Principles of management

Difference bettwen selection and recruitment

Recruitment
Selection
It the process of searching the candidates for It Involves the series of steps by which the
employment and stimulating them to apply for candidates are screened for choosing the most
jobs in the organization.
suitable persons for vacant posts.
The basic purpose of recruitments is to create a The basic purpose of selection process is to
talent pool of candidates to enable the
choose the right candidate to fill the various
selection of best candidates for the
positions in the organization.
organization, by attracting more and more
employees to apply in the organization.
Recruitment is a positive process i.e.
Selection is a negative process as it involves
encouraging more and more employees to
rejection of the unsuitable candidates.
apply.
Recruitment is concerned with tapping the
Selection is concerned with selecting the most
suitable candidate through various interviews
sources of human resources
and tests
There is no contract of recruitment established Selection results in a contract of service
in recruitment
between the employer and the selected
employee
It is an activity of establishing contact between It is a process of picking up more competent
employers and applicants.
and suitable employees.
It encourages large number of Candidates for a It attempts at rejecting unsuitable candidates.
job.
It is a simple process.
It is a complicated process.
The candidates have not to cross over many Many hurdles have to be crossed.
hurdles.
It is a positive approach.
It is a negative approach.
It precedes selection.
It follows recruitment.
It is an economical method.
It is an expensive method.
Less time is required.
More time is required.
Definition of Recruitment
Recruitment is a process of finding out the prospective applicants and stimulating
them to apply for the vacancy. It is a long process which involves a series of activities
that starts from analyzing the job requirements and ends on the appointment of
the employee. The activities involved in the recruitment of employees are as under:
Analyzing job requirement
Advertising the vacancy
Attracting candidates to apply for the job
Managing response

 Scrutiny of applications
Shortlisting candidates
Conducting examination or interview
Making decisions regarding selection
The recruitment is done by the Human Resource managers either internally or
externally. The sources of internal recruitment are: promotion, transfers, retrenched
employees, contact or references, ex-employees, retired employees etc. On the other
hand, sources of external recruitment are: recruitment through advertisement,
campus recruitment, recruitment by employment exchanges, recruitment by third
parties (recruitment agencies), internet recruiting, unsolicited applicants, etc.
Definition of Selection
Selection is an activity in which the organization selects a fixed number of candidates
from a large number of applicants. It involves the actual appointment of the
employee for filling up the vacancies of the enterprise. The term selection means the
placement of the right man at the right job. We all know that, a lot of people apply for
a single job at the time of recruitment, in which the recruiters have to decide which
candidate fits the best for the job.
Selection also involves a set of activities which are given as under:
Screening
Eliminating unsuitable candidates
Conducting the examination like aptitude test, intelligence test, performance
test, personality test etc.
Interview
Checking References
Medical Test
The process of selection is a time consuming one because the HR managers have to
identify the eligibility of every candidate for the post. Besides this, the educational
qualification, background, age, etc. are also some of the most important factors on
which they have to pay more attention. After this the written examination and
interview is also a very tough task.
VARIOUS TYPES OF LEADERSHIP
Different types of leadership styles exist in work environments.
Advantages and disadvantages exist within each leadership style. The
culture and goals of an organization determine which leadership style fits
the firm best. Some companies offer several leadership styles within the
organization, dependent upon the necessary tasks to complete and
departmental needs.
Laissez-Faire
A laissez-faire leader lacks direct supervision of employees and fails to
provide regular feedback to those under his supervision. Highly
experienced and trained employees requiring little supervision fall under

the laissez-faire leadership style. However, not all employees possess

those characteristics. This leadership style hinders the production of
employees needing supervision. The laissez-faire style produces no
leadership or supervision efforts from managers, which can lead to poor
production, lack of control and increasing costs.
Autocratic
The autocratic leadership style allows managers to make decisions alone
without the input of others. Managers possess total authority and impose
their will on employees. No one challenges the decisions of autocratic
leaders. Countries such as Cuba and North Korea operate under the
autocratic leadership style. This leadership style benefits employees who
require close supervision. Creative employees who thrive in group
functions detest this leadership style.
Participative
Often called the democratic leadership style, participative leadership
values the input of team members and peers, but the responsibility of
making the final decision rests with the participative leader. Participative
leadership boosts employee morale because employees make
contributions to the decision-making process. It causes them to feel as if
their opinions matter. When a company needs to make changes within the
organization, the participative leadership style helps employees accept
changes easily because they play a role in the process. This style meets
challenges when companies need to make a decision in a short period.
Transactional
Managers using the transactional leadership style receive certain tasks to
perform and provide rewards or punishments to team members based on
performance results. Managers and team members set predetermined
goals together, and employees agree to follow the direction and
leadership of the manager to accomplish those goals. The manager
possesses power to review results and train or correct employees when
team members fail to meet goals. Employees receive rewards, such as
bonuses, when they accomplish goals.
Transformational
The transformational leadership style depends on high levels of
communication from management to meet goals. Leaders motivate
employees and enhance productivity and efficiency through
communication and high visibility. This style of leadership requires the
involvement of management to meet goals. Leaders focus on the big
picture within an organization and delegate smaller tasks to the team to
accomplish goals.
Types of Leaders

Above leadership styles or different types of leaders are discussed below.

