12

CITY SCHOOLS DIVISION OF DASMARINAS

ABM
BUSINESS FINANCE

SELF- LEARNING MODULE

 ABM
Business Finance
QUARTER 3

Development Team of the Module

Author: Richelle C. Toledo

Editor: Joel Salazar

Management Team: Gemma G. Cortez, Ed.D., CID - Chief

Leylanie V. Adao, EPS - LR

Learning Area EPS: Joel Salazar

SDO Dasmariñas City

Schools Division Superintendent: Celedonio B. Balderas, Jr.
Asst. Schools Division Superintendent: Bernadette T. Luna

Guide in Using Learner’s Module

For the Parents/Guardian

This module is designed to assist you as the learning facilitator at home. It
provides you with activities and lessons’ information that the learners need
to accomplish in a distance learning modality.

For the Learner

This module is designed to guide you in your independent learning activities
at your own pace and time. This also aims to help you acquire the
competencies required by the Department of Education (DepEd) at the
comfort of your home.
You are expected to answer all activities on separate sheets of paper and
submit the outputs to your respective teachers on the time and date agreed
upon.

2
 What I need to know?

LESSON 1- INTRODUCTION TO FINANCIAL

MANAGEMENT (Weeks 1-2)
Great day learners! Welcome to your Business Finance course. This deals with the
fundamental principles, tools, and techniques of the financial operation involved in the
management of business enterprises. It covers the basic framework and tools for
financial analysis and financial planning and control, and introduces basic concepts
and principles needed in making investment and financing decisions. Introduction to
investments and personal finance are also covered in the course.

This module gives you an understanding of the definition of finance, the activities of
the financial manager, and the financial institutions and markets.

You are expected to demonstrate the following skills as your

learning outcomes:

1. Define Finance
2. Describe the primary activities and roles of the financial manager
3. Describe the role of financial institutions and markets

Most Essential Learning competencies:

• Explain the major role of financial management and the different individuals involved
ABM_BF12-IIIa-1
• Distinguish a financial institution from financial instrument and financial market
ABM_BF12-IIIa-2
• Explain the flow of funds within an organization – through and from the enterprise—
and the role of the financial manager ABM_BF12-IIIa-5

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 What is new?

The way you spent your money is called financial decision. Finance can be defined
as the science and art of managing money. (Gitman & Zutter, 2012) According to
B.O. Wheeler, “Business Finance is the business activities that are concerned
with the acquisition and conservation of capital funds in meeting the financial
needs and overall objectives of a business enterprise.”

Overall objective of the business: To maximize the wealth of the

shareholders (investors).

✓ Business Financial Terms:

▪ Finance can be defined as the science and art of managing money. (Gitman
and Zutter 2012)
▪ Budgeting is the act of estimating revenue (in the form of their allowance) and
expenses over a period of time (in this case, on a daily basis)
▪ Excess money presents an opportunity for investments. Investments come in
many forms that will generate income or appreciate in the future.
▪ Sources of funds are the people or institutions that will give us the money we
need when faced with financial difficulties (ex. the lack of funds to meet the
current expenses)

✓ Finance is concerned with decisions about:

▪ How much of their earnings they spend
▪ How much they save or how much they need
▪ How they invest their savings
▪ How they raise additional funds they need (Gitman)

✓ Role of Financial Management

▪ Financial management deals with decisions that are supposed to maximize
the value of shareholders’ wealth. (Cayanan)

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 ▪ These decisions will ultimately affect the markets perception of the company
and influence the share price.
▪ The goal of financial management is to maximize the value of shares of stocks.
▪ Managers of a corporation are responsible for making the decisions for the
company that would lead towards shareholders’ wealth maximization.

What is it?

✓ The Corporate organization Structure

✓ Functions of a Financial Manager

The four functions of a VP for finance (CFO):

1. Financing

2. Operating

3. Investing

4. Dividend Policies

5
 ✓ Financial System

▪ Financial Institutions – intermediaries that channel the savings of

individuals, businesses, and governments into loans or investments.
▪ Private Placements - the sale of a new security directly to an investor or
group of investors.
▪ Public Offering - The sale of either bonds or stocks to the general public.
▪ Financial Instruments – is a real or a virtual document representing a legal
agreement involving some sort-of monetary value. These can be debt
securities like corporate bonds or equity like shares of stock.

➢ Role of Financial Managers

Financial managers make financing decisions that require funding from investors in
the financial markets.

➢ Role of Financial Markets

The financial markets provide a forum in which firms can issue securities to obtain the
funds that they need and in which investors can purchase securities to invest their
funds

➢ Role of Investors
Investors provide the funds that are to be used by financial managers to finance
corporate growth.
6
 What is more?

ACTIVITY 1: Picture Paper

1. Create a one-line quote about Financial Management. Ex. Save Money,
Save Lives! (10points)

7
2. Based on your learning, fill the table of the summary of the topics presented. List
down as many as you can.

Business Functions of Financial Financial Financial

Financial a Financial Institutions Markets Instruments
Terms Manager

1 ex. finance

What I have learned?

