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FM 120: FINANCIAL MANAGEMENT

Welcome Message!

Welcome to FM 120: Financial Management! I am excited to embark

on this essential journey into the core principles of finance with you

this semester. This course is a cornerstone of your Bachelor of Science

in Business Administration program, designed to equip you with the

critical knowledge and technical skills needed to navigate the complex

world of corporate finance, investments, and financial markets.

Whether your future lies in banking, investment management,

corporate strategy, or entrepreneurship, the foundations we build here

will be vital to your success as a globally competitive and ethically

grounded professional.

Over the next few weeks, we will delve into key areas that form the

bedrock of financial decision-making. You will be introduced to

financial management concepts, master the analysis of financial

statements and cash flows, explore the crucial role of interest rates

and risk, and apply the powerful tool of time value of money. We will

learn techniques for valuing bonds and stocks, understand capital

budgeting for project evaluation, and examine how companies

manage working capital, leverage, and their overall cost of capital. Get

ready to apply financial formulas, construct analyses, interpret results,

and make strategic recommendations.

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This course is deeply aligned with our university's vision of excellence,

innovation, and inclusion, and its mission to generate and elevate

knowledge for sustainable development. Our core values – being God-

centered, critical, disciplined, committed, collaborative, resilient, and

sustainable – will guide our learning environment. You will have ample

opportunity to practice these values through diverse activities,

including case studies analyzing real companies, simulated investment

portfolio management, comparative financial analysis, and problem-

solving exercises. These practical applications are designed to develop

your competencies as research-oriented, ICT-enabled, effective

communicators, prepared for the demands of the financial world.

Prepare for an engaging and challenging semester! Active

participation in discussions, labs, case analyses, and problem-solving

sessions will be key to your success. We will utilize various

assessments – quizzes, problem sets, presentations, reports, and

portfolio analyses – to gauge your understanding and application of

the material. Embrace the opportunity to think critically, collaborate

with your peers, and develop the sound ethical judgment necessary

for effective financial decision-making. We are committed to

supporting your learning and look forward to a productive and

rewarding semester together as we explore the dynamic field of

Financial Management!

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FACULTY INFORMATION

Instructor: Jay Talingtingan Relatado

Office: BSBA Faculty office

Contact Information: relatadojayup02@[Link]

Jay Relatado on Facebook

Consultation Hours: Scheduled Consultation through e-mail

and fb chatrooms

GETTING HELP

For academic concerns: Dianne Rose T. Lunas, MBA

For administrative concerns: Rizaldy V. Maypa, PhD

For health and wellness concerns: University Clinic, Academic

Building

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TABLE OF CONTENTS
WELCOME MESSAGE
VISION................................................................................................................... vi
MISSION................................................................................................................ vi
CORE VALUES....................................................................................................... vi
GRADUATE OUTCOMES......................................................................................... vi
PROGRAM EDUCATIONAL OBJECTIVES (PEO) IN RELATION TO THE UNIVERSITY
MISSION............................................................................................................... vii
STUDENT OUTCOMES (SO) IN RELATION TO THE PROGRAM EDUCATIONAL
OBJECTIVES (PEO)................................................................................................ vii
COURSE INFORMATION....................................................................................... viii
COURSE LEARNING OUTCOMES (CLO)..................................................................ix
ALIGNMENT OF COURSE LEARNING OUTCOMES (CLO) TO STUDENT OUTCOMES
(SO)....................................................................................................................... ix
GRADING SYSTEM.................................................................................................. x
📘 Chapter 1: Principles of Finance.........................................................................1
📘 Chapter 2: Firms and the Financial Markets.......................................................9
📘 Chapter 3: Understanding Financial Statements..............................................18
📘 Chapter 4: Analysis of Financial Statements.....................................................28
📘 Chapter 5: Time Value of Money.......................................................................41
📘 Chapter 6: Interest Rates.................................................................................. 54
📘 Chapter 7 - Bond Valuation...............................................................................63
📘 Chapter 8 – Risk and Return............................................................................. 70
📘 Chapter 9: Stock Valuation............................................................................... 79
📘 Chapter 10: Cost of Capital...............................................................................89
📘 Chapter 11 — Capital Budgeting.......................................................................97
📚 References...................................................................................................... 119
✅ ANSWERS KEY................................................................................................. 121

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VISION
“A university of excellence, innovation, and inclusion”

MISSION
1. To elevate knowledge generation, utilization and distribution;
2. To promote inclusive sustainable development through research and
extension-based higher quality education, technical vocational skills,
responsive to the
needs of local and global community; and
3. To produce holistic, creative and inclusive human resource which
are responsive and resilient to global challenges while maintaining
strong sense of
nationhood.

CORE VALUES
1. God-centered and humane;
2. Critical and Creative;
3. Disciplined and Competent;
4. Committed and Collaborative; and
5. Resilient and Sustainable.

GRADUATE OUTCOMES
1. Research-oriented and innovative;
2. Empowered with sense of professionalism;
3. ICT enabled;
4. Effective Communicator; and
5. Endowed with Filipino and universal values.

FACULTY GOALS:
To create a vibrant classroom environment by ample classroom
facilities, laboratory equipment and apparatus to enrich institutional
experiences;
1. To produce technically competent and globally competitive hoteliers
and restauranteurs by nurturing and sustaining a renowned level of
skills-based training and research-based development in the
hospitality and tourism sector; and
2. To spawn ethical and globally qualified professionals equipped with a
reasonable management, financial and entrepreneurial skills.

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PROGRAM EDUCATIONAL OBJECTIVES (PEO) IN RELATION TO

THE UNIVERSITY MISSION
PROGRAM EDUCATIONAL OBJECTIVES (PEO) MISSION
The BACHELOR SCIENCE IN BUSINESS
1 2 3
ADMINISTRATION graduates shall:
1. Prepares the graduates for the various careers
in financial management as well as in related
fields, including but not limited to, corporate
finance, investment management, banking, credit,   
trust operations, insurance, foreign currency
market, money markets, capital markets and other
financial securities markets;
2. Provides the graduate with knowledge on
financial institutions and technical skills based on
  
established financial theories, methodologies, and
various analytical tools; and
3. It also promotes an outlook that is based
primarily on ethics, market integrity, regulations,
  
good governance, competitive global perspective,
necessary for effective financial decision making.

STUDENT OUTCOMES (SO) IN RELATION TO THE PROGRAM

EDUCATIONAL OBJECTIVES (PEO)

Upon completion of the program, the Bachelor of

Science in Business Administration students shall be PEO
able to:
1. Perform the basic functions of management such
as planning, organizing, staffing, directing and P
controlling;

2. Apply the basic concepts that underline each of

the functional areas of business (marketing, finance,
human resources management, production and
O
operations management, information technology, and
strategic management), and employ these concepts in
various business situations;

3. Select that proper decision-making tools to

critically, analytically and creatively solve problems and O
drive results;
4. Express oneself clearly and communicate
effectively with stakeholders both in oral and written O
forms;
5. Apply information and communication technology
O
(ICT) skills as required by the business environment;

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6. Work effectively with other stakeholders and

O
manage conflict in the workplace;
7. Plan and implement business related activities; P
8. Demonstrate corporate citizenship and social
O
responsibility;
9. Exercise high personal moral and ethical
O
standards;
10. Analyze the business environment for strategic
O
direction;
11. Prepare operational plans; L
12. Innovate business ideas based on emerging
O
industry;
13. Manage a strategic business unit for economic
O
sustainability; and
14. Conduct business research. O

COURSE INFORMATION

COURSE NUMBER: FM 120

COURSE TITLE: Financial Management

PRE-REQUISITE: None

CO-REQUISITE: None

NUMBER OF UNITS: 3

CONTACT HOURS: 90 Hours

COURSE DESCRIPTION: Introduction to financial management

and finance; cash flows and financial analysis; The make up of

interest rates, risk and the time value of money in financial

calculations: The techniques of valuing bonds and stocks

and the risks associated with valuations; Capital budgeting

techniques, cash flows estimation and risks in capital

budgeting; The components of capital, the cost of

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capital and leverage; Managing working and capital, cash

and financing; Corporate financial planning, corporate

restructuring and international finance.

COURSE LEARNING OUTCOMES (CLO)

CLO1 Introduce students to financial management and finance, and
factors affecting interest rates, risks and returns.
CLO2 Apply financial formulas, construct graphical representations,
analyze results of the computed values and recommend action
to be taken by the investor or the management.
CLO3 Evaluate investment worth projects based on criteria, and
strategic and sound decision making.

ALIGNMENT OF COURSE LEARNING OUTCOMES (CLO) TO

STUDENT OUTCOMES (SO)

Course Leve Student Course Outcomes Proficiency

Outcome l Outcomes Assessment Through
s Satisfied
CLO1 L, P SO1, SO6, Written and Oral Assessment, Web-
SO7, SO9, based Assessment
SO13,
SO14
CLO2 L, P, SO2, SO3, Written and Oral Assessment, Board
O SO4, SO5, work, Problem solving, practical
SO10 examination (on line ICT), Securities
assessment, Interview and Survey
CLO3 P, O SO8, SO11, Portfolio evaluation, Case Study,
SO12, Financial Plan
SO14

Legend: Level
/ L / = Facilitate LEARNING of the competencies (input is provided and
competency is evaluated)
/ P/ = Allow student to PRACTICE competencies (no input but
competency is evaluated)
/ O / = Provide OPPORTUNITY for development (no input or evaluation,
but there is opportunity to practice the competencies)

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GRADING SYSTEM

Particulars Percentage
Class Standing (Quizzes, Class 50%
Participation, Assignments and
other class evaluation)
Major Examination 30%
Laboratory Activities 20%
Total 100%

Final Rating:
Preliminary Grade 40%
Mid-Term Grade 30%
Final Grade 30%
Total Grade 100%

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📘 Chapter 1: Principles of Finance

🎬 Introduction

Imagine you were given ₱100,000 today — would you invest it in a

sari-sari store, open a milk tea franchise, or save it in a bank? In the

Philippines, where financial literacy remains a challenge, decisions like

these can change lives. Whether you dream of running your own

business in Mati or managing the budget of your future household,

understanding finance gives you the power to make informed choices.

This chapter is your first step into the exciting world of financial

decision-making.

🎯 Objectives
By the end of this chapter, students will be able to:

1. Define the field of finance and its relevance in personal and

professional contexts.

2. Differentiate among the three major forms of business organizations

in the Philippines.

3. Identify the primary roles and goals of a financial manager.

4. Explain the five foundational principles of finance using examples

relevant to Philippine contexts.

🧩 Activity: “Pera o Bayong” Decision Game

Instructions: In groups of 3, students will be presented with a scenario

involving a Filipino OFW who has returned home with ₱500,000. Each

group must decide how to allocate the money between investment,

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savings, debt repayment, and personal consumption. Groups will

defend their decision using basic financial logic.

🔍 Analysis Questions

1. If you were to start a small food business in your barangay, what

financial risks would you consider first?

2. How can the principle “Money Has a Time Value” help Filipino

students when deciding between studying now or working abroad?

3. Why is ethics crucial for business owners in the Philippines,

especially in handling community trust?

📚 Abstract

Introduction to Finance

Finance is the lifeblood of every economy, institution, and household.

In the Philippines, where entrepreneurship thrives from sari-sari stores

to tech startups, understanding finance equips individuals and

businesses to make sound decisions that create value and sustain

livelihoods. Finance encompasses not just the study of money

management but also strategic decision-making involving

investments, funding, and risk control.

In this chapter, students will discover how finance functions in both

business and personal life, understand the role of financial managers,

explore the different types of business organizations common in the

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Philippines, and delve into five core principles of finance that underlie

all financial decisions.

The Scope of Finance

Finance addresses three fundamental decisions that all businesses

face:

1. Capital Budgeting: Which long-term investments should a

business pursue?

o Example: San Miguel Corporation evaluating a ₱73B

investment in renewable energy plants in Luzon versus

expanding its Petron refinery in Bataan.

2. Capital Structure: How should investments be funded?

o Example: Cebu Pacific choosing between bank loans (e.g.,

BDO) or equity financing (PSE IPO) to fund new Airbus

A330neo aircraft.

3. Working Capital Management: How can daily cash flows be

optimized?

o Example: Jollibee Foods Corporation managing ₱2.4B in daily

receipts from 1,500+ stores during peak seasons

like Undas or Christmas.

These decisions are not limited to large corporations like Jollibee or

Ayala Corporation—they are equally relevant to tricycle drivers, online

sellers, and cooperatives.

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Forms of Business Organizations in the Philippines

Form Descriptio Advantages Disadvantag Example

n es
Sole Owned by Easy to set Unlimited A sari-sari
Proprietorshi one person. up, full liability store in
p Most control Mati
common in
PH.
Partnership Two or Shared Disputes may A dental
more responsibility arise, shared clinic with
owners. and capital liability two
Must be dentists
registered
with SEC.
Corporation Separate Limited Complex San Miguel
legal entity. liability, can registration, Corporatio
Governed raise large higher taxes n
by the capital
Revised
Corporation
Code.

In the Philippines, micro-entrepreneurs often start as sole proprietors,

then transition to corporations as their business scales.

Role and Goal of the Financial Manager

The financial manager is responsible for making decisions that

enhance the financial health and value of the business. Their core

functions include:

 Investment decisions (capital budgeting)

 Financing decisions (capital structure)

 Cash management (working capital management)

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Goal of the Financial Manager:

To maximize shareholder wealth, or in broader terms, to increase the

value of the firm. This is measured by the market price of shares in

corporations or by growth in owner’s equity in small businesses.

Ethics in Financial Management

In the Philippine setting, ethical financial behavior is crucial, especially

in areas like government procurement, LGU fund allocation, or

barangay development projects. For example, the misuse of public

funds in ghost projects leads not only to financial losses but also to

loss of public trust.

The Five Principles of Finance

These principles guide financial decision-making in every situation,

from setting up a lechon manok stall to launching a fintech app in

Manila.

1. Money Has a Time Value

A peso today is worth more than a peso tomorrow because of its

potential earning capacity.

 Example: A cooperative investing ₱100,000 today at 5 percent

interest annually will have ₱105,000 next year.

 Key Concept: The sooner you receive money, the sooner it can be

invested to earn more.

2. There Is a Risk-Return Tradeoff

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Higher returns are associated with higher risks. Rational investors will

only accept more risk if compensated by higher expected returns.

 Example: Buying a house and renting it out in Davao may yield

higher returns than a time deposit, but it involves risk like tenant

default or market downturns.

Risk
Investment Return
Level

Time Deposit Low 1–2% p.a.

Mutual Fund Medium 5–8% p.a.

10–15% p.a.
Stock Market High
(variable)

3. Cash Flows Are the Source of Value

The value of a business or investment lies in the cash it can generate

—not just in its assets.

 Example: A small bakery in Tagum may own expensive equipment,

but if it cannot turn these into cash through sales, its true value is

limited.

 Profit ≠ Cash. Accrual accounting may show a net income, but cash

flow statements reveal actual liquidity.

4. Market Prices Reflect Information

In efficient markets, prices of stocks or goods reflect all available

information.

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 Example: When a listed company like Globe Telecom announces a

merger, its share price adjusts quickly.

 In informal markets like Divisoria, prices of goods change rapidly

with supply chain disruptions or fuel price hikes.

This principle emphasizes transparency and the speed at which

financial markets incorporate news and expectations.

5. Individuals Respond to Incentives

Incentives motivate people to act in specific ways.

 Example: A barangay government offering cash aid to tricycle

drivers who register their vehicles may boost compliance.

 In businesses, commission-based sales models or profit-sharing

encourage better performance.

Agency problem arises when the interest of managers diverge from

that of owners. For instance, a manager may overspend on

unnecessary perks, reducing owner profits.