Type 1. Autocratic Style
Autocratic type of leader is called an Autocrat. He does not consult his
subordinates (followers). He takes all the decisions by himself. He also
takes full responsibility for his decisions. The subordinates must obey him
without asking any questions.
Type 2. Consultative Style
Consultative type of leader has an open mind. He encourages his
subordinates to give their suggestions and comments. If these
suggestions and comments are good, then he will accept them. So this
leader consults his subordinates before taking a decision. However, the
final decision is taken by the leader. Therefore, he takes full responsibility
for his decision.
Type 3. Participative Style
Participative type of leader encourages his subordinates to take part in
decision making. The final decision is not taken by the leader himself. It is
taken by the group (team), i.e. by the leader and his subordinates. The
leader gives his subordinates full scope for using their talents. He is loyal
to them. Therefore, they are loyal to him. They obey his orders willingly.
They have a genuine (real) respect for him.
Type 4. Laissez-Faire Style
Laissez-Faire style of leader is passive. He only acts as a contact man. He
provides information and resources to his subordinates. He believes that
the subordinates will work best if they are left alone. Therefore, he gives
them complete freedom to take their own decisions. He allows them to
plan and organise their own work. He allows them to set their own goals
and to solve problems on their own.
Type 5. Bureaucratic Leader
Bureaucratic leader follows all the rules and formalities of the
organisation. He does not believe in new ideas. He wants his subordinates
to follow all his orders. This leadership style result in red tapism and
unwanted paper work.
Type 6. Neurocratic Leader
Neurocratic leader is highly a task oriented one. He wants to get the work
done at any cost. He gets very upset if there is any failure. He is very

emotional, sensitive and eccentric. He does not consult his subordinates in

decision making. He takes his own decisions.
Type 7. Paternalistic Style
Paternalistic style of a leader creates a family atmosphere in the
organisation. He acts just like a parent of his subordinates. He advises,
guides and helps his subordinates with their personal problems. This style
of leadership will be successful in a small organisation having a very few
employees and only one leader.
Type 8. Sociocratic Style
The sociocratic leader tries to run the organisation just like a Social Club.
He gives less importance to production and more importance to
friendship. That is, he tries to keep his subordinates very happy. So, he
creates a warm and good social environment.
Type 9. Situational Style
Situational type of leader uses different styles in different situations. That
is, he changes his style according to the situation. Sometimes he will be
autocratic, or consultative, or participative, etc. Now-a-days, most
managers use this style of leadership.
fFUTURE AND OPTION
Futures and options represent two of the most common form of "Derivatives".
Derivatives are financial instruments that derive their value from an 'underlying'.
The underlying can be a stock issued by a company, a currency, Gold etc., The
derivative instrument can be traded independently of the underlying asset.
The value of the derivative instrument changes according to the changes in the value
of the underlying.
Derivatives are of two types -- exchange traded and over the counter.
Exchange traded derivatives, as the name signifies are traded through organized
exchanges around the world. These instruments can be bought and sold through
these exchanges, just like the stock market. Some of the common exchange traded
derivative instruments are futures and options.
Over the counter (popularly known as OTC) derivatives are not traded through the
exchanges. They are not standardized and have varied features. Some of the popular
OTC instruments are forwards, swaps, swaptions etc.
Futures

A 'Future' is a contract to buy or sell the underlying asset for a specific price at a predetermined time. If you buy a futures contract, it means that you promise to pay the
price of the asset at a specified time. If you sell a future, you effectively make a
promise to transfer the asset to the buyer of the future at a specified price at a
particular time. Every futures contract has the following features:

Buyer

Seller

Price

Expiry

Some of the most popular assets on which futures contracts are available are equity
stocks, indices, commodities and currency.
The difference between the price of the underlying asset in the spot market and the
futures market is called 'Basis'. (As 'spot market' is a market for immediate delivery)
The basis is usually negative, which means that the price of the asset in the futures
market is more than the price in the spot market. This is because of the interest cost,
storage cost, insurance premium etc., That is, if you buy the asset in the spot market,
you will be incurring all these expenses, which are not needed if you buy a futures
contract. This condition of basis being negative is called as 'Contango'.
Sometimes it is more profitable to hold the asset in physical form than in the form of
futures. For eg: if you hold equity shares in your account you will receive dividends,
whereas if you hold equity futures you will not be eligible for any dividend.
When these benefits overshadow the expenses associated with the holding of the
asset, the basis becomes positive (i.e., the price of the asset in the spot market is
more than in the futures market). This condition is called 'Backwardation'.
Backwardation generally happens if the price of the asset is expected to fall.
It is common that, as the futures contract approaches maturity, the futures price and
the spot price tend to close in the gap between them ie., the basis slowly becomes
zero.
Options
Options contracts are instruments that give the holder of the instrument the right to
buy or sell the underlying asset at a predetermined price. An option can be a 'call'
option or a 'put' option.

A call option gives the buyer, the right to buy the asset at a given price. This 'given
price' is called 'strike price'. It should be noted that while the holder of the call option
has a right to demand sale of asset from the seller, the seller has only the obligation
and not the right. For eg: if the buyer wants to buy the asset, the seller has to sell it.
He does not have a right.
Similarly a 'put' option gives the buyer a right to sell the asset at the 'strike price' to
the buyer. Here the buyer has the right to sell and the seller has the obligation to
buy.
So in any options contract, the right to exercise the option is vested with the buyer of
the contract. The seller of the contract has only the obligation and no right. As the
seller of the contract bears the obligation, he is paid a price called as 'premium'.
Therefore the price that is paid for buying an option contract is called as premium.
The buyer of a call option will not exercise his option (to buy) if, on expiry, the price
of the asset in the spot market is less than the strike price of the call. For eg: A bought
a call at a strike price of Rs 500. On expiry the price of the asset is Rs 450. A will not
exercise his call. Because he can buy the same asset from the market at Rs 450,
rather than paying Rs 500 to the seller of the option.
The buyer of a put option will not exercise his option (to sell) if, on expiry, the price
of the asset in the spot market is more than the strike price of the call. For eg: B
bought a put at a strike price of Rs 600. On expiry the price of the asset is Rs 619. A
will not exercise his put option. Because he can sell the same asset in the market at
Rs 619, rather than giving it to the seller of the put option for Rs 600
A:
The main fundamental difference between options and futures lies in the obligations
they put on their buyers and sellers. An option gives the buyer the right, but not the
obligation to buy (or sell) a certain asset at a specific price at any time during the life
of the contract. A futures contract gives the buyer the obligation to purchase a
specific asset, and the seller to sell and deliver that asset at a specific future date,
unless the holder's position is closed prior to expiration.
Aside from commissions, an investor can enter into a futures contract with no upfront
cost whereas buying an options position does require the payment of a premium.
Compared to the absence of upfont costs of futures, the option premium can be seen
as the fee paid for the privilege of not being obligated to buy the underlying in the
event of an adverse shift in prices. The premium is the maximum that a purchaser of
an option can lose.

Another key difference between options and futures is the size of the underlying
position. Generally, the underlying position is much larger for futures contracts, and
the obligation to buy or sell this certain amount at a given price makes futures more
risky for the inexperienced investor.
The final major difference between these two financial instruments is the way the
gains are received by the parties. The gain on a option can be realized in the
following three ways:exercising the option when it is deep in the money, going to the
market and taking the opposite position, or waiting until expiry and collecting the
difference between the asset price and the strike price. In contrast, gains on futures
positions are automatically 'marked to market' daily, meaning the change in the value
of the positions is attributed to the futures accounts of the parties at the end of every
trading day - but a futures contract holder can realize gains also by going to the
market and taking the opposite position.
.
sSOURCES OF FINANCE
Sources of funds
A company might raise new funds from the following sources:
The capital markets:
i) new share issues, for example, by companies acquiring a stock market listing for
the first time
ii) rights issues
Loan stock
Retained earnings
Bank borrowing
Government sources
Business expansion scheme funds
Venture capital
Franchising.
Ordinary (equity) shares
Ordinary shares are issued to the owners of a company. They have a nominal or
'face' value, typically of $1 or 50 cents. The market value of a quoted company's
shares bears no relationship to their nominal value, except that when ordinary