ACTIVITY 2: Finance in my daily life (20 points)

Talk to your parents or guardians; ask them if your family have savings in the bank, or
investment or insurance? If yes, state the Financial Institutions. If no, explain the
possible reason of not having any. As a student, do you think you need savings in the
bank, or investment or insurance now? Why or why not. Share your thoughts to your
family and write their feedback. You may fill-up the template or use separate sheet.
You may use recycled materials and other art materials. You may also opt to send a
digital output.

8
Rubric for Scoring for Activity 1 and 2:
• 18-20 points if the content is valid and correct and impressively creative.
• 15-17 points if the content is acceptable and impressively creative
• 12-14 points if the content is acceptable but less creative
• 9-11 points if the content needs improvement

9
Reflection:

Briefly answer the following question: What is the impact of good

business financial management?

Rubric for Scoring:

Validity of content- 3 Application of lesson learned- 2 Total = 5 points

References

▪ Business Finance Teachers’ Guide, Published by the Commission on Higher

Education, 2016
▪ https://www.investopedia.com

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 What I need to know?

LESSON 2- FINANCIAL PLANNING TOOLS AND

CONCEPT (Weeks 3-4)
Welcome back learners! First, take a deep breath and smile! (insert smiley icon). Your
lesson for today gives you an understanding of the financial planning process,
including budget preparation, cash management, and working capital management.

Overall objective of the business: To maximize the wealth of the

shareholders (investors).

❖ Future What?
1. “What do you see yourself five years from now?” Answer in mind.
2. “After we survive the Covid-19 pandemic, what is the first thing you will do?” Answer
in mind.
Your answer in the first question is your long-term goal that you plan to achieve in
the future, while your answer in the second question is a short-term goal which is
achievable in less than a year. In this activity, you have demonstrated that planning
plays an important role in everyday life as you already have in mind a set of plans for
the next five years. Even though you are not yet sure of what you want five years from
now, you will probably still have an idea of what kind of life you want to have. You are
still in the process of planning.

You are expected to demonstrate the following skills as your learning outcomes:

1. Illustrate the financial planning process

2. Prepare budgets such as projected collection, sales budget, production budget,
income projected statement of comprehensive income, projected of financial position,
and projected cash flow statement
3. Describe concepts and tools in working capital management
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At the end of this lesson, you will be able to:

• Identify the steps in the financial planning process ABM_BF12-IIIc-d-10

• Illustrate the formula and format for the preparation of budgets and projected financial
statement ABM_BF12-IIIc-d-11
• Explain tools in managing cash, receivables, and inventory ABM_BF12-IIIc-d-12

What is new?

✓ PLANNING
❖ Planning is an important aspect of the firm’s operations because it provides
road maps for guiding, coordinating, and controlling the firm’s actions to
achieve its objectives (Gitman & Zutter, 2012).
❖ Management planning is about setting the goals of the organization and
identifying ways on how to achieve them (Borja& Cayanan, 2015).
• long-term goals are the plans to achieve in the future
• short-term goals are the plans to achieve the long term goals

✓ STRATEGIC VS. TACTICAL PLANNING

A strategic plan is a course of action A tactical plan is a course of action
to achieve long-term goals, generally to achieve short-term goals, generally
up to five years. Strategic plans reflect within a year or less. Tactical plans
the company’s direction and its represent the short-term efforts to
purpose as stated in its mission achieve the strategic, longer-term
statement. In order to develop goals. They are concerned with what
strategic plans, top management must the units beneath top management
develop and use summary reports on must do, how they must do it and who
finances, operations and the external has the responsibility. They have
environment. Strategic plans influence shorter time frames and narrower
the development of tactical plans. scopes than the strategic plans.

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✓ TWO PHASES OF FINANCIAL PLANNING
• Long-term financial plans
o These are a set of goals that lay out the overall direction of the company.
• Short-term financial plans
o Specify short-term financial actions and the anticipated impact of those
actions.

✓ CHARACTERISTICS OF AN EFFECTIVE PLAN

• Specific – target a specific area for improvement.
• Measurable – quantify or at least suggest an indicator of progress.
• Assignable – specify who will do it.
• Realistic – state what results can realistically be achieved, given available
resources.
• Time-related – specify when the result(s) can be achieved. (Doran, G. T.
(1981).

What is it?

✓ FINANCIAL PLANNING PROCESS

1. Set goals
or
objectives
6.
Determine 2. Gather
contingency data
plans

5. Establish the
evaluation system 3.Identify
for monitoring and Resources
controlling
4. Establish
responsibility centers
for accountability and
13timeline
✓ Planning and Controlling
• A plan is useless if it is not quantified. A quantified plan is represented through
budgets and projected or pro-forma financial statements.
• These budgets and pro-forma financial statements are useful for controlling.
They serve as the bases for monitoring actual performance.

1. Sales Budget
The sales budget contains an itemization of a company's sales expectations for the
budget period, in both units and dollars (pesos).

Forecasted unit sales

x Price per unit
=Total gross sales
- Sales discounts & allowances
= Total net sales

2. Production budget

The production budget calculates the number of units of products that must be
manufactured, and is derived from a combination of the sales forecast and the planned
amount of finished goods inventory to have on hand.

