Mr. Dave Kieth J.

Lappay
Subject Teacher
 COURSE OBJECTIVES

• Identify the different sources of short-term

and long-term funds.
• Differentiate debt financing from equity
financing.
• Understand the advantages and
disadvantages of different sources of
financing.
• Identify the more appropriate source of
financing given funding requirement.
• Know the obligations of the borrowers to
their creditors.
 REVIEW OF CHAPTER 3

• This section will help students remember

and used the information they learned
from the previous chapter.
READY?
SOLVE THIS!
• The firm has a sale of P 5, 000 on the
first month. Due to increasing
demand, the sale rises to P 6, 000.
Find the forecasted amount of each
account followed by percent of sale
on the right.
Pro-Forma Balance Sheet
ASSETS LIABILITIES
Amount % Amount %
Cash 61. 200 66. Accounts Payable 71. 200 76.
Accounts
62. 200 67. Notes Payable 72. 200 77.
Receivable
Inventory 63. 500 68. Other Liabilities 73. 150 78.
Equipment 64. 500 69. Long-term Debt 74. 150 79.
Supplies 65. 100 70. Equity 75. 800 80.
• The firm has a sale of P 5, 000 on the
first month. Due to increasing
demand, the sale rises to P 6, 000.
Find the forecasted amount of each
account followed by percent of sale
on the right.
Pro-Forma Balance Sheet
ASSETS LIABILITIES
Amount % Amount %
Cash 61. 200 66. 240 Accounts Payable 71. 200 76.
Accounts
62. 200 67. 240 Notes Payable 72. 200 77.
Receivable
Inventory 63. 500 68. 500 Other Liabilities 73. 150 78.
Equipment 64. 500 69. 500 Long-term Debt 74. 150 79.
Supplies 65. 100 70. Equity 75. 800 80.
LESSON PROPER
CHAPTER 4:
SOURCES AND USES OF
SHORT-TERM AND LONG-TERM
FUNDS
 Sources of
Financing

Equity Financing

Debt Financing - Issuance of

new shares of
- Can be in a stocks and
form of retained
borrowing earnings.
from the - Safest source
banks. of financing
- Creates for a
contractual company for it
obligation for does not
the borrower require
to pay the mandatory
interest. payments of
dividends.
 DISADVANTAGES OF
EQUITY FINANCING
• Cash dividends are not tax-
deductible.
• Offering new shares to other investors
may dilute ownership stake in terms of
percentage of existing ones.
• It is the most expensive source of
financing.
 PECKING ORDER
HYPOTHESIS
• Internally generated funds – Funds
from operating cash flows.
• Debt – next alternative when internally
generated funds are not available.
• Equity – it is the most difficult to issue.
 SOURCES AND USES OF
SHORT-TERM FUNDS
• It is normally used to finance the day-
to-day operations of the company. It
is used for working capital
requirements such as accounts
receivable and inventories. There
funds are used for business
operations’ working capital.
• Short-term funds are used for business
operations’ working capital.
• Other term is working capital which
primary sources are savings accounts
and current accounts.
 SOURCES AND USES OF
SHORT-TERM FUNDS
• Working capital is defined as current
assets less current liabilities. It helps
carry out the normal operations of the
business.
• Marketable securities are used to
generate investments income through
capital appreciation in stock
investments or trading through bond
investments.
 SOURCES OF SHORT-
TERM FUNDS
• Suppliers’ credit
• Advances from stockholders
• Credit cooperatives
• Bank loans
• Lending companies
• Informal lending sources
 SOURCES AND USES OF
LONG-TERM FUNDS
Long-term funds are usually used for
start-up business requirements, capex,
expansion for existing business. Other
uses are:
• Equity investors
• Internally generated funds
• Banks
• Bond market
• Lending companies
 PROBLEMS FACES BY
SMES IN FINANCING
• Limited track record
• Limited acceptable collateral
• Inadequate financial statements
• Lack of business plan
• Poor credit history
• Insufficient collateral
• Insufficient sales
• Unstable business
• Poor business plan
 REQUIREMENTS OF
APPLYING FOR PERSONAL
LOAN
• Lending happens when the owner of
a property allows party the use of
property. Debt is the obligation to
pay back property or cash borrowed
in accordance to agreement through
promissory note. Credit is a loan
extended to a person/business in
exchange for return.
What affects credit ratings?
• Ability to pay the loan
• Character of the borrower
• Capacity
• Personal assets
• collateral
 DUTIES OF THE BORROWER
TO CREDITORS

• Pay the creditors based on the

payment schedule agreed upon.
• Provide the collaterals
• Comply with the provision of the loan
• Notify the creditor if the company is
acquiring another company.
• Do not default on the loans.
Credit Bureau is the agency that
gathers information about the credit
history of the borrower and sells this
information for a fee.

Insolvency is the inability to pay debts

on time when they are due.

Bankruptcy is a legal process wherein

assets of a debtor are distributed to
creditors to be able to pay his debts.
 SELF-TEST QUESTIONS

• What do you think is the formula in

getting the net worth of an individual?
Justify your answer.
• How does bonds work?
• How does equity financing work?