shares are issued for cash, the issue price must be equal to or be more than the
nominal value of the shares.
Deferred ordinary shares
are a form of ordinary shares, which are entitled to a dividend only after a certain
date or if profits rise above a certain amount. Voting rights might also differ from
those attached to other ordinary shares.
Ordinary shareholders put funds into their company:
a) by paying for a new issue of shares
b) through retained profits.
Simply retaining profits, instead of paying them out in the form of dividends, offers an
important, simple low-cost source of finance, although this method may not provide
enough funds, for example, if the firm is seeking to grow.
A new issue of shares might be made in a variety of different circumstances:
a) The company might want to raise more cash. If it issues ordinary shares for cash,
should the shares be issued pro rata to existing shareholders, so that control or
ownership of the company is not affected? If, for example, a company with 200,000
ordinary shares in issue decides to issue 50,000 new shares to raise cash, should it
offer the new shares to existing shareholders, or should it sell them to new
shareholders instead?
i) If a company sells the new shares to existing shareholders in proportion to their
existing shareholding in the company, we have a rights issue.In the example above,
the 50,000 shares would be issued as a one-in-four rights issue, by offering
shareholders one new share for every four shares they currently hold.
ii) If the number of new shares being issued is small compared to the number of
shares already in issue, it might be decided instead to sell them to new
shareholders, since ownership of the company would only be minimally affected.
b) The company might want to issue shares partly to raise cash, but more
importantly to float' its shares on a stick exchange.
c) The company might issue new shares to the shareholders of another company, in
order to take it over.
New shares issues
A company seeking to obtain additional equity funds may be:
a) an unquoted company wishing to obtain a Stock Exchange quotation

b) an unquoted company wishing to issue new shares, but without obtaining a Stock
Exchange quotation
c) a company which is already listed on the Stock Exchange wishing to issue
additional new shares.
The methods by which an unquoted company can obtain a quotation on the stock
market are:
a) an offer for sale
b) a prospectus issue
c) a placing
d) an introduction.
Offers for sale:
An offer for sale is a means of selling the shares of a company to the public.
a) An unquoted company may issue shares, and then sell them on the Stock
Exchange, to raise cash for the company. All the shares in the company, not just the
new ones, would then become marketable.
b) Shareholders in an unquoted company may sell some of their existing shares to
the general public. When this occurs, the company is not raising any new funds, but
just providing a wider market for its existing shares (all of which would become
marketable), and giving existing shareholders the chance to cash in some or all of
their investment in their company.
When companies 'go public' for the first time, a 'large' issue will probably take the
form of an offer for sale. A smaller issue is more likely to be a placing, since the
amount to be raised can be obtained more cheaply if the issuing house or other
sponsoring firm approaches selected institutional investors privately.
Rights issues
A rights issue provides a way of raising new share capital by means of an offer to
existing shareholders, inviting them to subscribe cash for new shares in proportion to
their existing holdings.
For example, a rights issue on a one-for-four basis at 280c per share would mean
that a company is inviting its existing shareholders to subscribe for one new share
for every four shares they hold, at a price of 280c per new share.
A company making a rights issue must set a price which is low enough to secure the
acceptance of shareholders, who are being asked to provide extra funds, but not too
low, so as to avoid excessive dilution of the earnings per share.

Preference shares
Preference shares have a fixed percentage dividend before any dividend is paid to
the ordinary shareholders. As with ordinary shares a preference dividend can only be
paid if sufficient distributable profits are available, although with 'cumulative'
preference shares the right to an unpaid dividend is carried forward to later years.
The arrears of dividend on cumulative preference shares must be paid before any
dividend is paid to the ordinary shareholders.
From the company's point of view, preference shares are advantageous in that:
Dividends do not have to be paid in a year in which profits are poor, while this is not
the case with interest payments on long term debt (loans or debentures).
Since they do not carry voting rights, preference shares avoid diluting the control of
existing shareholders while an issue of equity shares would not.
Unless they are redeemable, issuing preference shares will lower the company's
gearing. Redeemable preference shares are normally treated as debt when gearing
is calculated.
The issue of preference shares does not restrict the company's borrowing power,
at least in the sense that preference share capital is not secured against assets in
the business.
The non-payment of dividend does not give the preference shareholders the right
to appoint a receiver, a right which is normally given to debenture holders.
However, dividend payments on preference shares are not tax deductible in the way
that interest payments on debt are. Furthermore, for preference shares to be
attractive to investors, the level of payment needs to be higher than for interest on
debt to compensate for the additional risks.
For the investor, preference shares are less attractive than loan stock because:
they cannot be secured on the company's assets
the dividend yield traditionally offered on preference dividends has been much too
low to provide an attractive investment compared with the interest yields on loan
stock in view of the additional risk involved.
Loan stock
Loan stock is long-term debt capital raised by a company for which interest is paid,
usually half yearly and at a fixed rate. Holders of loan stock are therefore long-term
creditors of the company.

