00), the
financial statements shall be certified under oath by the
corporation’s treasurer or chief financial officer; and (b) A
general information sheet. Corporations vested with public
interest must also submit the following: (1) A director or
trustee compensation report; and (2) A director or trustee
appraisal or performance report and the standards or
criteria used to assess each director or trustee.
Executive Order No. 48, s. 2023

MALACAÑAN PALACE
MANILA
BY THE PRESIDENT OF THE PHILIPPINES
EXECUTIVE ORDER NO. 48
ADJUSTING THE DIVIDEND RATE OF THE
DEVELOPMENT BANK OF THE PHILIPPINES FOR
CALENDAR YEAR 2022 PURSUANT TO
SECTION 5 OF REPUBLIC ACT NO. 7656
Conclusion
 Every business needs funds and there are
ways to raise fund.
 company's income should only be recognized

after it has fully recovered its costs or its

capital has been maintained.
 Dividend policy is important as it determines

the amount of profits that will be distributed

as dividends, impacting the company’s
growth, stability, and attractiveness to
investors.
End…