Lesson 1

Question 1

Philippine is a long-term source of funds, while the issuance of commercial paper is a form of short-term debt financing.

Answer 1

Equity financing

Question 2

can be in the form of borrowing banks or other lending institutions or the issueance of debt securities like commercial papers and bonds

Answer 2

Debt financing

Question 3

the process by which a private company becomes publicly listed through a stock exchange by offering shares of stocks to the public.

Answer 3

Initial public offering

Question 4

the process of offering new shares where existing shareholders can subscribe to the new issues based on their proportionae share the company prior the issuance of new shares.

Answer 4

Stock rights offering

Question 5

creates a contractual obligation for the borrower to pay interest and the principal

Answer 5

Debt financing

Question 6

tax-deductible, provides a tax shield

Answer 6

Interest expense

Question 7

allows a company to grow without diluting the interest of the controlling shareholders or the proprietor, in the case of a single proprietorship.

advantageous to existing shareholders or owners because it allows a company to grow without fresh equity infusion.

This mode of financing does not dilute the existing ownership stake of existing shareholders or proprietors.

Answer 7

Debt financing

Question 8

generally do not intervene in the decisions of management.

impose certain conditions specified in the loan covenant, such as maintaining certain liquidity and stability ratios

do not intervene in managing their borrowers’ companies.

Answer 8

Creditors

Question 9

which means that for somebody to take more risk, he/ she has to be compensated by an expected higher return

Answer 9

“high risk, high return,”

Question 10

refers to the issuance of new shares of stock and retained earnings plowed back into company operations

safest source of financing for a company

Answer 10

Equity financing

Question 11

also called an internally generated fund

Answer 11

Latter

Question 12

corporate finance was developed based on repeated observations of how companies fund their financing requirements. According to this hypothesis, this is how companies fund their requirements:

Answer 12

Pecking Order Hypothesis

Question 13

These are the funds that come from operating cash flows and plowed back earnings of a company

Answer 13

Internally generated funds

Question 14

When internally generated funds have been exhausted, then is the next alternative.

Answer 14

debt financing

Question 15

The last in the priority list of financing

Answer 15

equity financing

Question 16

normally used to finance the day-to-day operations of a company.

It is used for working capital requirements, such as accounts receivable and inventories. It is also used to pay the salaries of employees, utility expenses, business and income taxes, and security services.

It can also be used for bridge financing where a company has some maturing obligations and does not have enough cash to pay such maturing obligations

Answer 16

Short-Term Funds

Question 17

Example of Sources of Short-Term Funds:

Answer 17

Suppliers’ credit

Advances from owners/ shareholders

Advances from customers

Loans from banks

Loans from cooperatives

Loans from lending companies

Commercial papers

Question 18

Example of Uses of Short-Term Funds:

Answer 18

Working capital

requirements, e.g..

inventories and accounts receivable

Operations, e.g..

salaries of employees,

rent, and utilities

Bridge financing

Question 19

Suppliers of raw materials and merchandise are the best sources of short-term working capital. This is the reason why a good relationship with suppliers has to be nurtured.

Answer 19

Suppliers’ credit

Question 20

f an owner or a controlling shareholder has enough personal assets, advancing funds to his/her company when there are financial requirements is an easy way for a company to raise funds

Answer 20

Advances from owners or shareholders

Question 21

There are occasions when a customer advances the payment for his/her purchase orders. The advances may be a percentage of the entire value of the order.

Answer 21

Advances from customers

Question 22

can lend as much as five times equity contributions.

Answer 22

Credit cooperatives.

Question 23

can provide both short-term and long-term loans.

Answer 23

Banks

Question 24

banks that offer short-term credit facilities to small and medium enterprises (SMEs)

Answer 24

Development Bank of the Philippines (DBP) and Land Bank of the Philippines (LBP)

Question 25

short-term debt securities issued to the public, normally with tenors of one year. This is a credit facility normally available to big corporations.