Regulation and Financial Integrity

In the United States, the Sarbanes–Oxley Act (SOX) was enacted to

combat corporate fraud. In the Philippines, similar efforts include:

 Republic Act 8799: Securities Regulation Code, regulating stock

markets

 Bangko Sentral ng Pilipinas (BSP): Oversees financial

institutions

 Commission on Audit (COA): Audits government finances

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Ethical finance, good governance, and transparency are crucial,

particularly in public-private partnerships, LGU funds, and community

enterprises.

📝 Summary

Finance is a foundational field that equips individuals and businesses

with the tools to make sound financial decisions. It covers:

 The importance of finance in life

 Business organization types

 The goal and ethical responsibility of financial managers

 The five fundamental principles that guide financial decision-making

Applied to the Philippine setting, finance helps MSMEs thrive,

promotes personal financial discipline, and shapes the economic

landscape of communities.

🛠 Application Task: Case Study Analysis

Task: Analyze a case study of a real company, focusing on its financial

management practices. Identify the forms of business organization

used, discuss the potential conflicts between managers, stockholders,

and bondholders, and evaluate the company's approach to business

ethics.

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Output: A detailed report (2-3 pages) summarizing findings, including

a discussion on potential career paths in finance related to the case.

📘 Chapter 2: Firms and the Financial Markets

🎬 Introduction

Imagine a fishball vendor in Davao saving part of his daily income in a

rural bank. Meanwhile, a startup tech firm in Manila seeks funding to

expand its app nationwide. What connects them? Financial markets.

Whether you are a saver, a borrower, or an entrepreneur, you are part

of a dynamic system that circulates capital and creates opportunities.

In this chapter, we dive into the Philippine financial markets and how

firms use them to thrive.

🎯 Objectives

By the end of this chapter, students will be able to:

1. Describe the structure and roles of financial markets and financial

institutions in the Philippines.

2. Differentiate between commercial banks and other financial

intermediaries.

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3. Explain how securities markets operate in both primary and

secondary transactions.

4. Identify and evaluate common financial instruments (stocks, bonds)

in the Philippine context.

5. Apply the principles of risk-return, market efficiency, and incentives

in financial market decision-making.

🧠 Activity: "Investor or Borrower?"

Instructions: Form two groups: borrowers (e.g., business owners, LGUs)

and investors (e.g., OFWs, retirees). Each group will draft a short role-

play pitch: borrowers must convince investors why they are worth

investing in; investors must ask sharp questions to assess risk, return,

and transparency.

🔍 Analysis Questions

1. Why is access to financial markets often difficult for micro-

enterprises in rural areas of the Philippines?

2. How do you think social media affects the value of publicly traded

companies in the Philippine Stock Exchange (PSE)?

3. What incentives can be introduced to encourage more Filipinos to

invest in financial instruments?

📚 Abstract

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The Financial Marketplace in Everyday Filipino Life

Financial markets are not just about Wall Street or Makati’s business

district—they are embedded in the day-to-day economic decisions of

every Filipino. When a small carinderia borrows from a cooperative, or

when an Overseas Filipino Worker (OFW) invests in retail bonds, they

are active players in the financial marketplace. This chapter explores

how firms and individuals interact through financial markets, the

institutions that serve as intermediaries, and the mechanisms through

which capital flows from savers to borrowers. The discussion aligns the

global theories with specific applications in the Philippine financial

environment.

Structure of Financial Markets

At its core, a financial market is a platform that facilitates the

exchange of capital. In the Philippines, this involves government

entities like the Bangko Sentral ng Pilipinas (BSP), private firms, banks,

cooperatives, and the Filipino public.

Participants in the Market:

Role Description Philippine Example

Borrowers Seek capital to finance SMEs borrowing from
investments DBP
Savers Supply funds in hopes of OFWs investing in Pag-
(Investors) returns IBIG MP2
Financial Link savers and borrowers BDO, rural banks,
Intermediaries cooperatives

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Case in point: A micro rice retailer in Bukidnon might borrow from a

local cooperative, which in turn pools capital from member deposits.

That cooperative serves as a financial intermediary between rural

savers and entrepreneurs.

Functions of Financial Markets:

 Allocate capital efficiently.

 Provide a mechanism for price discovery.

 Facilitate liquidity.

 Distribute risk.

Financial Institutions in the Philippine Marketplace

Financial institutions serve as bridges in the economy. These include:

1. Commercial Banks

 Collect deposits and provide loans.

 Examples: BDO, BPI, Metrobank, Land Bank of the Philippines.

 Dominant players in urban and suburban areas.

2. Rural and Cooperative Banks

 Serve countryside clients and farmers.

 Examples: CARD Bank, Rural Bank of Mati, Inc.

 Focus on financial inclusion.

3. Non-Bank Financial Institutions

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 Insurance companies: Offer protection and savings (e.g., Sun Life,

Philam Life).

 Mutual funds and UITFs: Managed investment funds available via

banks.

 Microfinance institutions: Target low-income borrowers (e.g., ASA

Philippines).

Financial Key Role Local Example

Institution
Commercial Bank Loans and deposit BDO
services Metrobank
PNB
DBP
Rural Bank Serve remote areas Rural Bank of Mati, Inc.
Enterprise Bank
Insurance Firm Manage risk and savings Philam Life
Cooperative Member-led savings and Tagum Coop,
loans King Coop
NICO
Investment Bank Capital raising for firms First Metro Investment
Corp

Money and Capital Markets

Financial markets in the Philippines are broadly categorized into:

A. Money Market (Short-term, ≤1 year)

 Treasury Bills (T-Bills)

 Short-term promissory notes (commercial paper)

 Example: BSP issues 91-day T-bills for government financing.

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B. Capital Market (Long-term, >1 year)

 Bonds, stocks, and long-term investments

 Example: SM Prime issues corporate bonds to fund new malls.

Market Features Philippine Instruments

Money Low risk, liquid T-bills, SDA (Special Deposit
Market Accounts)
Capital Higher return Stocks, bonds, REITs
Market potential

Securities Markets: Primary and Secondary Markets

Securities markets allow businesses to raise funds and investors to

trade financial instruments.

A. Primary Market

 Where companies first issue stocks or bonds.

 Example: Converge ICT’s IPO in the PSE, 2020.

B. Secondary Market

 Trading of existing securities among investors.

 Firms don’t receive money here, but liquidity is increased.

 Example: Juan sells his Jollibee Foods Corp. shares through an online

brokerage like COL Financial.

Steps in Securities Issuance and Flow:

1. Issuance: Firms issue stocks/bonds (primary market).

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2. Investment: Proceeds are invested in business operations.

3. Returns: Income is distributed as dividends or interest.

4. Resale: Investors trade in the secondary market.

Types of Securities: Debt vs. Equity

Type Features Local Example

Debt Fixed interest, repayable Government Bonds,
Securities Corporate Notes
Equity Ownership stake, PSE-listed stocks like Ayala
Securities variable returns Land, GMA7

 Debt = Borrowing money (e.g., Metro Pacific issues bonds to fund

infrastructure)

 Equity = Ownership in a business (e.g., buying shares of San Miguel

Corp.)

Investment Companies and New Financial Trends

With technology and deregulation, Filipinos now have more access to

diversified investment vehicles:

Instrumen Description Provider

t
Mutual Professionally managed pooled Sun Life, Philam
Funds investments
UITFs Bank-traded pooled funds BDO, Security
Bank
REITs Real estate income-generating funds AREIT, Filinvest
REIT
ETFs Index-tracking traded funds First Metro ETF

Tech note: Apps like GCash Invest Money and COL Financial allow small

investors to participate in markets once reserved for the elite.

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Applying Finance Principles

This chapter reinforces three key principles:

Principle 2: There Is a Risk-Return Tradeoff

 Pag-IBIG MP2 savings are safe but low-yielding.

 Investing in Philippine stock index funds offers higher returns but

higher volatility.

Principle 4: Market Prices Reflect Information

 Share prices of PLDT or ACEN respond quickly to news like earnings

reports or regulatory changes.

Principle 5: Individuals Respond to Incentives

 OFWs may be more willing to invest when the government offers

tax-free retail bonds or premium raffle incentives.

Philippine Regulatory and Institutional Environment

Institution Role
Bangko Sentral ng Pilipinas Oversees monetary policy and
(BSP) banking stability
Securities and Exchange Regulates corporate securities
Commission (SEC) and IPOs
Insurance Commission (IC) Regulates insurance providers
Philippine Stock Exchange Operates stock market
(PSE)
Bureau of the Treasury (BTr) Issues government bonds

These bodies ensure transparency, protect investors, and enable

capital formation across all regions of the country.

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Conclusion

Chapter 2 provides a practical framework to understand the roles and

interplay between firms, investors, and financial markets. In the

Philippine context, where many remain unbanked or underinvested,

these lessons empower individuals to participate meaningfully in

capital markets. Whether managing a family’s finances or leading a

corporate treasury, every Filipino benefits from an understanding of

how funds are sourced, invested, and circulated in the economy.

🛠 Application Task: “Stock Watch: The Pinoy Investor”

Instructions: Choose a company listed in the Philippine Stock

Exchange (e.g., GMA7, JFC, MER). Track its stock price daily for 1 week.

Record news articles or social media trends that may affect its

movement. Conclude: How did market prices reflect information?

Deliverables:

 Table of price movement

 Brief analysis (1–2 paragraphs)

 Presentation to class

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📘 Chapter 3: Understanding Financial Statements

🎬 Introduction

Imagine a small coffee shop in Mati City applying for a bank loan. The

bank officer asks for financial statements—documents that can tell the

story of that business in numbers. From sari-sari stores to large

corporations like Jollibee, financial statements help owners and

managers understand their performance, comply with government

regulations, and attract investors. In this chapter, we decode these

essential business tools and connect them to real-life Philippine

business practices.

🎯 Objectives

At the end of this chapter, students should be able to:

1. Identify and describe the purpose and structure of the four basic

financial statements.

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2. Interpret the key elements of the income statement, balance sheet,

and cash flow statement.

3. Apply accounting principles to analyze firm performance in

Philippine business settings.

4. Differentiate accounting earnings from cash flows and explain their

implications.

5. Compute and evaluate taxable income using Philippine corporate

tax rules.

🧠 Activity: “Business in a Box”

Instructions:

Students will be grouped and asked to simulate the operations of a

fictional business (e.g., a food cart, delivery service, or carinderia).

Each group must:

 Record sample income, expenses, and transactions

 Create a mini income statement and balance sheet

 Present their financial report in class

🔍 Analysis Questions

1. Why is it important to distinguish between profit and cash flow when

analyzing a firm?

2. How do local businesses in your area benefit from financial

statement reporting?

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3. What risks can arise if financial reports are inaccurate or

misleading?

📚 Abstract

Introduction to Financial Statements

Financial statements are the backbone of business communication. In

the Philippines, whether it's a micro-entrepreneur applying for a

barangay micro business enterprise (BMBE) certification or a listed

corporation filing annual disclosures with the Securities and Exchange

Commission (SEC), these statements provide critical insight into a

firm’s financial health. Understanding how to read, interpret, and use

financial statements is fundamental to decision-making, not just for

accountants, but for all business professionals and financial managers.

The Four Basic Financial Statements

According to both international and Philippine standards, every

business is required to maintain the following statements:

1. Income Statement (P&L Statement)

Shows profitability over time, typically quarterly or annually.

2. Balance Sheet (Statement of Financial Position)

A snapshot of what the business owns and owes at a specific date.

3. Cash Flow Statement

Tracks the movement of cash, crucial for evaluating liquidity.

4. Statement of Changes in Equity

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Reports changes in equity accounts such as retained earnings and

stock issuance.

📌 Philippine Insight: Under the BIR Revenue Regulations (RR No. 9-

2009), businesses earning more than ₱3 million annually are required

to submit audited financial statements along with their income tax

return (ITR).

The Income Statement: Evaluating Profitability

The income statement presents revenues and expenses to determine

net profit or loss.

Format:

Revenue– Cost of Goods Sold= Gross Profit– Operating Expenses=

Operating Income– Interest & Taxes= Net Income

Example (Mini Bakery in Davao):

Amount
Description
(₱)

Sales Revenue 500,000

Cost of Flour, Eggs, Sugar

250,000
(COGS)

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Amount
Description
(₱)

Operating Expenses (rent,

150,000
wages)

Interest and Taxes 25,000

Net Income 75,000

Key concepts include:

 Revenue Recognition Principle: Revenue is recorded when earned,

not when received.

 Matching Principle: Expenses must be matched to the revenues

they help generate.

Corporate Taxes in the Philippines

Firms must compute income tax based on taxable income. The

Philippine corporate tax rate is 25% for corporations with net taxable

income above ₱5 million and assets above ₱100 million, per the

Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act.

Tax Illustration:

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Amount
Item
(₱)

Gross Revenue 2,000,000

Less COGS 1,200,000

Gross Income 800,000

Operating
300,000
Expenses

Taxable Income 500,000

Income Tax @ 25% 125,000

🎯 Note: The Marginal Tax Rate applies to the last peso earned, while

the Average Tax Rate is the total tax divided by total income.

The Balance Sheet: Financial Position

This statement details assets, liabilities, and equity.

Basic Equation:

Assets = Liabilities + Owner’s Equity

Sample for a Small Coffee Shop:

Assets ₱ Liabilities & Equity ₱

Cash 50,000 Bank Loan 80,000
Equipment 120,00 Accounts Payable 20,000
0
Inventory 30,000 Owner's Equity 100,00
0
Total 200,00 Total Liabilities & 200,00
Assets 0 Equity 0

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Book vs. Market Value:

 Assets are recorded at historical cost, not current market value.

 In the Philippines, the Philippine Financial Reporting Standards

(PFRS) allow for fair value adjustments under certain conditions.

The Cash Flow Statement: Tracking Liquidity

Unlike the income statement, which is based on accruals, the cash

flow statement shows the real-time inflow and outflow of cash.

Cash Flow Sections:

1. Operating Activities – Sales receipts, payments to suppliers.

2. Investing Activities – Equipment purchase/sale, property

investments.

3. Financing Activities – Loan borrowings, dividends paid.

Sample:

Activity Amount
(₱)
Net Cash from 200,000
Operating
Cash used in Investing –100,000
Cash from Financing +50,000
Net Cash Flow +150,000

Importance in PH Setting:

Banks like Landbank or DBP often require cash flow statements from

MSMEs applying for financing.

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Statement of Changes in Equity

This statement details changes in owners’ equity accounts such as:

 Issuance of shares

 Retained earnings

 Dividends paid

Example:

If a company earned ₱1,000,000 in profit and declared ₱200,000 in

dividends:

 Retained earnings increase = ₱800,000

In the Philippines, the SEC mandates this statement for all registered

corporations.

Accounting Principles in Context

Understanding the principles behind how numbers are recorded is

vital:

1. Revenue Recognition Principle

Revenue is recognized when earned, not necessarily received.

2. Matching Principle

Expenses should be recorded in the period they contribute to

revenue.

3. Historical Cost Principle

Assets are recorded at original cost, even if current value changes.

These principles are embedded in PFRS and required by BIR and SEC.

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Cash Flows vs. Accounting Earnings

A major distinction for financial managers is understanding that profits

≠ cash.

Example:

A business sells goods worth ₱500,000 on credit. It's profitable on

paper, but without cash, it can’t pay its bills.

This is especially true for small Filipino businesses operating on tight

margins or in highly seasonal sectors like retail or agri-trade.

💡 Lesson: Managers must analyze both net income and actual cash

flow to avoid liquidity problems.

Real-World Applications in the Philippines

1. For SMEs:

 Financial statements are required for loans from banks and

cooperatives.

 Barangay micro-businesses need financial reports for DTI and BIR

compliance.

2. For Government & Taxation:

 BIR Form 1702 requires financial data from corporations.