Forecasted unit sales

+ Planned finished goods ending inventory balance
= Total production required

- Beginning finished goods inventory

= Products to be manufactured

3. Operating Budget

An operating budget portrays a company’s expenses, expected costs, and estimated

income, considering the quarterly or the annual performance. Accountants complete
the operating budget before the accounting period starts in order to include income
and cost projections.
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4. Cash Budget

The cash budget contains an itemization of the projected sources and uses of cash in
a future period. This budget is used to ascertain whether company operations and
other activities will provide a sufficient amount of cash to meet projected cash
requirements. If not, management must find additional funding sources.

Steps for preparing a cash budget:

a. Determine the beginning cash balance.

b. Add receipts
c. Deduct disbursements.
d. Calculate the cash excess or deficiency.
e. Determine financing needed.
f. Establish the ending cash balance.

What is more?

ACTIVITY 1: Picture Paper (20 POINTS)

Summarize the learnings from this topic in a one-page graphic presentation. You
may fill-up the template or use separate sheet. You may use recycled materials
and other art materials. You may also opt to send a digital output.

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 What I have learned?
ACTIVITY 2: My Life Map (20 points)

1. Create a life map of your 5-year plan. State your:

i. Plan/goal to achieve
ii. How will you do it
iii. How much money do you need
iv. Where will you get that money
v. Identify short-term and long-term plans
vi. Give a brief explanation of your plan

2. From your life map, prepare your financial planning process. (details from
your answer on no. 1)
You may use the template or use separate sheet. You may use recycled materials
and other art materials. You may also opt to send a digital output.

Rubric for Scoring for Activity 1 and 2:

• 18-20 points if the content is valid and correct and impressively creative.
• 15-17 points if the content is acceptable and impressively creative
• 12-14 points if the content is acceptable but less creative
• 9-11 points if the content needs improvement

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My Life Map

17
Financial Planning Process

Reflection:
Briefly answer the following question: 1. On your own understanding,
differentiate:
a. Short-term and Long-term Plans and Strategic and Tactical Planning

Rubric for Scoring: Validity of content- 3 Application of lesson learned- 2 Total =

5 points

References

▪ Business Finance Teachers’ Guide, Published by the Commission on Higher

Education, 2016
▪ https://www.investopedia.com
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 What I need to know?

LESSON 3- SOURCES AND USES OF SHORT-TERM

AND LONG-TERM FUNDS (Week 5)
Good day learners! In this lesson, we will determine the sources and uses of short-
term and long-term funds, and the requirements, procedure, obligation to creditor, and
reportorial necessities in Financial Planning.

You are expected to demonstrate the following skills as your learning outcomes:

1. Distinguish debt and equity financing

2. Identify the bank and nonbank institutions in the vicinity that are possible sources
of funds, and enumerate their requirements and process for loan application

At the end of this lesson, you will be able to:

• Compare and contrast the loan requirements of the different banks and
nonbank institutions and cite these institutions in the locality
ABM_BF12-IIIe-f-14

What is new?

Where do If your answer is from your parent or siblings, they are

you
get your financing your needs. If your answer is from your work,
money? you are financing yourself. Finance means providing
funds for a particular need. So where do businesses
get their money? Let’s find the answer in this lesson.

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Companies and businesses get their money or financing in two
forms:

https://www.credibly.com/incredibly/trending/debt-vs-equity-financing/

1. Debt Financing - borrowing money from lenders and not giving up ownership
(loan).

2. Equity Financing - the method of raising capital by selling company stock to

investors (stockholders) in exchange of ownership interests in the company.

DEBT FINANCING EQUITY FINANCING

Advantages Disadvantages Advantages Disadvantages

Cost It is limited to It does not It has the highest

interest require a fixed cost.
payments. dividend
payment.

Control Lender has no It may limit cash

control over dividend
operations and declaration by
investment management.
decisions.

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 Maturity There is a There is no
specified maturity maturity date. It
date or periodic is perpetual.
amortization
payments.

Risk There is a risk of Among the

not meeting the sources of
obligation financing, it is the
(default risk) riskiest.

Tax Interest Dividends are not

expense is tax tax deductible.
deductible (it
can minimize
tax expense).

Short term financing is debt scheduled to be paid within a year while long-term
financing is debt to be paid in more than a year.

Short-term funds – to be paid in a year

Long-term funds – to be paid in in more than a year

SOURCES OF SHORT-TERM FUNDS

Suppliers credit Refers to the extension of payment due date by suppliers

Advances from Personal funds advanced by a stockholder to a company that

stockholders usually requires interest.

Credit Provided lending services to its members. Members usually

cooperatives pay contributions to the cooperative.

Banks Provides several loan products catering to different types of

needs.

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Credit cards Just take note of the high interest rates on this source of
funds.

Lending Companies that are dedicated to lending. They usually

companies charge higher interest than banks but their credit
requirements are more lenient compared to banks.

Pawnshops Provides funds in exchange for collateral, usually jewellery,

or other items of value.

Informal lending Interest is usually paid per month, and monthly interest is (6-
sources 5)/5 or 20%. Annual interest is actually 20%*12 or 240%.