Loan stock has a nominal value, which is the debt owed by the company, and
interest is paid at a stated "coupon yield" on this amount. For example, if a company
issues 10% loan stocky the coupon yield will be 10% of the nominal value of the
stock, so that $100 of stock will receive $10 interest each year. The rate quoted is
the gross rate, before tax.
Debentures are a form of loan stock, legally defined as the written acknowledgement
of a debt incurred by a company, normally containing provisions about the payment
of interest and the eventual repayment of capital.
Debentures with a floating rate of interest
These are debentures for which the coupon rate of interest can be changed by the
issuer, in accordance with changes in market rates of interest. They may be
attractive to both lenders and borrowers when interest rates are volatile.
Security
Loan stock and debentures will often be secured. Security may take the form of
either a fixed charge or a floating charge.
a) Fixed charge; Security would be related to a specific asset or group of assets,
typically land and buildings. The company would be unable to dispose of the asset
without providing a substitute asset for security, or without the lender's consent.
b) Floating charge; With a floating charge on certain assets of the company (for
example, stocks and debtors), the lender's security in the event of a default payment
is whatever assets of the appropriate class the company then owns (provided that
another lender does not have a prior charge on the assets). The company would be
able, however, to dispose of its assets as it chose until a default took place. In the
event of a default, the lender would
probably appoint a receiver to run the company rather than lay claim to a particular
asset.
The redemption of loan stock
Loan stock and debentures are usually redeemable. They are issued for a term of
ten years or more, and perhaps 25 to 30 years. At the end of this period, they will
"mature" and become redeemable (at par or possibly at a value above par).
Most redeemable stocks have an earliest and latest redemption date. For example,
18% Debenture Stock 2007/09 is redeemable, at any time between the earliest
specified date (in 2007) and the latest date (in 2009). The issuing company can
choose the date. The decision by a company when to redeem a debt will depend on:

a) how much cash is available to the company to repay the debt

b) the nominal rate of interest on the debt. If the debentures pay 18% nominal
interest and the current rate of interest is lower, say 10%, the company may try to
raise a new loan at 10% to redeem the debt which costs 18%. On the other hand, if
current interest rates are 20%, the company is unlikely to redeem the debt until the
latest date possible, because the debentures would be a cheap source of funds.
There is no guarantee that a company will be able to raise a new loan to pay off a
maturing debt, and one item to look for in a company's balance sheet is the
redemption date of current loans, to establish how much new finance is likely to be
needed by the company, and when.
Mortgages are a specific type of secured loan. Companies place the title deeds of
freehold or long leasehold property as security with an insurance company or
mortgage broker and receive cash on loan, usually repayable over a specified
period. Most organisations owning property which is unencumbered by any charge
should be able to obtain a mortgage up to two thirds of the value of the property.
As far as companies are concerned, debt capital is a potentially attractive source of
finance because interest charges reduce the profits chargeable to corporation tax.
Retained earnings
For any company, the amount of earnings retained within the business has a direct
impact on the amount of dividends. Profit re-invested as retained earnings is profit
that could have been paid as a dividend. The major reasons for using retained
earnings to finance new investments, rather than to pay higher dividends and then
raise new equity for the new investments, are as follows:
a) The management of many companies believes that retained earnings are funds
which do not cost anything, although this is not true. However, it is true that the use
of retained earnings as a source of funds does not lead to a payment of cash.
b) The dividend policy of the company is in practice determined by the directors.
From their standpoint, retained earnings are an attractive source of finance
because investment projects can be undertaken without involving either the
shareholders or any outsiders.
c) The use of retained earnings as opposed to new shares or debentures avoids
issue costs.
d) The use of retained earnings avoids the possibility of a change in control resulting
from an issue of new shares.
Another factor that may be of importance is the financial and taxation position of the
company's shareholders. If, for example, because of taxation considerations, they

would rather make a capital profit (which will only be taxed when shares are sold)
than receive current income, then finance through retained earnings would be
preferred to other methods.
A company must restrict its self-financing through retained profits because
shareholders should be paid a reasonable dividend, in line with realistic
expectations, even if the directors would rather keep the funds for re-investing. At the
same time, a company that is looking for extra funds will not be expected by
investors (such as banks) to pay generous dividends, nor over-generous salaries to
owner-directors.
Bank lending
Borrowings from banks are an important source of finance to companies. Bank
lending is still mainly short term, although medium-term lending is quite common
these days.
Short term lending may be in the form of:
a) an overdraft, which a company should keep within a limit set by the bank. Interest
is charged (at a variable rate) on the amount by which the company is overdrawn
from day to day;
b) a short-term loan, for up to three years.
Medium-term loans are loans for a period of from three to ten years. The rate of
interest charged on medium-term bank lending to large companies will be a set
margin, with the size of the margin depending on the credit standing and riskiness of
the borrower. A loan may have a fixed rate of interest or a variable interest rate, so
that the rate of interest charged will be adjusted every three, six, nine or twelve
months in line with recent movements in the Base Lending Rate.
Lending to smaller companies will be at a margin above the bank's base rate and at
either a variable or fixed rate of interest. Lending on overdraft is always at a variable
rate. A loan at a variable rate of interest is sometimes referred to as a floating rate
loan. Longer-term bank loans will sometimes be available, usually for the purchase
of property, where the loan takes the form of a mortgage. When a banker is asked by
a business customer for a loan or overdraft facility, he will consider several factors,
known commonly by the mnemonic PARTS.
- Purpose
- Amount
- Repayment
- Term
- Security

