STRABA FINALS

STRATEGIC FINANCIAL STRUCTURES Notes Payable

ASPECT DESCRIPTION
Focusing on both financial structure and capital structure. What it is Formal written promises to pay a specific sum
Think of this as building the financial backbone of a company - on a certain date, often with interest.
how it funds its operations and assets. Characteristics  Involves written promissory note.
 Specifies principal, interest rate,
Financial Structure maturity date, and payment schedule.
 Represents the total mix of a company’s financing sources,  Can be short-term or long-term; this
encompassing both short-term and long-term debt, as well as focuses on short-term.
equity. Example A small business issues a nine-month
 It answers the broad question: “Where does all the money promissory note to purchase new equipment,
come from to pay for the company’s assets agreeing to pay principal plus interest.

Key Components:
1. Short-Term Debt LONG-TERM DEBTS
 Obligations due within one year
 E.g., accounts payable, short-term loans, notes payable Bonds Payable
ASPECT DESCRIPTION
2. Long-Term Debt What it is  Bonds are debt instruments issued by a
 Obligations due beyond one year company or government to raise capital
 E.g., bonds payable, term loans, mortgages from investors.
 The issuer borrows money from
3. Equity bondholder and promises to repay the
 The owners’ stake in the company principal at maturity along with the
 E.g., common stock, preferred stock, retained earnings periodic interest payments
Characteristics  Issued to multiple/large number of
4. Other liabilities investors.
 Miscellaneous liabilities that don’t fit nearly into short-term  Terms defines in a bond indenture, a
or long-term debt legal document outlining the obligations
 E.g., deferred revenue of the issuer.
 Can be secured (backed by specific
assets) or unsecured.
SHORT-TERM DEBTS  Interest rates can be fixed or variable.
 Bonds can be traded on the open
Accounts Payable market, so their market value can
ASPECT DESCRIPTION fluctuate based on interest rates, the
What it is Money owned to suppliers for goods or issuer’s creditworthiness, and other
services purchased on credit. economic factors.
Characteristics  Arises from routine operations.  Market value may fluctuate based on
 Short payment terms (e.g., net 30 days). interest rates and creditworthiness.
 No formal agreements or interest Example A corporation issues 100M in 10-year bonds
charges. with a 5% annual coupon rate to finance the
 A high balance may indicate effective construction of a new factory. The company is
use of credit or potential cash flow obligated to pay 5M in interest each year and
issues. repay the 100M principal after 10 years.
Example A retailer buys t-shirts on credit with net 60
terms; owed amount recorded as accounts Term Loans
payable. ASPECT DESCRIPTION
What it is Loans from a bank or financial institution for a
Short-Term Loans specific amount, with a predetermined
ASPECT DESCRIPTION repayment schedule and maturity date
What it is Loans with a maturity period of one year or extending beyond one year.
less, used for cash flow shortages or working Characteristics  Involves a direct relationship between
capital borrower and lender.
Characteristics  Can be secured or unsecured.  Terms outlined in a loan agreement.
 Involves formal written agreements.  Can be secured or unsecured.
 Interest expense incurred.  Interest rates can be fixed or variable.
 Ex: bank overdrafts and lines of credit  Repayment involved periodic
Example A retailer buys t-shirts on credit with net 60 installments including principal interest.
terms; owed amount recorded as accounts  May include covenants for the borrower
payable.
 STRABA FINALS
to adhere to. 3. BDO Unobank, Inc (PSE: BDO)
Example A company takes out a 5-year term loan from  BDO is one of the leading banks in the Philippines.
a bank to purchase new machinery, with a  Its publicity traded shares are common stock, giving
specified interest rate, annual payment, and owners a stake in the bank’s performance and voting
final repayment date. rights.

Mortgages 4. Philippine Long Distance Telephone Company (PLDT) Inc.

ASPECT DESCRIPTION (PSE: TEL)
What it is A long-term loan used to finance the purchase  A major telecommunications and digital services provider
of real estate, with the property serving as in the Philippines.
collateral.  PLDT’s shares are common stock.
Characteristics  Secured by the property being finances,  Owning TEL shares means you are a common
 Long repayment period (e.g. 15, 20, 30 shareholder in this key infrastructure company.
years).
 Periodic payments typically include both 5. Aboitiz Equity Ventures, Inc. (PSE:AEV)
principal and interest.  This is another large Philippine conglomerate with
 Lender can foreclose on the property if investments in power generation, financial services, food
payments default manufacturing, real estate, and infrastructure.
Example A company purchases an office building  Its listed shares are common stock.
financed with a 25-year mortgage from a
bank, with the building acting as security for IN THE PHILIPPINES, SOME COMPANIES ISSUE BOTH CLASS
the loan. A AND CLASS B COMMON SHARES.