SOURCES OF LONG-TERM FUNDS

Equity investors These are the individuals/corporations which are issued
common stock. They share in the ownership of the company.
There are also equity investors who do not have voting rights
in the company but have a share in dividends, usually a fixed
percentage. These investors are issued preferred stock.
Holders of preferred shares are first to receive dividends than
common stock holders.

Internally Not all profits are distributed to stockholders. Most of the

generated funds profits are re-invested and used by companies to finance their
needs.

Banks They provide long-term loans, depending on the nature of the

need. For example, a 5-year to 10-year loan may be granted
if the purpose of the loan is construction of an office building.

Bonds These are debt investments where an investor loans money

to an entity which borrows the funds.

Lending They can also provide long-term loans.

companies

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 What is it?

Banking Institution

A bank is a financial institution licensed to receive deposits and make loans.

Banks may also provide financial services such as wealth management,
currency exchange, and safe deposit boxes. There are several different
kinds of banks including retail banks, commercial or corporate banks, and
investment banks. In most countries, banks are regulated by the national
government or central bank.

Non-Banking Institution

Non-bank banks are financial institutions that are not considered full-
scale banks because they do not offer both lending and depositing
services. Non-bank banks can engage in credit card operations or
other lending services, provided they do not also accept deposits.
https://www.investopedia.com/

How to Apply for a Business Loan in the Philippines: A Step-by-

Step Guide for Small Business Owners
Step 1: Determine your reason for needing a loan.
Step 2: Decide how much money your business needs.
Step 3: Check if you’re eligible for a business loan.
Step 4: Find the best loan for your business needs.
Step 5: Submit the documentation requirements.
https://businessdiary.com.ph/

23
Typical Bank Loan Requirements for Businesses
✓ Business Financial statements for the last three years prepared by a CPA
including:
- Balance Sheets
- Income Statements
- Cash Flow Statements
- Interim financial statements for current year’s operation
✓ Bank account history
✓ Detailed list of business debt (may be in the form of a schedule
✓ Last three years of business tax returns
✓ Annual budgets
✓ A professionally prepared business plan
✓ Evidence of a strong business credit history
✓ Current on tax liabilities
✓ An abundance of collateral (such as real estate, equipment, inventory,
accounts receivable or cash) to secure financing.

Loan Requirements from other Institutions

1. Purpose of Loan
2. Business Experience
3. Business Plan
4. Credit History
5. Personal Information
6. Financial Statements
7. Collateral
8. Cash Flow
https://www.forafinancial.com/

Five Keys of Loan Applications Requirements

1. Credit history
2. Cash flow history and projections for the business
3. Collateral available to secure the loan

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 4. Character
5. Myriad pieces of loan documentation that includes business and personal
financial statements, income tax returns, a business plan and that essentially
sums up and provides evidence for the first four items listed
https://www.bizfilings.co

What is more?

ACTIVITY 1: Compare and Learn

1. Ask your parent or guardian, or search your community following the quarantine
protocols or search the web and look for 2 Banking Institutions and 2 Non-bank
Institutions. Fill the templates below.

Banking Institutions Non-bank Institutions

Name of Institution

Draw, copy/paste the

logo of the financial
institution.

Name of Institution

Draw, copy/paste the

logo of the financial
institution.

Are the institutions

near you?

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 What could be the
contributions of these
institutions to your
community?

Does your family avail

service from any of
your chosen
institution? Why or
why not?

What I have learned?

ACTIVITY 2: You Loan (20 points)

From activity 1, choose 1 bank and non-bank institutions. If you can, try to apply
personally for a simple personal loan to each institution following the quarantine
protocols. Identify the process and their loan requirements. Then fill-up the template
below. If you cannot do this activity, request your guardian to do this activity and share
to you the experience. You can also try to apply online to other bank and non-bank
institutions that are available online.

Banking Institution Non-bank Institution

Name of
Institution

Draw,
copy/paste the
logo of the
financial
institution.

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Date of Loan
Application

List of Loan
Requirements
needed

Loan Form
(Please
attached if you
can) Picture is
also accepted

27
How did you
find the
experience?

Do you think
businesses
can avail loan
fast? Why or
why not?

Documentation
of your
experience

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Rubric for Scoring for Activity 1 and 2:
• 18-20 points if the content is valid and correct and impressively creative.
• 15-17 points if the content is acceptable and impressively creative
• 12-14 points if the content is acceptable but less creative
• 9-11 points if the content needs improvement

Reflection:

Briefly answer the following question: What is the key difference on the
loan requirements from bank to non-bank institutions?

Rubric for Scoring: Validity of content- 3 Application of lesson learned- 2

Total = 5 points

References

▪ Business Finance Teachers’ Guide, Published by the Commission on

Higher Education, 2016
▪ https://www.investopedia.com
▪ https://www.bizfilings.co
▪ https://www.credibly.com/incredibly/trending/debt-vs-equity-financing/
▪ https://businessdiary.com.ph/
▪ https://www.forafinancial.com/

29
 What I need to know?

LESSON 3- SOURCES AND USES OF SHORT-TERM

AND LONG-TERM FUNDS (Week 6)
Welcome back learners! This lesson will give you a background to the basic concepts
of risk and return, and the time value of money.