 LGUs often require financial statements for business permit

renewals.

3. For Investors:

 Investors in the Philippine Stock Exchange rely on audited financials

to guide buy/sell decisions.

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4. For Financial Planning:

 Tools like personal income statements and balance sheets can be

applied for family budgeting and investment planning.

Integrating Finance Principles

This chapter applies key principles of finance:

Principle Application
P1: Time Value of Money Delayed income affects value—relevant for
receivables.
P3: Cash Flow is the Positive net income isn’t enough—cash is
Source of Value king.
P4: Market Prices Reflect Earnings reports impact stock prices (e.g.,
Information JFC, ACEN).
P5: Individuals Respond Managers may manipulate earnings for
to Incentives bonuses—hence, the role of regulation.

Conclusion

Understanding financial statements is fundamental in finance and

business. These tools allow stakeholders to assess profitability,

liquidity, solvency, and financial health. In the Philippine context,

where many MSMEs struggle with access to formal financial education

and capital, literacy in financial statements is an essential step toward

growth and sustainability. Through mastering these reports, students

and professionals can bridge theory and real-world decision-making,

and confidently engage in managing business resources.

🛠 Application Task: "Analyze and Reflect"

Instructions:

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1. Choose a real or sample financial statement from a local business

(can be simplified).

2. Identify and highlight:

o Total revenues and net income

o Assets and liabilities

o Cash inflow and outflow categories

3. Write a reflection (1 page) on what the data tells you about the

business’s health.

📘 Chapter 4: Analysis of Financial Statements

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🎬 Introduction

Have you ever wondered how banks decide to lend money to a

company, or how investors assess if a firm like Jollibee or Ayala Land is

financially healthy? It all begins with financial statement analysis—a

skill every entrepreneur, investor, or manager needs to master. In the

Philippines, where thousands of MSMEs operate alongside corporate

giants, being able to read beyond the numbers is critical. This chapter

unlocks the tools and techniques to evaluate business performance,

make smart decisions, and support the principle that “cash flows are

the source of value.”

🎯 Objectives

By the end of this chapter, students should be able to:

1. Identify and describe the key financial ratios used to evaluate a

firm’s performance.

2. Apply horizontal, vertical, and ratio analysis to financial statements.

3. Interpret results of financial analysis using Philippine business

scenarios.

4. Relate findings to the principles of finance, especially risk-return

tradeoff and the importance of cash flows.

5. Evaluate company health and performance using both accounting

data and financial insights.

🧩 Activity: “What Do You See?”

Instructions:

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 You will receive two very simple income statements (no technical
terms).
 In pairs, try to identify: “Who is doing better? And why?”
 Discuss with your partner based only on what you observe (e.g.,
who earned more, who spent more, who saved more).
📝 Purpose: This activity will warm you up to see patterns—even before

learning formal tools.

🔍 Analysis Questions

1. How would poor liquidity ratios affect a company’s ability to survive

during an economic crisis like COVID-19?

2. What signals can investors see in changes in profitability ratios over

time?

3. How can a cooperative or sari-sari store owner benefit from

analyzing their financial performance quarterly?

📚 Abstract

Why Analyze Financial Statements?

Alright, class—let’s say you’ve just inherited ₱100,000. You’re thinking

of investing it in a local business. But how do you know which business

is doing well? Just because they have many customers doesn't mean

they’re profitable. That’s where financial statement analysis comes in.

Financial analysis helps you move beyond the surface and dig into a

business's financial health. It's like checking the pulse, blood pressure,

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and temperature of a business. You’ll learn how to ask smart questions

like:

 Can this company pay its debts?

 Is it making enough profit from its sales?

 Is it growing or declining?

 Is it taking on too much debt?

This chapter will teach you not only how to analyze a business through

its financial statements but also how to apply your findings to real-

world decisions using the Principles of Finance.

What Is Financial Statement Analysis?

Financial statement analysis is the process of reviewing and evaluating

a company’s financial reports (income statement, balance sheet, and

cash flow statement) to make better economic decisions.

In the Philippine context, this is done by:

 Bank officers checking if your business qualifies for a loan.

 Business owners comparing their past and current performance.

 Government agencies like BIR and SEC monitoring financial

compliance.

 Investors deciding whether to buy stocks of companies like Jollibee

Foods Corp. or Ayala Corporation.

Main Tools of Financial Statement Analysis

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A. Horizontal Analysis (Trend Analysis)

This tool compares financial data over a period to see how

performance changes.

Example: Growth in Net Income of a Rice Mill in Davao

Item 2022 (₱) 2023 (₱) Amount % Change

Change (₱)
Sales Revenue 2,000,00 2,400,00 +400,000 +20.00%
0 0
Cost of Goods 1,200,00 1,440,00 +240,000 +20.00%
Sold 0 0
Operating 400,000 460,000 +60,000 +15.00%
Expenses
Net Income 200,000 250,000 +50,000 +25.00%

Interpretation:

From 2022 to 2023, the firm experienced a 20% growth in sales.

Operating expenses increased by 15%, while net income rose by 25%,

indicating improved profitability.

B. Vertical Analysis (Common-Size Statements)

This expresses each item in a financial statement as a percentage of a

base amount.

Item Amount (₱) % of Sales

Sales Revenue 2,400,000 100.0%
Cost of Goods Sold 1,440,000 60.0%
Gross Profit 960,000 40.0%
Operating Expenses 460,000 19.2%
Net Income 250,000 10.4%
Interpretation:

For every peso of sales, ₱0.60 went to production costs, ₱0.192 to

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operations, and ₱0.104 remained as net income. This helps the

manager see the structure of profitability.

C. Ratio Analysis

Ratio analysis is a tool used to evaluate a company’s financial

condition and performance by examining relationships among

different financial statement items. It helps managers, investors,

creditors, and even students assess business operations quickly and

objectively.

🔍 Categories of Ratios and Examples

1. Liquidity Ratios

These measure a firm’s ability to meet short-term obligations.

 Current Ratio = Current Assets / Current Liabilities

Example: If a sari-sari store has ₱120,000 in current assets

and ₱60,000 in current liabilities:
₱120,000 / ₱60,000 = 2.0

➤ This means the business has ₱2 in assets for every ₱1 in

short-term debt.

2. Asset Management Ratios

These show how efficiently a firm uses its assets.

 Inventory Turnover = Cost of Goods Sold / Average Inventory

Example: A bakery in Mati City has ₱400,000 in COGS and

₱80,000 in average inventory:
₱400,000 / ₱80,000 = 5 times

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➤ The bakery sells and replaces its inventory 5 times in a

year.

3. Debt Management Ratios

These assess the firm’s financial leverage or reliance on borrowed funds.

 Debt-to-Equity Ratio = Total Liabilities / Shareholder’s Equity

Example: A local printing shop has ₱300,000 in liabilities and

₱200,000 in equity:
₱300,000 / ₱200,000 = 1.5
➤ For every peso of equity, it owes ₱1.50, which indicates
moderate use of debt.

4. Profitability Ratios

These measure a firm’s ability to generate profits.

 Net Profit Margin = Net Income / Sales

Example: A food stall earns ₱50,000 net income on ₱500,000

sales:
₱50,000 / ₱500,000 = 0.10 or 10%
➤ This means the stall earns ₱0.10 for every peso in sales.

5. Market Value Ratios

These are useful for investors to assess how the market views the firm.

 Price-to-Earnings (P/E) Ratio = Market Price per Share / Earnings per

Share

Example: If Jollibee’s share price is ₱250 and its EPS is ₱10:

₱250 / ₱10 = 25
➤ Investors are willing to pay ₱25 for every ₱1 of earnings.

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📚 Practice Problems with Solutions

🧠 Problem 1: Current Ratio

A local cooperative has the following data:

 Cash: ₱30,000
 Accounts Receivable: ₱50,000
 Inventory: ₱70,000
 Accounts Payable: ₱80,000
 Short-term Loans: ₱20,000

Question: Compute the current ratio.

Solution:

Current Assets = ₱30,000 + ₱50,000 + ₱70,000 = ₱150,000

Current Liabilities = ₱80,000 + ₱20,000 = ₱100,000

Current Ratio = ₱150,000 / ₱100,000 = 1.5

Interpretation: The cooperative can cover its short-term debts 1.5 times.

🧠 Problem 2: Net Profit Margin

ABC Printing earned ₱120,000 in sales and had a net income of ₱18,000.

Question: What is the net profit margin?

Solution:

Net Profit Margin = ₱18,000 / ₱120,000 = 0.15 or 15%

Interpretation: The firm keeps ₱0.15 as profit for every peso of sales.

🧠 Problem 3: Inventory Turnover

A sari-sari store’s annual COGS is ₱360,000. Average inventory is ₱60,000.

Question: Calculate the inventory turnover.

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Solution:

Inventory Turnover = ₱360,000 / ₱60,000 = 6 times

Interpretation: The store replenishes its inventory six times a year.

🧠 Problem 4: Debt-to-Equity Ratio

XYZ Enterprises has ₱500,000 in total liabilities and ₱250,000 in equity.

Question: What is its debt-to-equity ratio?

Solution:

Debt-to-Equity Ratio = ₱500,000 / ₱250,000 = 2.0

Interpretation: The firm has twice as much debt as equity, indicating high
financial risk.

Interpreting Ratios: What’s Good or Bad?

Let’s be clear: No single ratio is perfect. Use them together for a

full picture.

Ratio “Good” Red Flag if…

if…
Current Ratio > 1.5 < 1.0 = risk of default
Net Profit Margin > 10% < 5% = thin margins
Inventory > 4x/year < 2x = slow-moving stock
Turnover
D/E Ratio < 2.0 > 2.5 = over-reliance on
debt
📌 In the Philippines, banks like Landbank, DBP, and BDO may use
these thresholds in loan evaluations.

Application in Philippine Businesses

1. Microenterprises

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 Example: A tricycle operator expands by adding another unit.

Analysis helps him assess if his fares cover fuel, maintenance, and

loan repayment.

2. Small Retailers

 Example: A sari-sari store notices its inventory isn’t moving. Using

inventory turnover reveals overstocking.

3. Corporations

 Example: A company like Globe Telecom issues annual reports with

ratio analysis. Investors use ROE and NPM before buying shares.

4. Government Use

 LGUs analyzing cooperatives for grant funding may look at liquidity

and net margins.

Limitations of Financial Analysis

Even the best ratios can mislead if:

 The data is manipulated (window dressing)

 There’s seasonality (e.g., high sales only in December)

 Inflation distorts values

 Industry benchmarks differ

Always combine financial analysis with business insights, market

research, and non-financial indicators like customer satisfaction or

employee turnover.

📝 Conclusion: You Are Now Financially Literate (Almost!)

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Financial statement analysis isn’t just for accountants or CFOs.

Whether you’re managing your family business, investing your first

salary, or applying for a loan—knowing how to read and interpret

financial reports is an essential life skill.

In the Philippine setting, this is especially powerful. With many MSMEs,

family-owned businesses, and startups, those who can analyze

financials have a strong edge in creating sustainable value.

Keep asking:

 “What do these numbers mean?”

 “How can I compare it fairly?”

 “What decisions will this analysis help me make?”

If you can answer those, you're ready to manage—and grow—a

business confidently.

🛠 Application Task: “Analyze a Real Business”

Instructions:

1. Select a local business (can be your family’s, a nearby shop, or a

famous Filipino company).

2. Collect or simulate the following:

o Income statement

o Balance sheet

3. Compute at least 3 ratios:

o Current ratio

o Net profit margin

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o Debt-to-equity ratio

4. Write a short analysis:

o What do the ratios suggest about the business’s performance?

o What would you recommend to improve the financial position?

📄 Assessment Activity: Financial Statement Analysis

Mabuhay Pasalubong Center is a microenterprise based in Davao City

that sells locally made delicacies. The owner wants to evaluate the

performance of the business over two years using financial statement

analysis.

📊 Hypothetical Income Statements (2023 and 2024)

Income Statement 2023 (₱) 2024 (₱)

Sales Revenue 1,200,000 1,500,000
Cost of Goods Sold 720,000 900,000
Gross Profit 480,000 600,000
Operating Expenses 300,000 350,000
Interest Expense 30,000 30,000
Income Before Tax 150,000 220,000
Income Tax (20%) 30,000 44,000
Net Income 120,000 176,000

📊 Hypothetical Balance Sheet (2024)

Assets ₱
Cash 100,000
Accounts Receivable 80,000
Inventory 120,000
Total Current Assets 300,000
Property, Plant & Equip. 500,000
Total Assets 800,000
Liabilities & Equity ₱
Accounts Payable 70,000
Short-Term Loans 80,000
Long-Term Loan 150,000
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Total Liabilities 300,000

Owner’s Equity 500,000
Total Liabilities & Equity 800,000

✅ Instructions to Students:

Answer the following exercises using the financial statements provided

above. Show your complete solutions.

✏️Part A: Horizontal Analysis

1. Prepare a horizontal analysis of the income statement, showing the

peso and percentage changes from 2023 to 2024 for:

o Sales Revenue

o Cost of Goods Sold

o Net Income

✏️Part B: Vertical Analysis

2. Prepare a vertical analysis of the 2024 income statement (based on

Sales Revenue).

o Express each item as a percentage of Sales Revenue.

3. Prepare a vertical analysis of the 2024 balance sheet (based on Total

Assets).

o Express each item as a percentage of Total Assets.

✏️Part C: Ratio Analysis

Compute the following ratios for 2024:

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4. Current Ratio = Current Assets / Current Liabilities

5. Inventory Turnover = COGS / Inventory

6. Debt-to-Equity Ratio = Total Liabilities / Owner’s Equity

7. Net Profit Margin = Net Income / Sales Revenue

8. Return on Assets (ROA) = Net Income / Total Assets

📌 BONUS (Critical Thinking)

9. Based on your analysis, do you think Mabuhay Pasalubong Center

performed better in 2024 compared to 2023? Support your answer

with at least two financial insights from your calculations.

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📘 Chapter 5: Time Value of Money

“Is a Peso Today Better Than a Peso Tomorrow?”

🎬 Introduction

Class, here’s a quick question: if I offered you ₱1,000 today or ₱1,000

a year from now, which would you choose? If you answered “today,”

congratulations—you already understand the basic idea behind one of

the most powerful concepts in finance: the Time Value of Money

(TVM). This principle tells us that money available now is worth more

than the same amount in the future—because it can be invested, earn

interest, and grow over time.

Think of this every time you save, spend, or borrow. Whether you’re

putting coins in your alkansya, opening a GCash savings account, or

investing in SSS or Pag-IBIG, you are using the Time Value of Money,

even if you don’t realize it—yet.

🎯 Objectives

By the end of this chapter, you should be able to:

1. Explain the concept and importance of the Time Value of Money.

2. Differentiate between simple and compound interest.

3. Compute the future value (FV) and present value (PV) of single

amounts and annuities.

4. Apply TVM concepts to real-life Philippine financial decisions (e.g.,

savings, loans, investment).

5. Connect TVM to the principle: Money Has a Time Value.

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🧠 Activity: “Now or Later?”

Instructions:

You’ll be given these two options in groups:

 Option A: Receive ₱2,000 today

 Option B: Receive ₱2,500 exactly one year from now

Each group should discuss and decide:

 Which option is better—and why?

 What would you do with the money if you took it now?

 What are the risks of waiting?

📝 This activity gets you thinking about opportunity cost, interest, and

the value of time—all core to TVM.

🔍 Analysis Questions

1. Why might a lender (like a bank or even a friend) charge interest

when they let you borrow money?

2. How does inflation affect the value of ₱1,000 after a few years?

3. If you want to double your money, which is more important: the

interest rate or the time?