P The purpose of the loan A loan request will be refused if the purpose of the loan is
not acceptable to the bank.
A The amount of the loan. The customer must state exactly how much he wants to
borrow. The banker must verify, as far as he is able to do so, that the amount
required to make the proposed investment has been estimated correctly.
R How will the loan be repaid? Will the customer be able to obtain sufficient income
to make the necessary repayments?
T What would be the duration of the loan? Traditionally, banks have offered shortterm loans and overdrafts, although medium-term loans are now quite common.
S Does the loan require security? If so, is the proposed security adequate?
Leasing
A lease is an agreement between two parties, the "lessor" and the "lessee". The
lessor owns a capital asset, but allows the lessee to use it. The lessee makes
payments under the terms of the lease to the lessor, for a specified period of time.
Leasing is, therefore, a form of rental. Leased assets have usually been plant and
machinery, cars and commercial vehicles, but might also be computers and office
equipment. There are two basic forms of lease: "operating leases" and "finance
leases".
Operating leases
Operating leases are rental agreements between the lessor and the lessee whereby:
a) the lessor supplies the equipment to the lessee
b) the lessor is responsible for servicing and maintaining the leased equipment
c) the period of the lease is fairly short, less than the economic life of the asset, so
that at the end of the lease agreement, the lessor can either
i) lease the equipment to someone else, and obtain a good rent for it, or
ii) sell the equipment secondhand.
Finance leases
Finance leases are lease agreements between the user of the leased asset (the
lessee) and a provider of finance (the lessor) for most, or all, of the asset's expected
useful life.

Suppose that a company decides to obtain a company car and finance the
acquisition by means of a finance lease. A car dealer will supply the car. A finance
house will agree to act as lessor in a finance leasing arrangement, and so will
purchase the car from the dealer and lease it to the company. The company will take
possession of the car from the car dealer, and make regular payments (monthly,
quarterly, six monthly or annually) to the finance house under the terms of the lease.
Other important characteristics of a finance lease:
a) The lessee is responsible for the upkeep, servicing and maintenance of the asset.
The lessor is not involved in this at all.
b) The lease has a primary period, which covers all or most of the economic life of
the asset. At the end of the lease, the lessor would not be able to lease the asset to
someone else, as the asset would be worn out. The lessor must, therefore, ensure
that the lease payments during the primary period pay for the full cost of the asset as
well as providing the lessor with a suitable return on his investment.
c) It is usual at the end of the primary lease period to allow the lessee to continue to
lease the asset for an indefinite secondary period, in return for a very low nominal
rent. Alternatively, the lessee might be allowed to sell the asset on the lessor's behalf
(since the lessor is the owner) and to keep most of the sale proceeds, paying only a
small percentage (perhaps 10%) to the lessor.
Why might leasing be popular
The attractions of leases to the supplier of the equipment, the lessee and the lessor
are as follows:
The supplier of the equipment is paid in full at the beginning. The equipment is sold
to the lessor, and apart from obligations under guarantees or warranties, the supplier
has no further financial concern about the asset.
The lessor invests finance by purchasing assets from suppliers and makes a return
out of the lease payments from the lessee. Provided that a lessor can find lessees
willing to pay the amounts he wants to make his return, the lessor can make good
profits. He will also get capital allowances on his purchase of the equipment.
Leasing might be attractive to the lessee:
i) if the lessee does not have enough cash to pay for the asset, and would have
difficulty obtaining a bank loan to buy it, and so has to rent it in one way or another if
he is to have the use of it at all; or
ii) if finance leasing is cheaper than a bank loan. The cost of payments under a loan
might exceed the cost of a lease.