You are expected to demonstrate the following skills as your learning outcomes:

1. Distinguish simple and compound interest

2. Solve exercises and problems in computing for time value of money with the aid of
present and future value tables
3. Prepare loan amortization tables

At the end of this lesson, you will be able to:

• Calculate future value and present value of money ABM_BF12-IIIg-h-18

• Compute loan amortization using mathematical concepts and the present
value tables ABM_BF12-IIIg-h-20

Are you interested in INTEREST?

Do you have an idea what INTEREST is?

After you have tried to apply a loan last meeting, you should understand that
borrowing money has compensation. In exchange of money borrowed is an
INTEREST.
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 What is new?

Please read Matthew 25:14–30

to further understand this
topic.
• Interest - the cost of holding money. It is the amount charged by the lenders to the
borrowers/ users of money, and is usually paid at regular intervals.

Based on your bible reading, the interests of each servants were as follows:
SERVANT 1 SERVANT 2 SERVANT 3
Principal 500,000.00 500,000.00 500,000.00
Interest 234,664.04 200,000.00 0.00
Total Returned 734,664.04 700,000.00 500,000.00

The Time Value of Money: Future Values (FV)

In finance, money has a time value because you can invest it to earn interest and that
interest accumulates over time.

Simple vs. Compound Interest

There are two primary ways that interest can be earned (or charged). Simple Interest
is applied only to the original value of the investment (the principle). Whereas
Compound Interest is applied to the original value plus all previously earned interest.

Simple Interest – Interest is earned or charged only on the principle amount of an

investment or loan. The amount of interest earned or charged is the same every
period.

Compound Interest – Interest is earned or charged on both the principle amount and
the interest earned on an investment or loan.

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For an example, a Principal amount (Present value) of $100 will get an interest of
10% for 5 years, the computation using the formula presented above is shown
below:
FV with Simple Interest = 100 + 100 (.10)(5) = $150

FV with Compound Interest = 100 (1 + .10)5 = $161.05

Using long method computation (Loan Amortization Table):

Future Value with Simple Interest Future Value with Compound Interest
Time Interest Balance Time Interest Balance

0 $ 100 0 $ 100
1 $ 100 x .10 = 10 $ 110 1 $ 100 x .10 = 10 $ 110
2 $ 100 x .10 = 10 $ 120 2 $ 110 x .10 = 11 $ 121
3 $ 100 x .10 = 10 $ 130 3 $ 121 x .10 = $ 133.10
12.10
4 $ 100 x .10 = 10 $ 140 4 $ 133.10 x .10 = $ 146.41
13.30
5 $ 100 x .10 = 10 $ 150 5 $ 146.41 x .10 = $ 161.05
14.64

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The Time Value of Money: Present Values (PV)
Finding the Present Value will answer question like, “How much do I have to invest
today to have $2,000 in 2 years?” or “How much is $5,000 to be received in 2 years’
worth today?” Using the formula below:

Example: You would like to have $3,000 in 2 years so that you can move into a new
apartment when you graduate. How much must you deposit today if you think you
can earn an interest rate of 7% per year?

This means that if you invest $2,620.32 and it grows at 7% as expected, then you will
have the $3,000 at the end of the 2 years.
Calculator Tip: Make use of the parenthesis on your calculator to help you with the
order of operations. The keystrokes, for most calculators, would be like
this: 3000/(1.07)^2=

Example: A friend has asked for your help. She wants to save some money to buy
a house in 10 years. She heard that there is an investment that could earn 8% per
year. If she would like a down payment of $50,000 for her house, how much must
she invest today?

https://tophat.com/

33
 What is it?
Using Tables to Solve Future Value Problems
Compound interest tables have been calculated by figuring out the (1+I) n values for
various time periods and interest rates. Please see TVM Table 1: Future Value
Factors

34
35
You will notice that this table summarizes the factors for various interest rates for
various years. To use the table, simply go down the left-hand column to locate the
appropriate number of years. Then go out along the top row until the appropriate
interest rate is located. Note there are three pages containing interest rates 1%
through 19%.

36
For instance, to find the future value of $100 at 5% compound interest, look up five
years on the table, then go out to 5% interest. At the intersection of these two values,
a factor of 1.2763 appears. Multiplying this factor times the beginning value of $100.00
results in $127.63, exactly what was calculated using the Compound Interest Formula
previously. Note, however, that there may be slight differences between using the
formula and tables due to rounding errors.

An example shows how simple it is to use the tables to calculate future amounts.
You deposit $2000 today at 6% interest. How much will you have in 5 years?

The Answer: $2000 × 1.3382 = $2676.40

Present Value
Present Value: is simply the reciprocal of compound interest. Another way to think of
present value is to adopt a stance out on the time line in the future and look back
toward time 0 to see what was the beginning amount.

Present Value = P0 = Pn / (1+I)n Please see TVM Table 3: Present Value Factors

37
38
39
TVM Table 3 shows Present Value Factors. Notice that they are all less than one.
Therefore, when multiplying a future value by these factors, the future value is
discounted down to present value.
The table is used in much the same way as the previously discussed time value of
money tables. To find the present value of a future amount, locate the appropriate
number of years and the appropriate interest rate, take the resulting factor and multiply
it times the future value.
40
An example illustrates the process.
How much would you have to deposit now to have $15,000 in 8 years if interest is 7%?