📚 Abstract

The Value of Time in Money

Let’s say someone offers you ₱10,000 now or ₱10,000 a year from

now. You’d probably take the money now, right? That’s because,

intuitively, you know that money today is more useful than money

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tomorrow. You could invest it, start a small business, or even put it in a

time deposit and earn interest.

This is the heart of the Time Value of Money (TVM)—a core principle in

finance that says a peso today is worth more than a peso in the future.

Why? Because of its earning potential. Time allows money to grow,

and inflation reduces future value. Whether you’re applying for a loan,

saving for a goal, or evaluating an investment in the Philippines, TVM

helps you make better financial choices.

Why Money Has a Time Value: Core Principle

One of the Five Principles of Finance is:

Money Has a Time Value.

This principle suggests that the sooner you receive money, the more

valuable it is. This is because:

 It can earn interest.

 It can be invested in business opportunities.

 It protects you from inflation (which in the Philippines has averaged

4–6% in recent years).

 It gives you flexibility and security.

In Filipino settings, you see this in:

 GCash or Maya savings accounts offering 3–6% per annum.

 Pag-IBIG MP2 which offers up to 6–7% return yearly.

 Loans with monthly amortizations and interest calculations.

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Simple Interest vs. Compound Interest

A. Simple Interest

This is when interest is calculated only on the original amount

(principal).

Formula:

Simple Interest=P×r×t

Total Amount=P+(P×r×t)

Example:

You invest ₱10,000 at 6% for 3 years:

Interest = ₱10,000 × 0.06 × 3 = ₱1,800

Total = ₱11,800

This is common in short-term lending schemes or government bonds.

B. Compound Interest

Interest is calculated on both the principal and past interest. This is

how savings accounts and investments grow faster.

Formula:

FV= P(1 + r)^t

Example:

Invest ₱20,000 in a rural bank time deposit at 5% compounded

annually for 3 years:

FV=20,000(1.05)^3 = ₱23,152.50

The difference (₱152.50) is the interest on your interest.

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Future Value and Present Value

These are the most important applications of TVM.

🧩 1. Future Value (FV) – Single Lump Sum

Example:
You invest ₱15,000 at 6% annual interest for 7 years.
Find the future value (FV).

Formula:
FV = P × (1 + r)^t

Solution:
P = 15,000
r = 0.06
t=7

FV = 15,000 × (1 + 0.06)^7
FV = 15,000 × (1.50363)
FV ≈ ₱22,554.45

🧩 2. Present Value (PV) – Single Amount

Example:
You will receive ₱100,000 in 10 years.
If the discount rate is 5%, what is the present value?

Formula:
PV = FV / (1 + r)^t

Solution:
FV = 100,000
r = 0.05
t = 10

PV = 100,000 / (1 + 0.05)^10
PV = 100,000 / (1.62889)
PV ≈ ₱61,391.33

🧩 3. Future Value of Annuity (FVA) – Regular Savings

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Example:
You save ₱2,000 every month in Pag-IBIG MP2 at 6% per annum (0.5%
per month).
Find the FV after 5 years.

Formula:
FV = P × [((1 + r)^nt – 1) / r]

Solution:
P = 2,000
r = 0.005 (monthly rate)
n = 12 (months per year)
t=5

FV = 2,000 × [((1 + 0.005)^(12×5) – 1) / 0.005]

FV = 2,000 × [(1.005^60 – 1) / 0.005]
FV = 2,000 × [(1.34885 – 1) / 0.005]
FV = 2,000 × (0.34885 / 0.005)
FV = 2,000 × 69.769
FV ≈ ₱139,537.57

🧩 4. Finding Time (t) – How Long to Double Money

Example:
How long will it take ₱25,000 to become ₱50,000 at 7% annual
interest?

Formula:
t = log(FV / P) / log(1 + r)

Solution:
FV = 50,000
P = 25,000
r = 0.07

t = log(50,000 / 25,000) / log(1.07)

t = log(2) / log(1.07)
t ≈ 0.3010 / 0.0294
t ≈ 10.24 years

🧩 5. Finding Rate (r) – What Interest Rate?

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Example:
₱50,000 will grow to ₱100,000 in 9 years.
What is the annual rate?

Formula:
r = (FV / P)^(1/t) – 1

Solution:
FV = 100,000
P = 50,000
t=9

r = (100,000 / 50,000)^(1/9) – 1
r = (2)^(1/9) – 1
r ≈ 1.0801 – 1
r ≈ 0.0801 or 8.01%

🧩 6. Loan Amortization – Monthly Payment (PMT)

Problem:
Loan: ₱100,000
Term: 3 years
Annual interest: 12%
Monthly payments

Formula:
PMT = [P × r × (1 + r)^n] / [(1 + r)^n – 1]

Solution:
P = 100,000
Annual rate = 0.12 → Monthly rate r = 0.01
n = 36 months

PMT = [100,000 × 0.01 × (1.01)^36] / [(1.01)^36 – 1]

PMT = [1,000 × 1.430768] / [0.430768]
PMT = 1,430.77 / 0.430768
PMT ≈ ₱3,321.43

🧩 7. Amortization Table (First 3 Months)

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Loan = ₱60,000
Annual interest = 10%
Monthly interest = 0.8333%
Term = 12 months
Monthly PMT = ≈ ₱5,274.92
Mont Begin Interes Principa Paymen End
h Balance t l t Balance
1 ₱60,000.00 ₱500.00 ₱4,774.9 ₱5,274.9 ₱55,225.08
2 2
2 ₱55,225.08 ₱460.21 ₱4,814.7 ₱5,274.9 ₱50,410.37
1 2
3 ₱50,410.37 ₱420.09 ₱4,854.8 ₱5,274.9 ₱45,555.54
3 2
Note: Interest = Begin Balance × 0.008333

Principal = PMT – Interest

End Balance = Begin Balance – Principal

📊 Excel Tutorial: Time Value of Money (TVM) Calculations

💡 Before You Start: Make sure you are familiar with these key TVM
variables:
Symbol Meaning
PV Present Value
FV Future Value
PMT Payment per period
r Interest rate per period
n Number of periods

🧮 1. Future Value (FV)

Example: What is the FV of ₱15,000 invested for 7 years at 6% annual
interest?
📝 Excel Formula:
=FV(rate, nper, pmt, pv, type)
✅ Steps:
1. Type the following values into Excel:
A1: Rate B1: 6%
A2: Nper B2: 7
A3: Pmt B3: 0
A4: PV B4: -15000
2. In cell B5, enter:

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=FV(B1,B2,B3,B4,0)
3. Answer: ₱22,554.45
🔎 Note: PV is entered as a negative number since it's money you
invest (cash outflow).

💰 2. Present Value (PV)

Example: How much is ₱100,000 worth today if received 5 years from
now at 6% interest?
✅ Steps:
1. Enter the following:
A1: Rate B1: 6%
A2: Nper B2: 5
A3: Pmt B3: 0
A4: FV B4: 100,000
2. In cell B5, enter:
=PV(B1,B2,B3,B4,0)
3. Answer: ₱74,725.09

⏳ 3. Number of Periods (nper)

Example: How long will it take ₱25,000 to double at 7% interest?
✅ Steps:
1. Enter:
A1: Rate B1: 7%
A2: Pmt B2: 0
A3: PV B3: -25000
A4: FV B4: 50000
2. In B5:
=NPER(B1,B2,B3,B4,0)
3. Answer: 10.24 years

📈 4. Interest Rate (rate)

Example: At what annual rate will ₱50,000 grow to ₱100,000 in 9
years?
✅ Steps:
1. Enter:
A1: Nper B1: 9
A2: Pmt B2: 0
A3: PV B3: -50000
A4: FV B4: 100000
2. In B5:
=RATE(B1,B2,B3,B4,0)
3. Answer: 8.01 or 8.01%
📌 Format as Percentage.

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🧾 5. Monthly Loan Amortization (PMT)

Example: Monthly payment for a ₱100,000 loan at 12% annually, 3
years (monthly payments).
✅ Steps:
1. Enter:
A1: Rate B1: =12%/12
A2: Nper B2: =3*12
A3: PV B3: -100,000
2. In B4:
=PMT(B1,B2,0,B3,0)
3. Answer: ₱3,321.97

📋 Bonus: Amortization Table Template (Basic)

Beginning Payment Ending
Month Interest Principal
Balance (PMT) Balance
1 =100000 =PMT =B1*0.0 =C1–D1 =B1–E1
1
2 =F1 =PMT =B2*0.0 =C2–D2 =B2–E2
1
… … … … … …
You can drag formulas for as many rows (months) as needed.

Application in Real-World Philippine Settings

TVM Application Filipino Context

Saving for college Using future value of annuities
Buying on credit Understanding present value of
payments
Choosing a loan Comparing interest and amortization
Investing in SSS or MP2 Evaluating compound growth
Paying off debt early Reducing future interest expense

Integration with the Principles of Finance

Principle Application
Money Has a Time Value ₱1,000 today > ₱1,000 next year
Risk-Return Tradeoff Higher rates = higher uncertainty
Cash Flows Are the Source of TVM helps compare future vs. present
Value flows
Market Prices Reflect Discount rates adjust based on inflation
Information or risk
Individuals Respond to Early-payment discounts rely on TVM
Incentives logic

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Conclusion

The Time Value of Money is more than a formula—it’s a mindset.

Whether you're a college student saving your allowance, a working

professional planning for retirement, or a business owner evaluating a

loan, TVM helps you make smart decisions. In a country like the

Philippines, where inflation, interest rates, and financial access vary,

knowing how to compute, interpret, and apply TVM gives you an edge.

From budgeting to investing, TVM is your key to making every peso

work for you—not just today, but far into the future.

🧠 Application/ Assessment.

Instructions: Solve the following problems. Write your solutions clearly.

Calculators allowed.

🧮 A. Future Value

Directions: Solve for the future value (FV) in each situation.

1. Carlo invests ₱12,000 in a time deposit that earns 5% annually.

What will be the value of his investment after 6 years?

2. A cooperative places ₱25,000 in an account that compounds

annually at 6%. What will the fund grow to in 10 years?

3. You save ₱2,000 every month in a digital bank offering 4% annual

interest (compounded monthly). How much will you have after 3

years?

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4. A local business reinvests ₱150,000 at 7% annual interest. What is

the investment worth after 8 years?

💰 B. Present Value

Directions: Solve for the present value (PV) needed to reach the future

goal.

5. You want to have ₱100,000 five years from now. If your savings earn

6% interest annually, how much do you need to invest today?

6. A barangay plans to receive a ₱1,000,000 grant in 10 years. If the

current discount rate is 5%, how much is that worth today?

7. You are promised ₱50,000 in 4 years. If the interest rate is 8%

annually, what is the present value?

8. A university receives a pledge for ₱750,000 to be given 15 years

from now. If the appropriate discount rate is 5.5%, how much is the

present value?

⏳ C. Solving for Time

Directions: Solve for the number of years (t) in each scenario.

9. How long will it take ₱30,000 to grow to ₱60,000 at an annual

interest rate of 6%?

10. A real estate investment of ₱500,000 is expected to become

₱1,000,000. If it earns 9% annually, how many years will that take?

11. How many years will it take for a ₱75,000 investment to grow

to ₱150,000 at 8% compounded annually?

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12. A parent wants to double their ₱200,000 college fund. If they

earn 5% annually, how long must they wait?

📈 D. Solving for Interest Rate (4 Items)

Directions: Solve for the annual interest rate (r) required in each case.

13. A ₱20,000 investment grows to ₱40,000 in 10 years. What is

the annual interest rate?

14. You invest ₱50,000 and receive ₱65,000 after 6 years. What is

the average annual return?

15. A ₱120,000 savings account becomes ₱240,000 in 9 years.

What rate of return was earned annually?

16. A business owner invests ₱300,000 and earns ₱500,000 in 7

years. What was the effective annual interest rate?

🧾 E. Loan Amortization

Directions: Compute the monthly amortization for the following loan.

17. A car loan worth ₱500,000 is to be paid over 5 years with an

annual interest rate of 10%. Payments are made monthly. What is

the monthly payment?

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📘 Chapter 6: Interest Rates

“Why Borrowing Costs Money and Saving Pays Off”

🎬 Introduction

Have you ever borrowed money from a friend and agreed to

pay “extra” for the favor? Or have you seen ads from banks like BDO

or GCash Save Money promising “interest on your savings”? That

“extra” is what we call interest—the cost of using money over time.

It’s everywhere: in loans, savings, credit cards, even online shopping

apps like Billease or Home Credit.

In this chapter, we explore interest rates—what they are, why

they matter, and how they affect everything from car loans to the

price of onions in the market.

🎯 Objectives

By the end of this chapter, students will be able to:

1. Explain what interest rates are and why they exist.

2. Identify the factors that influence interest rates.

3. Differentiate between nominal and real interest rates.

4. Understand how inflation affects interest rates and purchasing

power.

5. Analyze the impact of interest rates on savings, loans, and

investments in the Philippine setting.

6. Relate the topic to the principle of finance: There is a Risk-Return

Tradeoff.
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🧩 Activity: “What Would You Charge?”

Instructions:

Imagine you are lending your classmate ₱1,000. You can charge any

rate of interest, but they must agree to it. As a group, decide:

 How much interest would you charge for 1 month?

 What factors influenced your decision? (e.g., trust, inflation, need,

time, risk)

After discussion, share your rate and reasoning with the class.

💡 Purpose: Introduce students to the idea that interest is the price of

money, and it depends on risk, time, and economic conditions.

🔍 Analysis Questions

1. Why do banks charge different interest rates for different types of

loans?

2. How does inflation affect the “real” value of your savings?

3. If a savings account offers 2% interest but inflation is 5%, are you

actually earning or losing money?

📚 Abstract

I. Introduction to Interest Rates

Interest rates are fundamental to every financial decision. Whether

you're saving in a bank, investing in bonds, or borrowing for a new

business, the rate of interest determines the cost or reward of using

money over time.

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An interest rate is the price you pay for borrowing or the return you

earn for saving. Expressed as a percentage, it reflects time preference,

inflation, risk, and opportunity cost.

In the Philippine context, interest rates affect:

 Loans from BDO, BPI, or Landbank

 Government bonds like RTBs (Retail Treasury Bonds)

 Pag-IBIG MP2 savings

 SSS and GSIS pension payouts

 Consumer prices and credit card costs

Understanding how interest rates work is essential for both individual

financial decisions and national economic policies.

The Role of Interest Rates in Finance

In finance, interest rates perform several key functions:

1. Allocate Capital Efficiently: Higher interest rates typically discourage

excessive borrowing and promote saving.

2. Price of Time: Money today is more valuable than money in the

future (Time Value of Money).

3. Compensation for Risk: Riskier borrowers or investments command

higher interest.

4. Inflation Adjuster: They help protect the real value of money over

time.

📌 Finance Principle Connection:

“There is a Risk-Return Tradeoff.” Lenders demand higher interest for
higher perceived risk.
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Components of Interest Rates

According to Titman et al. (2020), the nominal (quoted) interest rate

includes several components:

Nominal Rate= Real Risk Free Rate+ Inflation Premium+

Default Risk Premium+ Liquidity Premium+ Maturity Risk Premium

1. Real Risk-Free Rate (r)*

 The return on a riskless investment assuming no inflation.

 In theory, derived from T-bills or government bonds.

2. Inflation Premium (IP)

 Compensates for the expected loss in purchasing power.

 In the Philippines, inflation can fluctuate between 3%–7% annually

depending on fuel prices, food supply, etc.

3. Default Risk Premium (DRP)

 Reflects the risk that a borrower may not repay.

 Government bonds have little to no DRP, while lending to small

businesses or individuals carries more.

4. Liquidity Premium (LP)

 Investors demand extra return for assets that are hard to sell

quickly.

 Shares in a cooperative may be less liquid than shares traded on the

PSE.

5. Maturity Risk Premium (MRP)

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 Longer loans have more risk, especially due to uncertainty and

inflation.

