Sources & Uses of Funds in Finance

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

Which document is NOT required for a company seeking to apply for a loan?

Certificate of conduct from previous loans (correct)

Latest audited financial statement

Curriculum vitae of the officers

Board resolution authorizing the application

What is the primary purpose of the certified list of stockholders in a loan application?

To calculate the total number of shares owned

To verify the financial status of shareholders

To ensure compliance with municipal regulations

To identify ownership structure and stake distribution (correct)

What type of obligation is based on moral duty between two parties?

General obligation (correct)

Accounting obligation

Legal obligation

Financial obligation

Which factor is NOT considered in evaluating alternative uses of funds?

Financial decisions of competitors Signup and view all the answers

Which of the following is included in the credit history/information of a borrower?

Marital status Signup and view all the answers

What distinguishes a bank from a non-bank financial company?

Non-banks do not hold a banking license. Signup and view all the answers

Which type of loan is specifically intended for real estate purchases?

Housing Loan Signup and view all the answers

Which of the following is NOT a type of non-bank financial company?

Universal Bank Signup and view all the answers

What is typically required from a partnership applying for a loan?

Article of Partnership Signup and view all the answers

Which of the following financial services is provided by a thrift bank?

Home mortgages Signup and view all the answers

What document is required from individuals seeking a loan?

Official receipt Signup and view all the answers

Which type of financial intermediary is a cooperative bank classified as?

Thrift bank Signup and view all the answers

Which of the following is NOT a requirement for a corporation applying for a loan?

Income statement of each member Signup and view all the answers

What is a defining characteristic of short-term financing?

Debt scheduled to be paid within a year Signup and view all the answers

Which of the following is NOT a drawback of debt financing?

Dilution of ownership control Signup and view all the answers

What is the consequence of issuing equity financing?

Potential dilution of control for current owners Signup and view all the answers

What is a primary benefit of using debt financing over equity financing?

Lower issuance costs Signup and view all the answers

When is liquidity risk most likely to occur?

When assets are tied up in investments or inventory Signup and view all the answers

What does liquidity risk prevent an investor from doing?

Avoiding financial loss through asset sales Signup and view all the answers

Which financing method typically increases financial risk?

Debt financing Signup and view all the answers

What is usually true about dividends in equity financing?

They are not mandatory and depend on company profits Signup and view all the answers

Study Notes

Sources & Uses of Short-Term and Long-Term Funds

Funds are pools of money allocated for specific purposes.
Financial institutions are sources of short-term and long-term funding.

Case Studies

Fabrics Inc.: Opened a PHP10 million clothing outlet using a one-year short-term loan. Average annual operating cash flow is PHP1.5 million. This case studies the financial implications if annual cash flow is significantly less than the loan amount.
Dragon Inc.: Fireworks production company. Peak season is during Christmas and New Year. Additional PHP500,000 needed to finance working capital. The focus is financing the peak season.

Financing Options

Equity Financing: Raising capital by selling company stock. Investors gain ownership interests.
- Less financial risk.
- Higher issuance costs.
- Greater future financing flexibility.
- No adverse effect on credit rating.
Debt Financing: Borrowing money from lenders (e.g., banks).
- Repayment is mandatory.
- Interest is tax-deductible.
- Increased financial risk.
- Cheaper issuance costs.
- Less future financing flexibility.
- Possible adverse effect on credit rating.

Types of Loans

Personal Loan: May or may not require collateral.
Housing Loan: For buying, constructing, or renovating real estate or dwellings.
Auto Loan: For purchasing expensive vehicles.

Types of Banks

Commercial Bank
Universal Bank
Thrift Bank
Savings Bank
Rural bank and Cooperative bank

Types of Non-Bank Financial Companies

Life and Non-Life Insurance
Pension Fund and Mutual Fund Companies
Investment House and Lending Investor Companies
Trust companies and Partnerships (Pawnshops)

Loan Origination Process

Loan Application Form (name, amount, address, purpose of the loan).
Credit history/information of the borrower (employer, salary, other income sources, marital status, dependents).
Credit Committee evaluation: approval or denial.

Obligations of Entrepreneurs to Creditors

General obligation: moral obligation tying two or more parties.
Accounting obligation: duty to make future payments.
Legal obligation: adhering to the terms of the loan agreement.

Alternative Uses of Funds

Management tools evaluate different funding alternatives.
Companies of varying sizes have differing approaches to capital allocation decisions.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

This quiz explores the various sources and uses of short-term and long-term funds in financial contexts. It includes case studies of specific companies, detailing their funding decisions and financial implications. Understand the distinctions between equity and debt financing options to enhance your financial literacy.