The Answer: $15,000 × .582 = $8730

Annuities
Using Tables to Solve Future Value of Annuity Problems
An annuity is an equal, annual series of cash flows. Annuities may be equal annual
deposits, equal annual withdrawals, equal annual payments, or equal annual receipts.
The key is equal, annual cash flows.

When cash flows occur at the end of the year, this makes them an ordinary Annuity:.
If the cash flows were at the beginning of the year, they would be an Annuity Due:.

Annuities work as follows:

• Annuity = Equal Annual Series of Cash Flows.
• Assume annual deposits of $100 deposited at end of year earning 5% interest
for three years.

Year 1: $100 deposited at end of year = $100.00

Year 2: $100 × .05 = $5.00 + $100 + $100 = $205.00

Year 3: $205 × .05 = $10.25 + $205 + $100 = $315.25 TVM Table 2: Future Value
of Annuity Factors

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42
43
Again, there are tables for working with annuities. TVM Table 2: Future Value of
Annuity Factors is the table to be used in calculating annuities due. Basically, this table
works the same way as the previous table. Look up the appropriate number of periods,
locate the appropriate interest, take the factor found and multiply it by the amount of
the annuity.

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For instance, on the three-year, 5% interest annuity of $100 per year. Going down
three years, out to 5%, the factor of 3.152 is found. Multiply that by the annuity of $100
yields a future value of $315.20.
Another example of calculating the future value of an annuity is illustrated.

You deposit $300 each year for 15 years at 6%. How much will you have at the end of
that time?

The Answer: $300 × 23.276 = $6982.80

Present Value of an Annuity

To find the present value of an annuity, use TVM Table 4: Present Value Of Annuity
Factors. Find the appropriate factor and multiply it times the amount of the annuity to
find the present value of the annuity. TVM Table 4: Present Value Of Annuity
Factors

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46
47
An example illustrates the process.

Find the present value of a 4-year, $3,000 per year annuity at 6%.

The Answer: $3,000 x 3.465 = $10,395

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 What is more?

ACTIVITY 1: Solve to Probe (10 POINTS)

1. You deposited PHP _______ (number of the letters of your first name x 1000)
in a bank with an interest rate of ______% (your age/4) for _____ years (your age/2
round-off so no decimal place). What is the future value of your deposit in simple
interest? In compound interest? Using the formula and using the TVM Table.

Example: PV: Richelle = 8 letters x 1000 = Php 8,000 Years: 12/2 = 6 years rate: 12/4
= 3%

Simple Interest Compound Interest

FV = 8000 + 8000 (.03)(6) = PHP 9,440 FV = 8000 (1 + .03)6 = PHP 9,552.42
***The use of Time Value Money Table is
for Compound Interest only TVM Table 1 = 8000 x 1.1941 = PHP
9,552.80
***There is a little difference in the final
answer when Time Value Money Table is
used.

Your solution:
Simple Interest Compound Interest

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Using the Long Method/Loan Amortization Table:
Sample Solution:
Future Value with Simple Interest Future Value with Compound Interest

Time Interest Balance Time Interest Balance

0 $ 100 0 $ 100
1 $ 100 x .10 = 10 $ 110 1 $ 100 x .10 = 10 $ 110
2 $ 100 x .10 = 10 $ 120 2 $ 110 x .10 = 11 $ 121
3 $ 100 x .10 = 10 $ 130 3 $ 121 x .10 = $ 133.10
12.10
4 $ 100 x .10 = 10 $ 140 4 $ 133.10 x .10 = $ 146.41
13.30
5 $ 100 x .10 = 10 $ 150 5 $ 146.41 x .10 = $ 161.05
14.64

Your Solution:
Future Value with Simple Interest Future Value with Compound Interest
Time Interest Balance Time Interest Balance

2. You need to save up for PHP _______ (number of the letters of your first name x
1000) in _____ years (your age/2 round-off so no decimal place). How much should
you save now if the bank offers a rate of ______% (your age/4). (Find the present
value using the formula and the Time Value Money Table)

Example: PV: Richelle = 8 letters x 1000 = Php 8,000 Years: 12/2 = 6 years rate: 12/4
= 3%
Using the formula: PV = 8000 / (1+0.03)6 = PHP 6,699.87
Using the TVM Table 3: PV = 8000 x .8375 = PHP 6,700.00

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 Your Solution:

What I have learned?

ACTIVITY 2: Compute to Learn (24 points)

Compute the present value and future value of PHP ______ (Total number of your
first name and surname x 100) cash flow for the following combination of discount
rates and times:

Example: Value = Richelle Toledo Company = 21 x 100 = PHP 2,100

You can use either the formula or the TVM Table for the following.