Nominal vs. Real Interest Rates

The nominal interest rate is the rate you see advertised, while the real

interest rate accounts for inflation. Fisher Equation (approximate):

Real Rate≈Nominal Rate–Inflation

Example (Philippine scenario):

If a bank offers 5% interest but inflation is 6.1%, the real rate is:
5%–6.1%=–1.1%

You are losing purchasing power.

Term Structure of Interest Rates (Yield Curve)

The term structure shows the relationship between interest rates and

loan maturities.

Shape of Yield Meaning

Curve
Normal (upward) Longer-term rates are higher (common during
growth)
Inverted (downward) Short-term rates are higher (can signal recession)
Flat Rates are similar for all maturities (uncertainty)
📍 Example:
In 2023, Philippine treasury yields rose steeply, reflecting inflation
fears and monetary tightening by BSP.

Compounding and Effective Annual Rate (EAR)

When interest is compounded more than once a year, the effective

annual rate (EAR) reflects the true return.

Formula:

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Where m = number of compounding periods per year.

Example:

12% nominal interest compounded quarterly:

Philippine Context: Where Do We Encounter Interest Rates?

1. Banks

 Time deposit: 1%–3% p.a.

 Personal loan: 18%–36% p.a.

 Home loan: 7%–12% p.a.

2. Digital Finance Apps (Maya, GCash, Tonik)

 Offer 4%–6% interest on digital savings.

 Interest computed daily and credited monthly.

3. Government Instruments

 Pag-IBIG MP2: ~6% p.a. (tax-free)

 Treasury Bonds (RTBs): 5.75%–6.25% p.a.

4. Microfinance and Lending

 MFI loans may charge up to 2%–3% monthly.

 Credit cards: ~2%–3% monthly (24%–36% annually).

5. Monetary Policy (BSP)

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 BSP uses the overnight reverse repurchase (RRP) rate to control

inflation and liquidity.

 Hikes in BSP rates raise borrowing costs across the economy.

Effects of Changing Interest Rates

When Rates Rise When Rates Fall

Loans become more Borrowing becomes cheaper
expensive
Savings earn more Savings earn less
Investments in bonds fall Bond prices rise
Consumers reduce spending Encourages
borrowing/spending

Interest Rates and Risk-Return Tradeoff

Investors demand higher returns (interest) for higher risks:

 Lending to an unemployed borrower: 24%+

 Lending to a friend: depends on trust

 Investing in a bank: 2–3%

 Investing in a start-up: higher risk, higher potential return

This dynamic shows the risk-return tradeoff in real life.

Conclusion

Interest rates are a fundamental concept in finance,

representing the cost of borrowing money or the return earned from

saving or investing it. They play a vital role in financial decisions—

affecting individuals, businesses, and governments alike. In the

Philippine context, interest rates influence how people borrow from

banks, invest in Pag-IBIG MP2 or government bonds, or save through

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digital wallets like GCash and Maya. The nominal interest rate, often

seen in advertisements, includes components such as inflation

expectations, default risk, liquidity, and maturity risk.

However, the real interest rate—adjusted for inflation—gives a

clearer picture of purchasing power. When inflation is high, as it has

been in recent years in the Philippines, even high nominal returns may

result in a negative real return, meaning savers could actually be

losing value. Interest rates also vary based on loan terms and

borrower risk; higher-risk borrowers or longer-term loans typically

command higher interest. Furthermore, understanding the term

structure of interest rates (e.g., yield curves) helps predict economic

trends and guide investment strategies. As interest rates rise or fall,

they influence consumer spending, investment behavior, and business

expansion. Ultimately, interest rates are a reflection of the principle of

risk-return tradeoff—higher returns generally come with higher risks.

Mastering how interest works enables students and future

professionals to make smarter choices in borrowing, saving, and

investing.

🎯 Application Activity: "Compare and Decide – Which Financial

Option Is Better?"

Instructions:

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You are given three financial options available in the Philippines. Using

what you’ve learned about interest rates, choose the most favorable

option based on your goal and explain why.

Scenario:

You are planning to save ₱50,000 for your future tuition. You want to

deposit this amount for 3 years. You are considering the following

options:

Annual
Optio Inflation Frequency of
Institution Nominal
n Estimate Compounding
Rate
A GCash Save 2.6% 5.5% Monthly
Money (via CIMB)
B Pag-IBIG MP2 6.0% (tax- 5.5% Compounded
free) Annually
C Time Deposit at 3.5% 5.5% Quarterly
Local Bank (taxable)

Your Task:

1. Compute the Effective Annual Rate (EAR) of each option.

2. Compute the Real Rate of Return (Nominal – Inflation) for each.

3. Rank the options from best to worst in terms of:

o Real return

o Future value (FV)

o Suitability for your financial goal

4. Write a 1-paragraph reflection answering:

o Which option would you choose? Why?

o How did the interest rate and inflation affect your decision?

💡 Hints:
 Use the EAR formula:

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 Real Rate ≈ Nominal Rate – Inflation Rate

Criteria Point
s
Accurate EAR & Real Rate 4 pts
Calculations
Correct Ranking and Justification 3 pts
Insightful Reflection 2 pts
Neatness and Completeness 1 pt

📘 Chapter 7 - Bond Valuation

🎯 Introduction

Have you ever heard your parents talk about investing in "government

bonds" or maybe heard it on the news during SONA (State of the

Nation Address)? You might have wondered: what is a bond and why

do people buy them? Think of it as lending your money to someone—

like the government or a company—and earning interest from it. In

this chapter, we’ll explore how bonds work, how they are valued, and

why understanding bond valuation can help you make smarter

financial decisions in the future. As future business professionals in the

Philippines, understanding this topic will empower you to assess

investment options that are safe, stable, and income-generating.

🎯 Objectives

By the end of this chapter, you will be able to:

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1. Define what a bond is and explain how it works.

2. Identify and describe the types of bonds available in the Philippine

market.

3. Calculate the value of a bond using present value techniques.

4. Understand the relationship between bond prices and interest rates.

5. Apply the principle of finance: "The value of an investment is based

on the present value of its future cash flows."

🎲 Activity: "If You Were the Lender"

Imagine your friend needs to borrow PHP 1,000 and promises to pay

you back in 3 years with 5% interest each year. Would you lend the

money?

Instructions:

1. Form groups of 3.

2. Discuss whether you'd lend the money and why.

3. Estimate how much total money you’ll receive at the end of 3 years.

4. Share your reasoning with the class.

🧠 Analysis Questions

1. Why might the government or companies choose to issue bonds

instead of taking a bank loan?

2. What factors might affect whether you decide to lend money to

someone (or buy a bond)?

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3. How does inflation affect your earnings from a bond in the Philippine

context?

📖 Abstract

A bond is essentially a loan—but instead of borrowing from a

bank, a government or corporation borrows from the public. When you

buy a bond, you are lending money in exchange for regular interest

payments (called coupons) and the promise to get your money back

(the face value or par value) at a specific date in the future (the

maturity date).

📌 In the Philippines, examples include:

 Retail Treasury Bonds (RTBs) issued by the Bureau of the Treasury

 Corporate bonds issued by companies like Ayala Corporation or San

Miguel

 Municipal bonds (though rare in PH)

Why Is Bond Valuation Important?

Bond valuation is the process of determining the fair price of a bond.

Investors use it to decide whether a bond is worth buying, and issuers

use it to determine the interest rate they should offer.

Accurate bond valuation helps:

 Investors choose among different bonds

 Banks and financial institutions manage risks

 Governments evaluate the cost of borrowing

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Key Terms to Remember

Term Definition
Face Value / Par The amount the bondholder will receive at maturity
Value (usually ₱1,000 or ₱10,000)
Coupon Rate The interest rate stated on the bond (e.g., 6%
annually)
Coupon Payment The actual cash payment made to the investor
annually or semi-annually
Maturity The number of years until the bond’s face value is
repaid
Yield to Maturity The expected return on the bond if held to maturity
(YTM)
Market Interest The current rate in the market for similar bonds
Rate

Bond Valuation Formula

To calculate the value of a bond, we discount the future cash flows

(coupon payments and face value) back to the present using the

market interest rate:

Where:

 r = market interest rate per period

 n = each period up to (maturity)

 C= coupon

 F= Face Value

Calculator Way:
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Bond Price = C * [1 - (1 + r)^(-n)] / r + F / (1 + r)^n

Where:

C = coupon payment per period

r = rate per period (required yield or market rate)

n = number of periods until maturity

F = face value of the bond (par value)

In the Philippines, bonds are typically issued with face value in

Philippine Pesos (PHP) and pay coupons semi-annually. However, the

formula can be adjusted for the payment frequency.

Example 1: Corporate Bond in the Philippines

Suppose a Philippine corporation issues a bond with:
Face Value (F) = PHP 1,000
Annual Coupon Rate = 8% (so semi-annual coupon = 8%/2 = 4% of
face value)
Time to Maturity = 5 years (so 10 semi-annual periods)
Market Rate (Yield to Maturity) = 10% per annum (so 5% per semi-
annual period)

Calculations:
Coupon per period (C) = 4% * PHP 1,000 = PHP 40
r = 5% (or 0.05) per period
n = 10 periods
F = PHP 1,000
Bond Price = 40 * [1 - (1 + 0.05)^(-10)] / 0.05 + 1000 / (1 + 0.05)^10

Step-by-step calculation:

1. Calculate the present value of the coupons (annuity part):

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Annuity factor = [1 - (1.05)^(-10)] / 0.05

= [1 - 1.05^(-10)] / 0.05
= [1 - 0.613913] / 0.05
= 0.386087 / 0.05
= 7.72174
PV of coupons = 40 * 7.72174 = PHP 308.8696

2. Calculate the present value of the face value:

PV of face value = 1000 / (1.05)^10
(1.05)^10 = 1.62889462677
PV = 1000 / 1.62889462677 ≈ 613.91325
3. Total bond price = 308.8696 + 613.91325 = PHP 922.78285
(approximately PHP 922.78)

Premium, Par, and Discount Bonds

Situation Market Rate vs. Bond

Coupon Price
Premium Market Rate < Coupon Price > Par
Bond
Par Bond Market Rate = Coupon Price = Par
Discount Market Rate > Coupon Price < Par
Bond

Bond Investing in the Philippine Context

Type Description Example

Retail Treasury Offered by the PH government; safe; RTB-29
Bonds (RTBs) 3-5 years; interest paid quarterly
Corporate Bonds Issued by private companies; higher Ayala Corp
risk, higher returns Bonds
Digital Bonds Available through apps like [Link] Start at
or GCash ₱5,000

Risk Factors in Bonds

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1. Interest Rate Risk – When market rates rise, bond prices fall.

2. Credit Risk – The risk that issuer might default.

3. Reinvestment Risk – The risk that future coupons may be reinvested

at lower rates.

4. Liquidity Risk – The chance that you cannot sell the bond easily.

📌 Finance Principle: There is a risk-return tradeoff. Higher yields = higher

risk.

Summary

Bond valuation involves calculating the present value of a

bond’s future cash flows using the current market interest rate. The

key factors include coupon rate, face value, time to maturity, and

market yield. When the market rate is lower than the bond's coupon,

the bond sells at a premium; when higher, it sells at a discount.

In the Philippines, bonds are accessible to retail investors

through RTBs, corporate issues, and digital platforms. Understanding

how to value bonds equips students and professionals to make

informed decisions, whether for investing, financial planning, or policy

making.

📚 Application:

Answer the following:

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1. A friend of yours just invested in an outstanding bond with a

5% annual coupon and a remaining maturity of 15 years. The

bond has a par value of P1,000,000, and the market interest

rate is currently 10%. How much did your friend pay for the

bond? Is it a par, premium, or discount bond?

2. A bond that matures in 8 years has a par value of P500,000

and an annual coupon payment of P50,000; its market interest

rate is 15%. What is its price? Is it a par, premium, or discount

bond?

3. A bond that matures in 12 years has a par value of P150,000

and an annual coupon rate of 10%; the market interest rate is

5%. What is its price? Is it a par, premium, or discount bond?

📘 Chapter 8 – Risk and Return

🎬 Introduction

Imagine you're given two investment options:

 One is a guaranteed ₱10,000 return in 1 year.

 The other could give you ₱15,000 or maybe nothing.

Which one would you choose?

This simple choice introduces you to one of the most important ideas

in finance: risk and return. Every financial decision—from putting

money in a bank to investing in stocks—involves balancing the

possibility of gaining more with the risk of losing.

In this chapter, we'll unpack what risk really means, how it's

measured, and why return is not always as straightforward as it

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seems. More importantly, we’ll relate it to decisions Filipinos make

every day—from opening a GCash savings account to investing in

Jollibee stocks.

🎯 Objectives

By the end of this chapter, you should be able to:

1. Define risk and return in financial terms.

2. Measure return using expected return and historical average return.

3. Measure risk using standard deviation and coefficient of variation.

4. Explain the relationship between risk and return using real-life

investment examples in the Philippines.

5. Understand the concept of diversification and its impact on risk.

6. Apply the principle of risk-return tradeoff in evaluating investment

decisions.

🧩 Activity: “Your Money, Your Call”

Instructions:

You have ₱20,000 to invest. Choose ONE of the following:

A. Put it in a digital bank savings account with 4% annual return (very

low risk).

B. Invest in a Philippine stock (e.g., Ayala Land Inc.) with potential

return of 15% but risk of loss.

C. Start a mini online business with expected return of 25% but

uncertain success.

Questions for group discussion:

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 Which option did you choose and why?

 What risks are you willing to take?

 Is a higher return always worth the risk?

💡 This activity introduces the core concept: The higher the potential
return, the higher the risk involved.

🔍 Analysis Questions

1. What factors should you consider before taking financial risks in the

Philippines?

2. How does diversification help reduce risk in investments?

3. Why do people still invest in risky assets like stocks or crypto

despite the uncertainty?

📚 Abstract:

🔍 What Is Return?

Return is the profit or loss an investor earns from an investment. It

reflects how much your money has grown or shrunk over a period.

💡 Formula for Holding Period Return (HPR):

📌 Example 1 (Philippine Context):

You bought 100 shares of Jollibee (JFC) at ₱200 each. After 1 year, the

price is ₱230, and you received ₱5 per share in dividends.

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17.5% return means your investment earned ₱35 per share over the year.

⚠️What Is Risk?

In finance, risk refers to the uncertainty about future returns. It is not

just the chance of losing money—but the possibility that the actual

return will be different from what was expected.

Example: A GCash Save Money account promises 4% interest. Low

risk.

Investing in PH cryptocurrencies like [Link] tokens? High return

possible, but high risk too.

📈 Measuring Risk: Standard Deviation

What Is Standard Deviation?

Standard deviation (σ) is the most common way to measure

investment risk. It shows how much individual returns deviate (or

differ) from the average return.

 A higher standard deviation means greater uncertainty (riskier).

 A lower standard deviation means more predictable returns (safer).

🧮 How to Compute Standard Deviation (Step-by-Step):

Let’s say we have 5 years of returns from an investment:

Year Return (%)

1 10%

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2 12%
3 8%
4 14%
5 6%

Step 1: Compute the Average Return

Step 2: Find Each Deviation from the Mean and Square It

Year Return Mean Deviation Squared

1 10% 10% 0 0.00
2 12% 10% 2 4.00
3 8% 10% -2 4.00
4 14% 10% 4 16.00
5 6% 10% -4 16.00

Step 3: Compute Variance (Average of Squared Deviations)

Step 4: Compute Standard Deviation

📌 Interpretation:
This investment has an average return of 10%, but returns typically
fluctuate by ±2.83%, indicating moderate risk.

🧮 Coefficient of Variation (CV): Risk-Per-Unit of Return

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Using previous data:

The lower the CV, the better—you’re getting more return per unit of

risk.