Class A Shares
EQUITY  These are typically reserved for Filipino investors.
Class B Shares
Common Stock  This can be owned by both Filipino and foreign investors
ASPECT DESCRIPTION  Both classes usually have the same rights to dividends and the
same voting power.
What it is Represents basic ownership in a corporation
 The classification mainly serves to monitor the equity
with voting rights.
ownership by local and foreign investors in certain sectors.
Characteristics  Holders have voting rights (usually one
vote per share).
Preffered Stock
 Rank last in claims during liquidation.
ASPECT DESCRIPTION
 Dividends are not guaranteed and
depend on board decisions. What it is A class of stock with special preferences over
common stock, particularly regarding
 Potential for capital appreciation.
dividends and liquidation claims.
Example An individual buys shares of publicly traded
Characteristics  Usually lacks voting rights.
company, gaining voting rights and potential
dividends.  Fixed dividend rate, paid before
common stock dividends.
 Higher claim on assets than common
PROMINENT EXAMPLES OF COMPANIES LISTED ON THE
stockholders in liquidation.
PHILIPPINE STOCK EXCHANGE (PSE) THAT ISSUE COMMON
 May be cumulative, non-cumulative,
STOCK
callable, or convertible.
1. Ayala Corporation (PSE: AC) Example An investor buys preferred stock paying a
fixed annual dividend of $5 per share,
 One of the oldest and largest conglomerates in the
received before any common stock dividends.
Philippines, with interest in real estate, banking,
telecommunications, energy, and other sectors.
 When you buy shares of AC, you are purchasing Retained Earnings
common stock in this major Philippine holding company. ASPECT DESCRIPTION
 Common stockholders of Ayala Corporation typically What it is Accumulated profits not distributes as
have voting rights. dividends, reinvested bank into the business.
Characteristics  Increases with net income and
2. SM Prime Holdings, Inc (PSE: SMPH) decreases with net losses or dividends.
 As the largest integrated property developer on the  Represents assets financed through
Philippines, owning numerous shopping malls, residential past earnings, not cash.
condominiums, and commercial buildings.  A large balance indicates effective
 SMPH’s shares traded in the PSE are common stock. reinvestment and management.
 Shareholders have voting rights in the company. Example A profitable company reinvests a portion of its
profits for expansion, reflected in the retained
earnings balance.
 STRABA FINALS
DEFERRED REVENUE Industry Norms
 Arises when a customer pays for a product or service in  Capital structures often vary across industries due to different
advance, but the company has not yet delivered the product or assets intensity, growth rates, and business risks.
performed the services.
 Because the revenue should be recognized when it is earned, FEATURE FINANCIAL CAPITAL
the company cannot record this upfront payment as revenue STRUCTURE STRUCTURE
immediately. Scope Encompasses all Focuses on long-
 Instead, it’s recorded as a liability, representing the company’s liabilities and equity term debt and equity
obligation to the customer. Time horizon Includes both short- Primarily concerned
term and long-term with long-term funds
STRATEGIC CONSIDERATIONS funds
Focus Overall financing mix Long-term financing
Liquidity mix and leverage
 A company with a significant amount of short-term debt needs decisions
to ensure it has sufficient liquid assets to meet those
obligations DEFINING AND MEASURING CAPITAL LEVERAGE

Flexibility Capital Leverage

 A financial structure with diverse funding sources can provide  A.k.a financial leverage
more flexibility in responding to changing economic conditions  Refers to the use of debt to acquire additional assets.
or new opportunities.  It measures a company’s ability to use borrowed funds to
increase its investment potential, thereby magnifying potential
Risk returns to equity holders.
 Higher levels of debt generally increase financial risk, as the
company has fixed interest and principal payments to make. Measurement Capital Leverage can be measured using various
indicators:
Cost of Capital
 Different sources of financing have different costs. Debt-to-Equity Ratio
 The overall financial structure influences the company’s  This ratio compares total liabilities to shareholders’ equity,
weighted average cost of capital (WACC). showing the proportion of debt used in the capital structure.

Debt Ratio
CAPITAL STRUCTURE  This is the ratio of total debt to total assets, indicating the
 Refers to the specific mix of long-term debt and equity used to percentage of a company’s assets that are financed by debt.
finance a company’s long-term assets and operations.
 It answers the questions “How should the company finance its Equity Multiplier
long-term needs - through borrowing or by using owner’s  This is calculated as total assets divided by total equity,
investments?” indicating how much of a company’s assets are financed by
shareholders’ equity.
STRATEGIC CONSIDERATIONS

Leverage
 The extent to which a company uses debt financing (financial
leverage) significantly impacts its risk and potential return.
 Higher leverage can amplify both profits and losses.

Cost of Capital Optimization

 Companies strive to find the optimal mix or debt and equity that
minimizes their cost of capital, thereby maximizing firm value.

Financial Risk Management

 The levels of debt in the capital structure directly influences the
company’s financial risk, particularly its ability to meet fixed
financial obligations.

Control
 Issuing more equity can dilute the ownership and control of
existing shareholders.