A. r = 8%, t = 5 years
B. r = 8%, t = 10years
C. r = 5%, t = 5years
D. r = 5%, t = 10 years
Example Solution:
Value r t PV FV with SI FV with CI
1,400 8 5 PV = 2,100 / (1+0.08)5 FV = 2100 + 2100 (.08)(5) FV = 2100 (1 + .08)5
= PHP 1,429.22 = PHP 2,940.00 = PHP 3,085.59
1,400 8 8 PV = 2100 x .5403 FV = 2100 + 2100 (.08)(8) FV = 2100 X 1.8509
= PHP 1,134.63 = PHP 3,444.00 = PHP 3,886.89
Your solution:
Value r t PV FV with SI FV with CI

8 5

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 8 8

5 5

5 8

Rubric for Scoring for Activity 1 and 2:

• 2 points for every correct answer with solution

• 1 point for every correct answer

Reflection:

Briefly answer the following questions:

1. What could be the importance of learning these lessons?

Rubric for Scoring: Validity of content- 3 Application of lesson learned- 2

Total = 5 points

References

▪ Business Finance Teachers’ Guide, Published by the Commission on Higher

Education, 2016
▪ https://www.investopedia.com
▪ https://www.bizfilings.co
▪ www.studyfinance.com
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 What I need to know?

LESSON 4 - BASIC LONG-TERM FINANCIAL

CONCEPT (Week 7)
Welcome back learners! This is the part 2 of Basic Long-term Financial Concept.
This lesson will give you a background to the basic concepts of risk and return, and
the time value of money.

You are expected to demonstrate the following skills as your learning outcomes:

1. Compute for the net present value of a project with a conventional cash-flow
pattern
2. Describe the risk-return tradeoff

At the end of this lesson, you will be able to:

• Apply mathematical concepts and tools in computing for finance and

investment problems ABM_BF12-IIIg-h-21
• Explain the risk-return trade-off ABM_BF12-IIIg-h-22

What is new?

Overall objective of the business: To maximize the wealth of the

shareholders (investors).

Capital Budgeting
• It is the process of evaluating and selecting long-term investments that are consistent
with the firm’s goal of maximizing owners’ wealth.

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Difference of long-term investment from operating expenses:
• Long-term investment results in benefits to accrue to the company in excess of one
year while operating expenses benefits the company only within the operating
period.

Examples of capital expenditure:

• Expand or enter into a new line of business
• Replace or renew fixed assets
• Construct new premises
• Opening a new branch
• Acquisition of machineries and equipment

The Steps in Capital Budgeting

1. Investment Proposal
Proposals for capital expenditure come from different levels within a business
organization. These are submitted to the finance team for thorough analysis.
2. Review and Analysis
Financial personnel perform formal review and analysis to assess the benefits
and cost of the investment proposals. These personnel make use of several
financial tools which they see fit in evaluating the project.
3. Decision Making
Companies usually delegate capital expenditure decisions on the basis of value
limits. The analysis is presented to the proper approving body who will in turn
make the decision on whether to push through with the project or not.
4. Implementation
Release of funds and start of the project occurs after approval. Large
expenditures are usually released in phases.
5. Monitoring
Results are monitored and actual cost and benefits are compared with those
that were expected. Action may be required if deviations from the plan are
significant in amount.

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 What is it?

The Risk and Return Trade-Off

• In making investment decisions, financial managers take note of the risk and
returns of the projects they are entering.
• Recall the story of Jack and the Beanstalk. In the story, Jack trades his cow
for three magic beans. This is a very risky move for Jack since these beans may be
fake and therefore, worthless. Luckily those
magic beans grew into beanstalk that gave Jack the opportunity to gather riches
beyond his wildest dreams, while fighting with a giant along the way. Jack gambled
in this transaction. Should Jack
decide not to sell the cow for magic beans and instead sold it at the current
market value, the story
would be different. As we can see, the higher the risk, the higher the returns, but
of course, if turned
sour, the higher the losses as well.
• This situation is also true for making financial decisions. Taking a higher risk
gives you the opportunity
to earn higher returns. Low risk investments like treasury notes, also called risk-
free instruments, earn a
low and steady income flow. In making investment decisions, financial managers
ensure that the proposed business will earn more than the risk-free rate since they
need to compensate for the risk the investment will entail. This introduces us to the
Required Rate of Return. It is the minimum expected yield investors require in order
to select a particular investment.

Basic Terminologies Related to Capital Budgeting

Independent vs. Mutually Exclusive Investments
• Independent Projects are those whose cash flows are independent of one
another. The acceptance of one project does not eliminate the others from further
consideration.
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 • Mutually exclusive projects, on the other hand, are projects which serve the
same function and therefore compete with one another. The acceptance of one
eliminates all other proposals that serve a similar function from further consideration.

Unlimited Funds vs. Capital Rationing

• The amount and availability of funds affects the company’s decisions in capital
outlays. If the company has unlimited funds, then all projects which pass the risk-return
criteria will be accepted and implemented. Otherwise, firms will operate under capital
rationing and will accept only projects which provide the best opportunity to increase
shareholder wealth.

Accept-Reject vs. Ranking Approaches

• The Accept-Reject approach is usually done for mutually exclusive projects
where one project is favored over the others. The approach accepts projects which
pass a certain criteria. Ranking is done when there are several projects passing the
criteria and the company is only able to fund so much. The highest ranking projects will
be selected for implementation.