📊 Risk and Return Tradeoff

📌 Principle of Finance:
There is a Risk-Return Tradeoff. To earn higher returns, you must accept higher risk.

Investment Type Expected Standard Risk

Return Deviation Level
GCash Save Money 4% 0.2% Very Low
Pag-IBIG MP2 6% 1.5% Low
PH Blue-Chip Stocks 10–12% 5–7% Medium
PH Small-Cap Stocks 15–20% 10–15% High
Crypto (e.g., 40%+ 25–40% Very High
[Link])
🔄 Diversification: Reducing Risk

Diversification means investing in a mix of assets to reduce total

risk.

💡 Example:

Instead of investing ₱100,000 in just one stock, spread it like this:

 ₱40,000 in Pag-IBIG MP2

 ₱30,000 in PSE Index Fund

 ₱30,000 in a local start-up

If one fails, the others may perform well—this reduces total portfolio

volatility.

Application to the Philippine Context

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 GSIS and SSS invest in low-risk government bonds.

 BSP considers risk-return when adjusting interest rates.

 Retail investors (like teachers or employees) now access mutual

funds and Unit Investment Trust Funds (UITFs) from BPI, Security

Bank, and Metrobank.

 Young Filipinos explore risky options like crypto or forex—high

potential, high volatility.

✅ Summary

Return tells us how much we gain; risk tells us how uncertain that gain

is. We use standard deviation to measure risk: the greater the spread

of returns, the riskier the investment.

In the real world—especially in the Philippines—investors must

consider both return and risk. A savings account may feel safe, but

inflation can eat your earnings. A hot stock might double your money

—or halve it.

The key to smart investing is understanding your risk tolerance,

setting clear goals, and diversifying to balance risk and return.

🛠 Application Activity 1: "Build Your Risk Portfolio"

Instructions:

You are given ₱100,000. Design a portfolio using at least three

different financial instruments available in the Philippines. For each:

 Specify amount allocated

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 Estimate return and risk level

 Justify your choice based on your risk tolerance

 Create a pie chart or table showing your portfolio allocation.

📊 Application 2: Risk and Return

Instructions: Solve the following problems. Show all your

computations. Use calculator or Excel as needed.

🧮 Part A: Return Calculations (Items 1–3)

1. Simple Return

You purchased a stock for ₱150. After 1 year, you sold it for ₱180

and received ₱5 in dividends.

👉 Compute your total return (%).

2. Holding Period Return (HPR)

You invested ₱50,000 in a mutual fund. After 2 years, the investment

is worth ₱62,000.

👉 Compute your total return and average annual return.

3. Return with Loss

You bought shares in a cooperative for ₱10,000. After a year, the

value dropped to ₱8,800 and you received ₱200 in patronage refund.

👉 What is your percentage return?

📈 Part B: Average Return and Standard Deviation (Items 4–9)

Use these annual returns from an investment to answer items 4 to 9.

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Yea Return
r (%)
1 10%
2 14%
3 6%
4 8%
5 12%
4. Compute the Average Return (%) (Round to 2 decimal places.)

6. Compute the Variance (Round to 2 decimal places.)

7. Compute the Standard Deviation (%) (Round to 2 decimal places.)

8. Compute the Coefficient of Variation (CV)

Express CV as a decimal. (Round to 2 decimal places.)

⚖️Part C: Portfolio and Diversification (Items 8–10)

8. Portfolio Return (Weighted Average)

You invest ₱40,000 in a bond earning 6% and ₱60,000 in a stock

earning 12%. What is the portfolio return?

9. Portfolio Standard Deviation (Simplified)

Two stocks have returns of 10% and 14%, with weights of 50% each.

The standard deviations are 4% and 6%, and the correlation

between them is 0. Compute the approximate portfolio standard

deviation.

10. Compare Risk and Return

Stock A has an average return of 15% and σ = 9%.

Stock B has an average return of 10% and σ = 4%. Compute CV for

both and determine which is better based on risk-adjusted return.

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📘 Chapter 9: Stock Valuation

"How Do You Know What a Share is Really Worth?"

🎬 Introduction

Have you ever wondered how companies like Jollibee, Ayala Land, or

even Globe Telecom set the price of their shares? Is it based on

popularity? Hype? Or is there a more logical way to figure it out?

Welcome to the world of Stock Valuation—where we learn how

investors determine the fair price of a company's stock.

Understanding this can help you become smarter investors, better

financial managers, or even future analysts!

🎯 Objectives

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By the end of this chapter, you should be able to:

1. Define what a stock is and differentiate between common and

preferred shares.

2. Explain the concept of intrinsic value and why it's important.

3. Apply different stock valuation models such as the Dividend

Discount Model (DDM) and the Price-Earnings (P/E) ratio.

4. Relate valuation principles to actual Philippine-listed companies.

5. Apply the Principle of Finance: Value depends on future cash flows.

🧩 Activity: “Stock Shopping Challenge”

💡 Task: Pretend you have ₱50,000 to invest in the Philippine Stock

Exchange (PSE).

Browse the websites of BDO Nomura, COL Financial, or PSE Edge

and select any 3 stocks you want to “buy.”

For each stock:

 What is the current price?

 What do you know about the company?

 Why do you think it's worth that much?

Access PSE Edge at: [Link]

🔍 Analysis Questions

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1. What factors do you think influence a stock’s market price in the

Philippines?

2. Why might two similar companies have different stock prices?

3. If a stock pays no dividend, how else can investors benefit?

📚 Abstract

What Is Stock Valuation?

Stock valuation is the process of determining the true (intrinsic)

value of a company’s stock. The price you see on the Philippine

Stock Exchange (PSE) may not reflect a company’s real worth. Stock

valuation helps investors decide whether a stock is undervalued,

overvalued, or fairly valued.

📌Key Principle of Finance:

“A stock’s value depends on the present value of future cash flows.”

📌In simple terms:

If a stock is expected to generate high, growing, and reliable future
income, it’s probably more valuable.

Why Stock Valuation Matters

Stock valuation is essential for:

 Investors: deciding when to buy or sell.

 Financial managers: issuing stock or evaluating firm performance.

 Traders: determining entry and exit points.

In the Philippine setting, stock valuation is used by:

 Retail investors on COL Financial or BDO Nomura

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 Institutions like ATRAM or BPI AMTC

 Mutual fund managers

 Even students investing in real-time stock market simulations

📈 Types of Stocks

1. Common Stock

o Ownership in a firm

o Voting rights

o May receive dividends

o Example: Shares of Jollibee (JFC) or Ayala Land (ALI)

2. Preferred Stock

o No voting rights

o Pays fixed dividends

o Has priority over common stock during liquidation

o Less common in PSE

🧮 Stock Valuation Models

Stock valuation models help determine the intrinsic value of a stock

by estimating the present value of expected future cash flows,

especially dividends and earnings.

A. 📊 Dividend Discount Model (DDM)

This model works best for dividend-paying companies.

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Where:

 P0 = current value of stock

 D1 = expected dividend next year

 r= required rate of return

 g= dividend growth rate

🔢 Example 1: Using DDM

Company: PLDT (TEL)

 Current dividend = ₱90

 Growth rate = 3%

 Required return = 8%

👉 If the stock is trading at ₱1,700, it’s undervalued.

B. 📉 Zero-Growth DDM (for preferred stock)

Example: A preferred share pays ₱6 yearly, required return is 12%.

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C. 📊 Price-Earnings (P/E) Ratio Model

This model is useful when companies don’t pay dividends or when

comparing to industry peers.

Stock Value=EPS×P/E Ratio

 EPS = Earnings per Share

 P/E Ratio = Market Price / EPS

🔢 Example 2: Using P/E Ratio

Company: SM Investments (SM)

 EPS = ₱40

 P/E = 18

Stock Value=40×18=₱720

If the market price is ₱800 → Overvalued

If price is ₱650 → Undervalued

D. 📌 Choosing the Right Model

Model When to Use

DDM For stable, dividend-paying firms (e.g.,
PLDT, GMA7)
Zero-Growth For preferred stocks or fixed dividend
DDM securities
P/E Ratio For growth firms with no dividends (e.g.,
Converge, DITO)

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Other Factors Affecting Stock Value

Factor Explanation Philippine

Example
GMA7 had record-
More dividends =
Dividends high dividends in
higher value
2022
Higher EPS = Ayala Corp's rising
Earnings higher stock profits in real
value estate
Expected long- BDO expands
Growth Rate
term growth branches yearly
Risk Startups on PSE
Higher risk =
(Required SME Board
lower value
Return)
BSP rate hikes
Interest Higher rates =
affect market
Rates lower stock value
valuations

Valuation vs Market Price

 If Market Price < Intrinsic Value → Stock is Undervalued (Buy)

 If Market Price > Intrinsic Value → Stock is Overvalued (Avoid/Sell)

📌 This is where value investors like Warren Buffett make money—

buying undervalued stocks and waiting for prices to rise.

Local Application: Valuing a PSE Stock

Company: Ayala Land, Inc. (ALI)

 EPS = ₱2.50

 P/E Ratio (industry average) = 18

 D₁ = ₱0.50

 g = 5%

 r = 10%

P/E Method:

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DDM Method:

👉 Interpretation: P/E may be more appropriate if the company

reinvests most of its profits.

Limitations of Valuation

 Estimates can be wrong (especially growth rates)

 Market sentiment can distort prices (e.g., hype stocks like DITO or

SPNEC)

 Macroeconomic shocks (COVID-19, oil price hikes, elections) affect

valuations

📌 Valuation is a guide, not a guarantee.

📝 Summary

Stock valuation is about figuring out what a company’s share

is really worth based on its earnings and dividends—not just price

movements. We use models like Dividend Discount Model (DDM)

and Price-Earnings Ratio to estimate intrinsic value.

In the Philippine setting, this knowledge helps investors decide

when to buy or sell stocks on the PSE. Smart investing means you

don’t rely on hype, but on valuation, cash flows, and long-term

potential.

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Remember: A good stock is not always the one going up—it’s the
one selling for less than it’s truly worth.

🛠 Application Task 1: "Valuing a Real PSE Stock"

🔍 Go to [Link] and pick a stock from the Philippine

Stock Exchange.

Instructions:

1. Find the latest EPS and dividend per share (DPS).

2. Assume a required return of 10% and dividend growth rate of 4%.

3. Use DDM or P/E method to estimate intrinsic value.

4. Compare it with the current market price.

5. Answer: Is it overvalued, undervalued, or fairly valued?

📊 Application 2: Stock Valuation

Instructions: Solve each problem. Show your complete solutions and

final answers clearly.

1. Valuing a Stock with Constant Growth (DDM)

A company listed on the Philippine Stock Exchange pays an annual

dividend of ₱3.00 per share. The dividend is expected to grow at 5%

annually, and the required rate of return is 10%.

👉 Compute the intrinsic value of the stock using the Gordon Growth

Model.

2. Using the Price-Earnings Ratio (P/E Method)

A listed company, such as SM Investments, reports Earnings Per

Share (EPS) of ₱6.00. The industry average P/E ratio is 20.

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👉 Compute the estimated stock price using the P/E model.

3. Zero-Growth Dividend Valuation (Preferred Stock)

A preferred share pays a fixed dividend of ₱7 per year. If investors

require a return of 8%,

👉 What is the present value of this preferred share?

4. Determine Market Reaction: Overvalued or Undervalued?

A stock has an intrinsic value of ₱58.00 (based on your DDM

computation). If the current market price is ₱62.50,

👉 Is the stock overvalued or undervalued? Justify your answer with

computation or logic.

5. Combined Valuation Using EPS and Dividends

A company pays a ₱2.50 dividend, has a growth rate of 6%, and the

required return is 11%. The EPS is ₱4.00, and the industry P/E ratio

is 15.

A. Compute the intrinsic value using the Dividend Discount Model

(DDM).

B. Compute the value using the P/E Ratio Model.

C. If the stock’s current market price is ₱52, which valuation is more

reliable, and what action would you recommend (Buy/Hold/Sell)?

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📘 Chapter 10: Cost of Capital

🎬 Introduction

Imagine this: you're starting a small business in Davao, and you

need ₱500,000 to get going. You could borrow from a bank, attract

an investor, or even issue shares someday. But here’s the question:

How much does it cost you to use that money?

In this chapter, we’ll explore the Cost of Capital—the required return

that makes a business investment worthwhile. It’s a powerful

concept that helps businesses make smart decisions on financing

and expansion.

🎯 Objectives

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By the end of this chapter, you will be able to:

1. Define and explain the concept of cost of capital.

2. Identify the components of cost of capital: debt, equity, and

preferred stock.

3. Compute the Weighted Average Cost of Capital (WACC).

4. Apply cost of capital concepts to investment decisions.

5. Relate cost of capital to the finance principle: “A firm must earn at

least its cost of capital to create value.”

🧩 Activity: "How Much Will It Cost Me?"

Scenario:

You are planning to open a local milk tea shop in Mati City. You need

₱300,000 in total.

 A bank offers you a loan at 8% interest.

 A friend offers ₱100,000 in exchange for 10% ownership (expects a

12% return).

 You can personally fund ₱100,000 from savings.

👉 Discuss: What’s the average cost of the capital you’re using?

👉 Which source of financing is cheapest or most expensive?

👉 Would you change the mix of funding?

🔍 Analysis Questions
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1. Why is knowing your cost of capital important before starting a

project or expansion?

2. If borrowing is cheaper than issuing shares, should businesses

always borrow?

3. How does inflation or high interest rates in the Philippines affect a

firm’s cost of capital?

📚 Abstract

💡 What Is Cost of Capital?

Let’s start with a basic question: What does it cost to use money?

Whether you borrow from a bank, raise funds from investors, or sell

shares of your company, you’re using other people’s money. And

naturally, they expect something in return—either interest, dividends,

or capital appreciation.

The Cost of Capital is the minimum rate of return that a company must

earn on its investments to satisfy its creditors, owners, and other

providers of capital.

📌 In simpler terms:
It's the return a company must generate just to “break even” on the
money it raised.

Why Is Cost of Capital Important?

The cost of capital plays a major role in:

 Evaluating projects — Should we build a new branch? Launch a new

product?

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 Choosing financing options — Should we borrow from BDO? Or issue

shares on the PSE?

 Valuing the company — A lower cost of capital increases the value

of the business.

Principle of Finance:

“A firm must earn more than its cost of capital to create value.”

If a company earns less than its cost of capital, it is destroying

shareholder value.

Components of Capital

A company can raise funds through three main sources:

1. Debt – borrowing money (e.g., from banks, issuing bonds)

 Example: Taking out a loan at 10% from Landbank

 Lenders expect interest

 Tax-deductible in the Philippines (25% tax rate as of 2024)

2. Equity – selling ownership (common stock)

 Investors expect dividends or growth in share value

 Riskier than debt (no guaranteed payment)

3. Preferred Stock – hybrid form

 Fixed dividend but no voting rights

 Often used by large PH firms like San Miguel or Ayala Corp

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Measuring the Cost of Each Source

A. Cost of Debt (After-Tax)

Where:

 i = interest rate

 T = corporate tax rate (25% in PH)

Example:
A company borrows at 10% interest.

This means the real cost of borrowing is just 7.5% because interest
payments are tax-deductible.

B. Cost of Equity (using Dividend Discount Model – DDM)

Where:
 D1 = expected dividend next year
 P0 = current stock price
 g = dividend growth rate
Example (Jollibee-style company):
Dividend next year = ₱2.50, Price = ₱100, Growth rate = 5%

C. Cost of Preferred Stock

Example: A preferred share pays ₱9 annually and sells for ₱100.

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Weighted Average Cost of Capital (WACC)

Now, companies don’t just use one type of capital—they use a mix.

That’s why we compute a weighted average.