Operating leases have further advantages:

The leased equipment does not need to be shown in the lessee's
published balance sheet, and so the lessee's balance sheet shows no increase in its
gearing ratio.
The equipment is leased for a shorter period than its expected useful life. In the
case of high-technology equipment, if the equipment becomes out-of-date before the
end of its expected life, the lessee does not have to keep on using it, and it is the
lessor who must bear the risk of having to sell obsolete equipment secondhand.
The lessee will be able to deduct the lease payments in computing his taxable
profits.
Hire purchase
Hire purchase is a form of instalment credit. Hire purchase is similar to leasing, with
the exception that ownership of the goods passes to the hire purchase customer on
payment of the final credit instalment, whereas a lessee never becomes the owner of
the goods.
Hire purchase agreements usually involve a finance house.
i) The supplier sells the goods to the finance house.
ii) The supplier delivers the goods to the customer who will eventually purchase
them.
iii) The hire purchase arrangement exists between the finance house and the
customer.
The finance house will always insist that the hirer should pay a deposit towards the
purchase price. The size of the deposit will depend on the finance company's policy
and its assessment of the hirer. This is in contrast to a finance lease, where the
lessee might not be required to make any large initial payment.
An industrial or commercial business can use hire purchase as a source of finance.
With industrial hire purchase, a business customer obtains hire purchase finance
from a finance house in order to purchase the fixed asset. Goods bought by
businesses on hire purchase include company vehicles, plant and machinery, office
equipment and farming machinery.
Government assistance
The government provides finance to companies in cash grants and other forms of
direct assistance, as part of its policy of helping to develop the national economy,
especially in high technology industries and in areas of high unemployment. For

example, the Indigenous Business Development Corporation of Zimbabwe (IBDC)

was set up by the government to assist small indigenous businesses in that country.
Venture capital
Venture capital is money put into an enterprise which may all be lost if the enterprise
fails. A businessman starting up a new business will invest venture capital of his own,
but he will probably need extra funding from a source other than his own pocket.
However, the term 'venture capital' is more specifically associated with putting
money, usually in return for an equity stake, into a new business, a management
buy-out or a major expansion scheme.
The institution that puts in the money recognises the gamble inherent in the funding.
There is a serious risk of losing the entire investment, and it might take a long time
before any profits and returns materialise. But there is also the prospect of very high
profits and a substantial return on the investment. A venture capitalist will require a
high expected rate of return on investments, to compensate for the high risk.
A venture capital organisation will not want to retain its investment in a business
indefinitely, and when it considers putting money into a business venture, it will also
consider its "exit", that is, how it will be able to pull out of the business eventually
(after five to seven years, say) and realise its profits. Examples of venture capital
organisations are: Merchant Bank of Central Africa Ltd and Anglo American
Corporation Services Ltd.
When a company's directors look for help from a venture capital institution, they must
recognise that:
the institution will want an equity stake in the company
it will need convincing that the company can be successful
it may want to have a representative appointed to the company's board, to look
after its interests.
The directors of the company must then contact venture capital organisations, to try
and find one or more which would be willing to offer finance. A venture capital
organisation will only give funds to a company that it believes can succeed, and
before it will make any definite offer, it will want from the company management:
a) a business plan
b) details of how much finance is needed and how it will be used
c) the most recent trading figures of the company, a balance sheet, a cash flow
forecast and a profit forecast

d) details of the management team, with evidence of a wide range of management

skills
e) details of major shareholders
f) details of the company's current banking arrangements and any other sources of
finance
g) any sales literature or publicity material that the company has issued.
A high percentage of requests for venture capital are rejected on an initial screening,
and only a small percentage of all requests survive both this screening and further
investigation and result in actual investments.
Franchising
Franchising is a method of expanding business on less capital than would otherwise
be needed. For suitable businesses, it is an alternative to raising extra capital for
growth. Franchisors include Budget Rent-a-Car, Wimpy, Nando's Chicken and
Chicken Inn.
Under a franchising arrangement, a franchisee pays a franchisor for the right to
operate a local business, under the franchisor's trade name. The franchisor must
bear certain costs (possibly for architect's work, establishment costs, legal costs,
marketing costs and the cost of other support services) and will charge the
franchisee an initial franchise fee to cover set-up costs, relying on the subsequent
regular payments by the franchisee for an operating profit. These regular payments
will usually be a percentage of the franchisee's turnover.
Although the franchisor will probably pay a large part of the initial investment cost of
a franchisee's outlet, the franchisee will be expected to contribute a share of the
investment himself. The franchisor may well help the franchisee to obtain loan capital
to provide his-share of the investment cost.
The advantages of franchises to the franchisor are as follows:
The capital outlay needed to expand the business is reduced substantially.
The image of the business is improved because the franchisees will be motivated
to achieve good results and will have the authority to take whatever action they think
fit to improve the results.
The advantage of a franchise to a franchisee is that he obtains ownership of a
business for an agreed number of years (including stock and premises, although
premises might be leased from the franchisor) together with the backing of a large
organisation's marketing effort and experience. The franchisee is able to avoid some

of the mistakes of many small businesses, because the franchisor has already
learned from its own past mistakes and developed a scheme that works

HOW IS VALUATION OF BONDS AND STOCK DONE?