Payback Method
• This is the simplest method used in capital budgeting. It measures the amount
of time, usually in years, to recover the initial investment. To illustrate this method, let
us use our previous examples for relevant cash flows:

For Project A, the initial cash flow is PHP72,000. In 4 years, Mr. Alfonse would
have generated a total cash flow of PHP68,000. To get the actual time period,
let us divide the remaining amount (4,000)* and divide it by the cash flow for
year 5. We get .24, so the total payback period for Project A is 4 + .24 = 4.24
years. Conversely, if the cash flows are equal, you may derive the answer by
dividing the initial cash flow by the annuity, 72,000/17,000 = 4.24 years. Using
this method for Project B, we get the payback period of 80,000/21,000 =3.81
years.

Let us also illustrate an example of computing the payback period for uneven
cash flows.
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 Initial Investment = 15,000
Year 1 = 7,000
Year 2 = 4,000
Year 3 = 6,000
Year 4 = 3,000

For years 1 and 2, we have already recovered 11,000 of our investment. We

need 4,000 more to reach 15,000 thus for the third year, we have 4,000/6,000
= 0.67. The payback period is 2.67 years.
Notice that the cash flow for year 4 is already ignored.

• Managers usually set an acceptable payback period for projects. For making
accept-reject decisions, projects which meet the set acceptable payback period shall
be accepted and those which not are discarded. It is a popular method used especially
for small projects due to its simplicity and consideration for the timing of cash flows.
The criticism of this method, however, it that it does not consider the time value of
money. Also, it fails to consider the cash flows after the payback period. For instance,
in our previous example, we can see that Project B is better compared to Project A due
to the quick recovery of the investment. If Project A has a cash flow of, let’s say
PHP50,000 at year 5, we can easily deduce that Project A is more profitable. However,
the payback method only recognizes the gains during the payback period.

Net Present Value (NPV)

• This method is more sophisticated than the payback method since it considers
the time value of money and it considers all the cash flows during the life of the project
including the terminal value. The NPV can be computed by comparing the present
value of cash inflows against the present value of cash outflows. Cash flows are
discounted using the firm’s cost of capital (cost of acquiring funding needs) to get the
present values.
NPV = Present value of cash inflows – present value of cash outflows

• If the NPV of a project is zero or positive, it should be accepted. In finance, if these

projected cash flows are realized, the NPV of the project should be equivalent to the
increase in total shareholder’s value.
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• Assuming that the cost of capital is 8%, let us compute the NPV for our previous
example.
Project A = 17,000 x PVAF(3.993) – 72,000 = 67,881 – 72,000 = (4,119)

the NPV of Project B.

Project B = 21,000 x PVAF(3.993) – 80,000 = 83,853 – 80,000 = 3,853
We can see that Project A’s NPV is negative and Project B’s NPV is positive, thus, we
only accept project B.

Internal Rate of Return (IRR)

• The IRR is one of the most widely used techniques in capital budgeting. It is defined
as the discount rate that equates the NPV of an investment to zero. If this method is
used for capital budgeting analysis, the project’s IRR is compared to the company’s
cost of capital. If the IRR is greater than the cost of capital, the project should be
accepted otherwise, it should be rejected. Manual computation of the IRR involves trial
and error, however, this IRR computation is a lot easier using computation applications
like MS Excel.

• For example, you are planning to build a branch for your business at PHP350,000
and expect to receive PHP400,000 in 1 year. First, compute for the rate of return
(profit/investment).
Rate of return = 50,000/350,000 = 14.3%
• We compute for the rate of return because the NPV of a project with cost of capital
equal to
the rate of return is equal to zero. To illustrate:
NPV = 400,000/(1+0.143) – 350,000 = 0
• The IRR can easily be computed using MS Excel using the IRR function.
• The NPV and IRR are interrelated techniques. An IRR greater than the cost of capital
equates to a positive NPV and vice versa. On a purely theoretical view, NPV is the
better measure since it measures the actual cash value a project creates for
shareholders. However, IRR is also a widely used tool since financial managers usually
like to think in terms of ratios and percentages.

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 What is more?

ACTIVITY 1: Solve to Probe (20 POINTS)

Solve the following:

Year Project Milk Tea

0 (100,000)

1 50,000

2 Total number of the letter of your first

name and surname x 5000
(Example) Ann Co = 3 + 2 = 5 x 5000

= 25,000

1. Given the cash flows above and a discount rate of 5%, compute the payback period
and NPV of Project Pizza.

2. If PHP 36,000 is earned on the 3rd year of the project, what is the new NPV of the
project? What is the payback period?

What I have learned?

1. Using your life map from Week 3-4 Activity 2 output, create a Capital
Budgeting following the Steps in Capital Budgeting

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 My Life Map Budgeting

Rubric for Scoring for Activity 2:

• 18-20 points if the content is valid and correct and impressively creative.
• 15-17 points if the content is acceptable and impressively creative
• 12-14 points if the content is acceptable but less creative
• 9-11 points if the content needs improvement

Reflection:
Briefly answer the following question: 1. As finance people, why do we
need to understand the importance of risk and return?

Rubric for Scoring: Validity of content- 3 Application of lesson learned- 2

Total = 5 points

References

▪ Business Finance Teachers’ Guide, Published by the Commission on Higher

Education, 2016
▪ https://www.investopedia.com
▪ https://www.bizfilings.co

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