Where:

 w = proportion of each capital component

 K = cost of each component

Full Example:

Let’s say a company uses this capital mix:

Source Amount Cost Weight

(₱) (K) (w)
Debt ₱400,000 7.5% 0.40
Equity ₱500,000 10% 0.50
Preferred ₱100,000 9% 0.10
Stock

So the company must earn at least 8.9% on new projects to make

them worthwhile.

What Affects Cost of Capital?

Factor Impact
Market interest Affects cost of debt
rates
Company risk Riskier firms = higher cost of equity
Tax rates Lower taxes reduce after-tax cost of debt
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Capital structure More debt may lower WACC (cheaper), but too
much adds risk
📌 In the Philippines, companies monitor BSP rates and inflation when
evaluating cost of capital.

Application in the Philippine Setting

Firm Application of Cost of Capital
Jollibee Foods Corp Uses WACC to evaluate new stores or global
expansion
Ayala Land Inc. Assesses cost of long-term debt vs. equity for
real estate projects
Startups in PH Estimate cost of capital using investor return
expectations (usually 12%–20%)
Government Determine viability based on return vs. cost of
infrastructure PPPs funding

🛠 Application Task: Compute Your WACC

Scenario: You are a finance officer at a local manufacturing firm. Your

company uses the following capital mix:

 ₱600,000 debt at 8% (tax rate = 25%)

 ₱300,000 common equity with a required return of 12%

 ₱100,000 preferred shares paying ₱9 per share at a price of ₱100

Instructions:

1. Compute the after-tax cost of debt

2. Compute cost of preferred stock

3. Compute WACC

4. Answer: What does your WACC tell you? What return should your

new project exceed?

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📘 Assessment (Quiz): Cost of Capital

Instructions: Answer each question. Show your solution for

computational items.

Question 1: Multiple Choice

Which of the following best describes the cost of capital?

A. The total cost of running a business

B. The average price of capital equipment

C. The minimum return a firm must earn to satisfy its capital providers

D. The amount a firm pays in income taxes

Question 2: Computation – Cost of Debt

A company borrowed ₱1,000,000 at an annual interest rate of 9%. The

Philippine corporate tax rate is 25%.

👉 Compute the after-tax cost of debt (Kd).

Question 3: Computation – Cost of Preferred Stock

A preferred share pays an annual dividend of ₱6.00 and is currently

selling for ₱75.00.

👉 Compute the cost of preferred stock (Kps).

Question 4: Computation – Cost of Equity (Dividend Discount

Model)

A company pays a dividend of ₱3.00 next year. Its stock sells for ₱60,

and the dividend is expected to grow by 4% annually.

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👉 Compute the cost of equity (Ke) using the constant growth DDM.

Question 5: Computation – Weighted Average Cost of Capital

(WACC)

A company uses the following capital structure:

Sourc Amount Cost

e (₱) (%)
Debt ₱400,000 7.5%
Equity ₱600,000 10.0%

👉 Compute the WACC. (Assume no preferred stock.)

📘 Chapter 11 — Capital Budgeting

“How businesses in the Philippines make smart, long-term investment
decisions”

🎬 Introduction

Have you ever thought about starting a business—maybe a small café

or printing shop? Now imagine needing ₱500,000 to buy equipment.

How would you know if it’s worth the investment?

Welcome to Capital Budgeting, where we make smart long-term

investment decisions. In this chapter, we’ll learn how Filipino

entrepreneurs, corporations, and even LGUs decide whether to invest

in a project using tools like Net Present Value (NPV) and Internal Rate

of Return (IRR).

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🎯 Objectives

By the end of this chapter, you will be able to:

1. Define and explain the concept of capital budgeting and its purpose.

2. Apply different capital budgeting techniques (NPV, IRR, Payback, PI).

3. Evaluate investment decisions using cash flows and discounting.

4. Connect the concept to the principle of finance: “A peso today is

worth more than a peso tomorrow.”

5. Analyze project decisions in real-life Filipino business scenarios.

🧩 Activity: "Would You Invest?"

Imagine you’re offered the following opportunity:

 You can invest ₱100,000 in a food cart business in Davao.

 You will earn ₱40,000 per year for 3 years.

 At the end of year 3, you get your capital back.

 A bank savings account pays 3% interest annually.

Group Discussion:

 Would you take the investment?

 How do you compare future cash to today’s money?

 How does this compare to saving in a bank?

💡 This introduces the concept of time value and evaluating investment

returns.
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🔍 Analysis Questions

1. Why should a business consider the time value of money when

investing?

2. Why might a project with fast payback not be the best investment?

3. What risks do Filipino entrepreneurs face in long-term investments?

📚 Abstract

What is Capital Budgeting?

Capital budgeting is a business tool for making capital expenditure

decisions. It may, however, be better to use the term ‘capital

investments’, rather than ‘capital expenditures’, as the technique

involves the outlays of funds, which yield the desired benefits and

gains in the near future (say, in three to five years or even more), and

that too, in a phased manner. While the raising and management of

short-term funds (working capital decisions) and long-term funds

(investment decisions) are important financial decisions, the most

critical and crucial aspect of the business management pertains to the

steps and strategies concerning the allocation of its capital, referred to

as the capital budgeting decisions. It is for this specific reason that the

capital budgeting decision is also referred to as the strategic asset

allocation decision.

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Investments typically involve large amounts of capital and span

several years, such as:

 Buying new equipment or machinery

 Expanding into new locations (e.g., opening a Jollibee in General

Santos)

 Launching a new product line

 Installing solar panels in factories

 Constructing a new school building in Davao

Capital budgeting ensures that companies only invest in projects that

will generate returns greater than their costs over time.

📌 Principle of Finance Applied:

“A peso today is worth more than a peso tomorrow.”
That's why we discount future cash flows to present value when
analyzing projects.

CAPITAL BUDGETING: WHY CONSIDERED SO IMPORTANT?

Capital Budgeting exercise is considered to be so crucial because, it

involves high value investments and also has far-reaching long-term

ramifications, and once the project gets started, any reverting back

becomes too difficult and damaging, expensive and a loss-making

proposition.

Therefore, ‘think and re-think, plan and re-plan’, seems to be of

essence in the capital budgeting exercise. Accordingly, it should

necessarily involve the top executives and the engineers as also the

technical and finance experts, plus the people from the purchase,

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production and marketing divisions, with a view to jointly evaluating

and assessing the capital investment proposals. Conversely speaking,

such decisions should not be left to the finance manager alone.

PHASES OF CAPITAL BUDGETING PROCESS

We will now discuss the various steps and phases involved in the

capital budgeting exercise.

Step 1

First, the Potential Investment Opportunities should be identified.

Immediately thereafter, we should form a Top Planning Committee,

which is referred to as the Business Organization Development

Committee (BODC). This committee prepares the estimate for the

future ‘sales’, which, in turn, becomes the base for the estimates of

the various items involved in capital budgeting. For example, the

estimates for the ‘Production’ of goods and/ or services, and the

various resources and materials required for the purpose.

Step 2

Hereafter, comes the turn of the estimates for plant and machinery,

men and materials, and so on. The future investments may be

estimated in the following steps and phases:

1. We must scan and monitor the external environment, so as to sense

and detect the investment opportunities.

2. Then, we must go on to formulate a Corporate Strategy based on

SWOT (Strength, Weakness, Opportunities, Threats) Analysis.

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3. Such a corporate strategy must then be shared among all the

members of the top planning committee, as also among the other

officers involved in the budgeting and implementation process.

4. It will augur well if the employees are urged and motivated to make

some suggestions, by giving them the impression and feeling that

these are greatly valued by the top management.

5. Then, on receipt of the suggestions, they must be properly

evaluated, accepted, modified, or rejected, as the case may be.

6. Now comes the turn for the integration of the budget estimates,

prepared by different departments and functional areas. Such

proposals are examined by various functionaries, before their

submission to the capital budgeting committee, so that it gets

thoroughly scrutinized from different angles and points of view. Here,

the creation of a climate of coordination and cooperation,

interdependence and mutual help, and in effect, building an effective

team, and sustaining the team spirit all through, is of essence.

Step 3

Here, the stage is finally set for the commencement of the decision-

making process. Here, it must be emphasized that the decisions

pertaining to high value expenditures should be cleared by the top

planning committee. The officers at different lower levels, however,

must be delegated some discretionary financial powers,

commensurate with their role and responsibility, and their position in

the hierarchy, so that they may take prompt and on-the-spot

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decisions, up to a certain extent, without waiting for clearance from

the top planning committee.

Step 4

Now starts the exercise for preparation of the capital budget and the

appropriation or allocation of funds. Here again, the projects, involving

smaller investments, could well be decided by the executives of

different lower levels, according to their seniority and position, to

ensure prompt action and implementation. The projects, involving high

value investments should, however, necessarily require the seal of

approval and clearance from the top planning committee, which, in

turn, must ensure that the company has sufficient and satisfactory

financial resources. Only thereafter, the appropriation order must be

issued, and that too, well before undertaking the respective projects.

Step 5

Before the project implementation stage begins, the various

investment proposals need to be converted into concrete and specific

projects, which, in fact, is a crucial and complex, risk-prone and time-

consuming process. It must always be borne in mind that any kind of

delay, at any stage, may necessarily lead to cost overruns, which, in

turn, may mostly upset the whole capital budgeting exercise, and may

even put the project itself in jeopardy. We should, therefore, always

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remember the adage that ‘Time is Money’, and especially so in money

matters.

HOW TO AVOID TIME OVERRUNS?

Time overruns could be avoided by adopting the following helpful

measures:

(i) Adequate Project Formulation

It is most important and vital that the project must be formulated

with great care and consideration of the various facets and

factors involved.

(ii) Responsibility Accounting Besides, care should be taken to

adequately define and fix the responsibilities on the respective

task heads, with a view to completing the assigned tasks on

time, well within the allotted resources and funds, and by

adopting all possible cost-effective strategies.

(iii) Network Techniques The network techniques like, Programmed

Evaluation Review Technique (PERT) and Critical Path Method

(CPM), should be put to most fruitful and effective use, so as to

facilitate the periodical monitoring of the progress at regular

intervals.

PERFORMANCE REVIEW

Periodical performance review of the progress and performance, as per

the schedule, must invariably and meticulously take place, so as to

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compare the actual performance with the projected levels, and to

critically analyze the facilitating and hindering factors, responsible for

the favorable or unfavorable variances (and not necessary the positive

or negative variances) in the various areas of work and performance.

For example, a positive variance in income may be termed as

favorable, but a positive variance in cost or time overruns may be

termed as unfavorable, and vice versa.

CRITERIA OF INVESTMENT EVALUATION

The investment decision rules are also referred to as the capital

budgeting techniques, or the investment criteria, for measuring the

economic worth of the investment in the proposed project. The basic

aim of such decision is to maximize the worth of the shareholders.

The evaluation of any investment generally comprises the following

three steps:

(i) Estimating the cash flows,

(ii) Estimating the required rate of return, and

(iii) Applying the decision rules for making the right choice. The

capital budgeting techniques may broadly be classified under the

following two categories:

(a) Discounted Cash Flow (DCF) Criteria, and

(b) Non-discounted Cash Flow (Non-DCF) Criteria.

Further, the Discounted Cash Flow (DCF) Criteria comprise:

(i) Net Present Value (NPV) [of money],

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(ii) Internal Rate of Return (IRR),

(iii) Benefit Cost Ratio (BCR), Profitability Index (PI), and

(iv) Discounted Payback (PB) Period. The Non-discounted Cash Flow

(Non-DCF) Criteria comprise: (i) Payback (PB) Period, and (ii)

Accounting Rate of Return (ARR) or Return on Investment (ROI)

Technique:

1. Net Present Value (NPV) Technique

The Net Present Value (NPV) technique is one of the Discounted Cash

Flow (DCF) techniques, which takes into account the principles of time

value of money. That is, it validly recognizes that the cash inflows,

arising at different points in time, differ in their real value, and become

comparable only after their equivalent (present) values have been

determined. Thus, the NPV must be computed by subtracting the

present value of cash outflows from the present value of cash inflows,

and the project should be accepted only when the resultant NPV

comes out to be a positive figure, i.e., when the NPV is greater than

zero. Accordingly, when the NPV comes out to be in the negative, the

proposed project must be declined outright. But then, if it comes out

to be exactly zero or equal, the management may use its discrete

business sense to decide whether at all to go for it or not.

We find the NPVs as follows:

1. The present value of each cash flow is calculated and discounted at

the project’s risk-adjusted cost of capital.

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2. The sum of the discounted cash flows is defined as the project’s

NPV.

The equation for the NPV:

Illustrative Example 1:

Illustrative Example 2:

2. Internal Rate of Return (IRR) Technique

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The Internal Rate of Return (IRR) of a project is the discount rate at

which its NPV is equal to zero. That is, it is the discount rate, which

equates the present value of the future cash flows with the initial

investment. We may thus, observe that, while in the case of the NPV

method, we assume that the discount rate (cost of capital) is known,

and then we proceed to compute the NPV, in the IRR method, we first

set the NPV at zero and then go to determine the discount rate, which

satisfies this condition.

Illustrative Example 1:

The cash inflow of the Project Luffy has been given in Table:

Solution:

The IRR would be the value of ‘r’ (rate of interest), which should satisfy

the following equation:

The value of ‘r’ (rate of interest) is to be found out by trial and error

method. Here, we may have to try different levels of ‘r’ (rate of

interest), till we are able to find out that the right hand side of the

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above equation is equal to 100. Let us first take the ‘r’ (rate of

interest) to be 15 per cent. At this rate, the right-hand side of the

above equation comes to 100.807, as follows:

As this value is a little higher than our projected (expected) value (i.e.

100), we may make another attempt by slightly raising the value of ‘r’

(rate of interest) say, at 16 per cent.

This is so because, a higher ‘r’ lowers the value of the right-hand side

and conversely, a lower ‘r’ increases the value of the right-hand side.

The computation has been shown as follows:

Now, the right-hand side has come to 98. 623 instead, whereby the

present value has become less than 100.

We may thus, safely conclude that the value of ‘r’ (rate of interest)

lies somewhere between 15 per cent and 16 per cent. However, for all

our practical purposes, this much of estimation should be good

enough to serve the desired purpose.

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But then, if we are interested in somewhat refined and quite close

approximation, we may follow the following steps:

1. Determine the NPV of the two closest possible rates of return, i.e.

(100.807 – 1) and (98.623 – 100 = 1.377). [These figures have been

worked out in absolute terms, and not in terms of (+) or (–), (say, 15

per cent and 16 per cent), as has been shown above, which has come

to 0.807 and 1.377, respectively.

2. Now, add up these two absolute values, which comes to 0.807 +

1.377 = 2.184.

3. Compute the ratio of the NPV of the smaller discount rate (vide Step

1) and the sum obtained in Step 2 above. That is 0.807 ÷ 2.184, which

comes to 0.37. [.807 + 1.377 = 2.184].

4. Add the number, so obtained in Step 3, to the smaller of the two

discount rates, that is 15+0.37 = 15.37 per cent.

This way, we have been able to find out that, if calculated at the level

of ‘r’ (rate of interest) at 15.37 per cent, the resultant IRR would be

nearest approximation of our estimates.

The rule for making a decision pertaining to IRR is as follows:

Accept: If the IRR is greater than the cost of capital.

Reject: If the IRR is less than the cost of capital.

Multiple Internal Rates of Return (Multiple IRR)

A problem with the IRR is that under certain conditions a project may

have more than one IRR. First, note that a project is said to have

normal cash flows if it has one or more cash outflows (costs) followed
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by a series of cash inflows. If, however, a cash outflow occurs

sometime after the inflows have commenced, meaning that the signs

of the cash flows change more than once, the project is said to have

non-normal cash flows. Examples follow:

An example of a project with non-normal cash flows would be a strip

coal mine where the company spends money to purchase the property

and prepare the site for mining, has positive inflows for several years,

and then the company spends more money to return the land to its

original condition. In such a case, the project might have two IRRs,

that is, multiple IRRs.