Answer 25

Commercial papers

Question 26

can finance working capital requirements. Some of them may require documents such as a purchase order to support a loan application. This purchase order may become the basis of a loan release

Answer 26

lending companies

Question 27

sources such as “5-6.” This is a very expensive source of financing and should be avoided. It is called as such because for every 15 that one borrows, he/she has to return 6. This 20% interest is just for a month

Answer 27

Informal lending

Question 28

are used for long-term investments, or sometimes called capital investments.

These include replacement of old equipment, expansion of production capacity, and buying a piece of land that will be the site of future expansion.

can also be used to finance permanent working capital requirements

Answer 28

Long-term funds

Question 29

Example of long term funds:

Answer 29

Equity infusion

Internally generated funds

Loans from banks

Loans from lending companies

Bonds

Question 30

Example of Uses of Long-Term Funds

Answer 30

Long-term investments, e.g..

expansion of production capacity

Permanent working capital

requirements

Question 31

have to be financed by long-term sources of funds to minimize default risk. The returns on long-term investments may not be realized immediately and, therefore, require more patient sources of financing.

Answer 31

Long-term investments

Question 32

can be in the form of fresh equity infusion from the owner in a single proprietorship or issuance of new ordinary shares or perpetual preference shares for a corporation. This is the most patient source of capital.

Answer 32

Equity financing

Question 33

contains information that will guide potential investors in making an investment decision. This is prepared through the services of investment bankers.

Answer 33

prospectus

Question 34

Instead of declaring cash dividends or distributing the profits to the proprietor,

for expansion or finance other types of capital investments

Answer 34

Internally generated funds

Question 35

sources of different types of financing, from short-term to long-term. They provide lower interest rates as compared to other financial institutions. Still, they have many requirements, and a borrower goes through a process, normally a month to three months before a loan gets approved (refer to the next section for the list of requirements, general procedures, and flowchart on a loan application).

Answer 35

Banks

Question 36

This market is gaining more popularity among our big publicly listed companies for their fund-raising activities.

Answer 36

Bond Market

Question 37

credit rating agencies is important because

Answer 37

it will dictate the interest rate that an issuer can charge to the buyers of the bonds.

Question 38

means that a bond issuer has low credit risk

Answer 38

high credit rating

Question 39

General Steps on Loan Application

Answer 39

1. The loan applicant approaches an account officer to apply for a loan.
2. The account officer evaluates if the loan applicant qualifies for any of the bank’s loan products.
3. If qualified, the account officer gives the loan applicant the list of requirements (refer to Appendix 1 for a possible list of requirements).
4. The loan applicant completes the requirements and submits them to the account officer.
5. The account officer checks the completeness of the requirements and forwards them to the credit evaluation department if the requirements are complete.
6. The credit evaluation department assigns the account to a credit analyst who will evaluate the creditworthiness of the loan applicant.
7. The credit analyst prepares a recommendation and will present the recommendation

before a loan committee that approves the loan application. The loan committee is

generally composed of top executives from the bank.

8. If the loan is approved, the post-approval requirements will be sent to the loan applicant for compliance.

Question 40

reasons for the inability of SMEs to take advantage of available financing:

Answer 40

1. Limited track record
2. Limited acceptable collateral
3. Inadequate financial statements
4. Lack of business plans

Question 41

The potential creditors of these SMEs cited the following reasons for rejecting the loan applications:

Answer 41

1. Poor credit history
2. Insufficient collateral
3. Insufficient sales, income, and cash flows.
4. Unstable business type
5. Poor business plans

Question 42

One way of establishing credibility is ________

Answer 42

paying obligations on time

Question 43

These conditions are supposed to benefit the borrower so that his/her company will not be overexposed to borrowing, or he/she will monitor the liquidity position on a more regular basis.

Answer 43

Comply with the provisions of loan covenant, such as maintaining certain liquidity and stability or leverage ratios.

Question 44

if a company is acquiring another company or if a company is now the subject of acquisition.

Answer 44

Notify the creditors