To illustrate multiple IRRs, suppose a firm is considering a potential

strip mine (Project M) that has a cost of $1.6 million and will produce a

cash flow of $10 million at the end of Year 1. Then at the end of Year 2,

the firm must spend $10 million to restore the land to its original

condition. Therefore, the project's expected cash flows (in millions) are

as follows:

We can substitute these values into Equation and solve for the IRR:

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NPV equals 0 when IRR = 25%, but it also equals 0 when IRR =

400%.9 Therefore, Project M has an IRR of 25% and another of 400%,

and we don't know which one to use.

Note that no dilemma regarding Project M would arise if the NPV

method was used; we would simply find the NPV and use it to evaluate

the project. We would see that if Project M 's cost of capital was 10%,

its NPV would be -$0.7736 million, and the project should be rejected.

However, if r was between 25% and 400%, NPV would be positive, but

those numbers would not be realistic or useful for anything.

Modified Internal Rate of Return (MIRR)

It is logical for managers to want to know the expected rate of return

on investments, and this is what the IRR is supposed to tell them.

However, the IRR is based on the assumption that projects' cash flows

can be reinvested at the IRR. This assumption is generally incorrect,

and this causes the IRR to overstate the project's true return. Given

this fundamental flaw, is there a percentage evaluator that is better

than the regular IRR? The answer is yes—we can modify the IRR to

make it a better measure of profitability.

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This new measure, the modified IRR (MIRR), is illustrated for Project S.

It is similar to the regular IRR except that it is based on the

assumption that cash flows are reinvested at the WACC (or some other

explicit rate if that is a more reasonable assumption).

Modified IRR (MIRR) is the discount rate at which the present value

of a project's cost is equal to the present value of its terminal value,

where the terminal value is found as the sum of the future values of

the cash inflows, compounded at the firm's cost of capital.

1. Project S has just one outflow, a negative $1,000 at t = 0. Because it

occurs at Time 0, it is not discounted and its PV is -$1,000. If the

project had additional outflows, we would find the PV at t = 0 for

each one and sum them to arrive at the PV of total costs for use in

the MIRR calculation.

2. Next, we find the future value of each inflow compounded at the

WACC out to the "terminal year," which is the year the last inflow is

received. We assume that cash flows are reinvested at the WACC.

For Project S, the first cash flow, $500, is compounded at WACC =

10% for 3 years and it grows to $665.50. The second inflow, $400,
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grows to $484.00; the third inflow grows to $330.00. The last inflow

is received at the end, so it is not compounded at all. The sum of the

future values, $1,579.50, is called the "terminal value," or TV.

3. We now have the cost at t = 0, -$1,000, and the TV at Year 4,

$1,579.50. There is some discount rate that will cause the PV of the

terminal value to equal the cost. That interest rate is defined as the

MIRR. Using your financial calculator, enter N = 4, PV = -1000, PMT

= 0, and FV = 1579.50. Then when you press the I/YR key, you get

the MIRR, 12.11%.

4. The MIRR can be found in a number of ways. Figure above illustrates

how the MIRR is calculated: We compound each cash inflow, sum

them to determine the TV, and then find the rate that causes the PV

of the TV to equal the cost. That rate is calculated as 12.11%.

However, some of the better calculators have a built-in MIRR

function that streamlines the process. In Excel, you can use either

the RATE function or MIRR function to calculate the MIRR, as shown

in Figure.

The MIRR has two significant advantages over the regular IRR:

 First, whereas the regular IRR assumes that the cash flows from

each project are reinvested at the IRR, the MIRR assumes that

cash flows are reinvested at the cost of capital (or some other

explicit rate). Because reinvestment at the IRR is generally not

correct, the MIRR is generally a better indicator of a project's true

profitability.

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 Second, the MIRR eliminates the multiple IRR problem— there

can never be more than one MIRR, and it can be compared with

the cost of capital when deciding to accept or reject projects.

3. Benefit-Cost Ratio (BCR) or Profitability Index (PI)

Technique:

The benefit-cost ratio (BCR) represents the ratio of the present value

of the benefits (cash inflows), at the required rate of return, to the

initial investment (cash outflow). It may be either gross or net, i.e.

gross minus one.

The formula for calculating the Benefit-Cost Ratio (BCR) or the

Profitability Index (PI) is:

Illustrative Example 1:

The rules of acceptance in such cases are as follows:

✅Accept, when BCR is greater than one; and

❌ reject, if it is less than one.

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But, if it is equal to one, the management could accept or reject it, at

its own discretion.

Similarly:

✅Accept when NBCR is greater than zero; and

❌reject when it is less than zero.

But if it is equal is zero, the management could accept or reject it, at

its own discretion.

4. Discounted Payback Period Technique

To facilitate the understanding of this technique, we propose to first

discuss the Payback (PB) Period Technique, which is much simpler and

easy to understand and calculate, though it suffers from some

inherent weaknesses, due to the fact that it does not take into account

the most vital factor, like the time value of money.

NPV is the most commonly used method for capital budgeting today;

historically, however, the first

selection criterion used was the

payback period, defined as the

number of years required to recover the funds invested in a project

from its cash flows.

The shorter the payback, the better the project.

We start with the project's cost, a negative value, and then add the

cash inflow for each year until the cumulative cash flow turns positive.

The payback year is the year prior to full recovery plus a fraction equal

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to the shortfall at the end of that year divided by the cash flow during

the full recovery year:

The payback has three flaws:

(1) All dollars received in different years are given the same weight

(i.e., the time value of money is ignored);

(2) cash flows beyond the payback year are given no consideration

regardless of how large they might be;

(3) unlike the NPV, which tells us how much wealth a project adds, and

the IRR, which tells us how much a project yields over the cost of

capital, the payback merely tells us when we will recover our

investment.

There is no necessary relationship between a given payback and

investor wealth maximization, so we do not know what an acceptable

payback is. The firm might use 2 years, 3 years, or any other number

as the minimum acceptable payback; but the choice is arbitrary.

To counter the first

criticism, analysts

developed the

discounted payback.

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Here cash flows are discounted at the WACC; then those discounted

cash flows are used to find the payback.

In the figure, we calculate the discounted paybacks for S and L

assuming that both have a 10% cost of capital. Each inflow is divided

by (1 + r)^t = (1.10)^t, where t is the year in which the cash flow

occurs and r is the project's cost of capital, and those PVs are used to

find the payback. Project S's discounted payback is 2.95, while L's is

3.78.

Note that the payback is a "break-even" calculation in the sense that if

cash flows come in at the expected rate, the project will break even.

However, because the regular payback does not consider the cost of

capital, it does not specify the true break-even year. The discounted

payback does consider capital costs, but it still disregards cash flows

beyond the payback year, which is a serious flaw. Further, if mutually

exclusive projects vary in size, both payback methods can conflict with

the NPV, which might lead to a poor choice. Finally, there is no way of

telling how low the paybacks must be to justify project acceptance.

🛠 Application

Evaluate the Project

Scenario: A small cooperative in Mati City is planning to invest

₱120,000 in a rice milling machine. It expects to earn:

 Year 1: ₱50,000

 Year 2: ₱45,000

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 Year 3: ₱40,000

 Required return = 10%

Task:

1. Compute the NPV.

2. Compute the Payback Period.

3. Should the co-op invest? Why?

Optional: Solve IRR using Excel: =IRR(values)

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📚 References
Accounting and Financial Management UK by Mintel Group Ltd (2023)
Bangko Sentral ng Pilipinas. (2023). Financial Inclusion
Initiatives. [Link]
Bloomberg. [Link]
Brigham, E. F., & Houston, J. F. (2020). Fundamentals of Financial
Management (Concise 10th ed.). Cengage Learning.
Contemporary Financial Management by James McGuigan, William
Kretlow and Charles Moyer
Corporate Financial Management 6th edition by Glen Arnold and
Deborah Lewis (2023)
Financial Management by F.C. Sharma, R. U. Singh, and Rachit Mittal
(2022) SBPD Publications
Financial Management for Small Businesses: Financial Statements &
Present Value Models by Lindon J. Robinson, Steven D. Hanson, J.
Roy Black (2021). Michigan State University
Financial Management Part II 2nd ed by Ferdinand L. Timbang, CPA,
REB, MSCF, DBA (2022)
Financial Management Principles and Applications Comprehensive
Volume 2012-2013 Vol by Ma. Elenita Balatbat Cabrera, BBA, MBA,
CPA, CMA
Financial Management The Ultimate Guide to Planning, Organizing,
Directing, and Controlling the Financial Activities of an Enterprise by
Greg Shields (2018)
Fundamentals of Financial Management 13th edition by Eugene
Brigham and Joel Houston
Fundamentals of Financial Management 15e by Eugene F. Brigham and
Joel F. Houston (2018)
Fundamentals of Financial Management, 10th Edition by Eugene F.
Brigham and Joel F. Houston. 2004.

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Introduction to Finance: Markets, Investments, and Financial

Management, 13th edition by Ronald W. Melicher and Edgar A.
Norton
[Link]. [Link]
Money and Capital Markets by Peter S. Rose & Milton H. Marquis. 2009
PSE EDGE portal [Link]
Securities and Exchange Commission Philippines. (2020). Revised
Corporation Code. [Link]
Titman, S., Keown, A. J., & Martin, J. D. (2020). Financial Management:
Principles and Applications (13th ed.). Pearson Education.
World Bank. (2022). Philippines Economic
Update. [Link]
Yahoo Finance

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✅ ANSWERS KEY

MODULE 4:

Answer Key for the exercises on Horizontal Analysis, Vertical

Analysis, and Ratio Analysis based on the assessment activity for

Mabuhay Pasalubong Center:

✏️Part A: Horizontal Analysis

Item 2023 (₱) 2024 (₱) Change %

(₱) Change
Sales Revenue 1,200,00 1,500,00 +300,000 +25.00%
0 0
Cost of Goods 720,000 900,000 +180,000 +25.00%
Sold
Net Income 120,000 176,000 +56,000 +46.67%

✏️Part B: Vertical Analysis

2024 Income Statement (Vertical % of Sales)

Base: ₱1,500,000 (Sales Revenue = 100%)

Item Amount % of
(₱) Sales
Sales Revenue 1,500,000 100.0%
Cost of Goods Sold 900,000 60.0%
Gross Profit 600,000 40.0%
Operating 350,000 23.3%
Expenses
Interest Expense 30,000 2.0%
Income Before Tax 220,000 14.7%
Income Tax (20%) 44,000 2.9%
Net Income 176,000 11.7%

2024 Balance Sheet (Vertical % of Total Assets)

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Base: ₱800,000 (Total Assets = 100%)

Item Amount % of Total

(₱) Assets
Cash 100,000 12.5%
Accounts Receivable 80,000 10.0%
Inventory 120,000 15.0%
Total Current Assets 300,000 37.5%
Property, Plant & 500,000 62.5%
Equip.
Total Assets 800,000 100.0%
Accounts Payable 70,000 8.75%
Short-Term Loans 80,000 10.0%
Long-Term Loan 150,000 18.75%
Total Liabilities 300,000 37.5%
Owner’s Equity 500,000 62.5%
Total Liab. & Equity 800,000 100.0%

✏️Part C: Ratio Analysis

4. Current Ratio = Current Assets / Current Liabilities

= ₱300,000 / (₱70,000 + ₱80,000)

= ₱300,000 / ₱150,000 = 2.0

5. Inventory Turnover = COGS / Inventory

= ₱900,000 / ₱120,000 = 7.5 times

6. Debt-to-Equity Ratio = Total Liabilities / Owner’s Equity

= ₱300,000 / ₱500,000 = 0.6

7. Net Profit Margin = Net Income / Sales

= ₱176,000 / ₱1,500,000 = 0.117 or 11.7%

8. Return on Assets (ROA) = Net Income / Total Assets

= ₱176,000 / ₱800,000 = 0.22 or 22%

✏️Bonus - Sample Student Insight:

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“Mabuhay Pasalubong Center improved its performance in 2024. Sales

increased by 25% and net income rose by 46.67%, showing stronger

profitability. Also, the ROA of 22% indicates the company is using its

assets efficiently to generate earnings.”

MODULE 5:

Answer Key – Time Value of Money (TVM) Quiz

🧮 A. Future Value (FV)

1. ₱16,077.63
FV = 12,000 × (1.05)^6
2. ₱44,766.01
FV = 25,000 × (1.06)^10
3. ₱77,987.27
Monthly r = 0.04 / 12 = 0.003333
FV = 2,000 × [(1 + 0.003333)^36 – 1] / 0.003333
4. ₱257,339.47
FV = 150,000 × (1.07)^8

💰 B. Present Value (PV)

5. ₱74,725.09
PV = 100,000 / (1.06)^5
6. ₱613,913.25
PV = 1,000,000 / (1.05)^10
7. ₱36,765.56
PV = 50,000 / (1.08)^4
8. ₱359,318.77
PV = 750,000 / (1.055)^15

⏳ C. Solving for Time (t)

9. 11.90 years
t = log(60,000 / 30,000) / log(1.06)
10. 8.04 years
t = log(1,000,000 / 500,000) / log(1.09)
11. 9.01 years
t = log(150,000 / 75,000) / log(1.08)
12. 14.21 years
t = log(400,000 / 200,000) / log(1.05)

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📈 D. Solving for Interest Rate (r)

13. 7.18%
r = (40,000 / 20,000)^(1/10) – 1
14. 4.45%
r = (65,000 / 50,000)^(1/6) – 1
15. 8.01%
r = (240,000 / 120,000)^(1/9) – 1
16. 7.72%
r = (500,000 / 300,000)^(1/7) – 1
🧾 E. Loan Amortization (Monthly Payment)
17. ₱10,623.11
 P = 500,000
 Annual rate = 10% → Monthly rate = 0.10 / 12 = 0.008333
 n = 5 years × 12 = 60 months
 PMT = [P × r × (1 + r)^n] / [(1 + r)^n – 1]
→ PMT ≈ ₱10,623.11

Module 7

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MODULE 8:

✅ Answer Key: Risk and Return – Computational Assessment

5.

6.

7.

8.
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9.

10.

11.

Although Stock A has a higher return, Stock B has a better risk-

adjusted return (lower CV).
✅ Stock B is better based on CV.

MODULE 9:

✅ Answer Key: Stock Valuation – Computational Assessment

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C. Analysis and Recommendation:

 DDM Value = ₱50.00
 P/E Value = ₱60.00
 Market Price = ₱52.00
✅ The market price is between both valuations.
If the investor values earnings more, Buy (stock is undervalued based
on EPS).
If prioritizing dividends, the stock is slightly overvalued.
Recommended Answer:
Hold the stock if already owned or Buy cautiously for long-term
growth.

MODULE 10:

✅ Answer Key: Cost of Capital Quiz

Answer 1:

C. The minimum return a firm must earn to satisfy its capital providers.

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MODULE 11:

✅ Answer Key: Evaluate the Project

📝 Given:
 Initial investment (C₀) = ₱120,000
 Cash inflows:
o Year 1 = ₱50,000
o Year 2 = ₱45,000
o Year 3 = ₱40,000
 Required return (discount rate) = 10%

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3. Should the co-op invest? Why?

Answer: No, the co-op should not invest.
 The NPV is negative (₱-7,305.02), meaning the project destroys
value.
 Although the Payback Period is 2.63 years (which might be
acceptable), it ignores time value of money.
 Since the project’s return is less than the required 10%, the
investment should be rejected.

Input in Excel:
=IRR({-120000,50000,45000,40000})
IRR ≈ 7.71%
Since IRR < 10%, the project is not acceptable.

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