Valuation of a bond requires an estimate of expected cash flows and a required rate
of return specified by the investor for whom the bond is being valued. If it is being
valued for the market, the markets expected rate of return is to be determined or
estimted.
A simplified bond valuation model or exercise is based on the following features of
the bond.
Fixed coupon rate for the term of the bond.
Coupon payments are made annually and the next coupon payment is receivable in
year from now.
The bond will be redeemed at par on maturity.
The bond is noncallable. It will not be redeemed before the maturity.
The formula for discounting the associated cash flows is
Sum of all C/(1+r)t (t = 1 to n)+ P/(1+r)n
Where C = annual coupon payment
r = required rate of return
n = number of years to maturity
P = Par value
The formula can be modified for various complex features of bond, like half yearly
payments, redemption at premium on maturity etc.
sset can be real or financial, like shares and bonds are called financial assets, asset
like plant and machinery are called real assets. Real assets can be valued easily but
there is no easy way to predict the prices of share and bonds.
The unpredictable nature of the security prices is, in fact, a logical and necessary
consequence efficient capital markets.

Concepts of ValueThere are many concepts of value that are used for different
purposes,

Book value-Assets are recorded at historical cost, and they are depreciated
over years. Book value may include intangible assets at acquisition cost
minus amortized value.

Replacement value-Ignore the benefits of intangibles and utility of existing

assets.

Liquidation value-If company sold its assets it would be liquidation value.

Going concern value

Market value-Price which the asset or security is being sold or brought in the
market.

Features of a BondA bond is a long-term debt instrument or securities issued by the

government do not have any risk default.
The main features of a bond are
Face value.

Interest rate.

Maturity.

Redemption value.

Market value.

Bonds maybe classified into three categories.

(1).Bonds with maturity.
(2).Pure discount bonds.
(3).Perpetual bonds.
(1).Bonds with Maturity
Issue bonds that specify the interest rate and the maturity period.
Value of bond with maturity
B0=INT X [(1/Kd)-(1/Kd(1+Kd)n] Bn/(1+Kd)n
Bond Value = Present value of interest + Present value of maturity value

Yield to Maturity
Kd= INT/ B0

(2).Pure Discount Bonds

Bonds do not carry an explicit rate of interest, it provides for the payment of a lump
sum amount at a future date.
B0 = M / (1+Kd)n

(3).Perpetual Bonds
Also called consols, has an indefinite life and therefore, it has no maturity value.

WHAT IS BALANCE SHEET? WHAT ARE ITS COMPONENTS?

Balance Sheet Categories
The accounting balance sheet is one of the major financial statements used by
accountants and business owners. (The other major financial statements are
the income statement, statement of cash flows, andstatement of
stockholders' equity) The balance sheet is also referred to as the statement of
financial position.
The balance sheet presents a company's financial position at the end of a specified
date. Some describe the balance sheet as a "snapshot" of the company's financial
position at a point (a moment or an instant) in time. For example, the amounts
reported on a balance sheet dated December 31, 2015 reflect that instant when all
the transactions through December 31 have been recorded.
Because the balance sheet informs the reader of a company's financial position as of
one moment in time, it allows someonelike a creditorto see what a
company owns as well as what it owes to other parties as of the date indicated in
the heading. This is valuable information to the banker who wants to determine
whether or not a company qualifies for additional credit or loans. Others who would
be interested in the balance sheet include current investors, potential investors,
company management, suppliers, some customers, competitors, government
agencies, and labor unions.

The balance sheet provides information on what the company owns (its assets), what
it owes (its liabilities) and the value of the business to its stockholders (the
shareholders' equity) as of a specific date.

Total Assets = Total Liabilities + Shareholders' Equity

Assets are economic resources that are expected to produce economic
benefits for their owner.

Liabilities are obligations the company has to outside parties. Liabilities

represent others' rights to the company's money or services. Examples
include bank loans, debts to suppliers and debts to employees.

Shareholders' equity is the value of a business to its owners after all of its
obligations have been met. This net worth belongs to the owners.
Shareholders' equity generally reflects the amount of capital the owners have
invested, plus any profits generated that were subsequently reinvested in the
company.

Assets

Assets are the resources that a business uses to operate its business such as
cash, inventories, land and buildings, and equipment. Essentially, assets are any
items of value owned or controlled by the business that contributes towards
generating revenue. Assets are categorised as either current or non-current
assets.

Current assets:
are items of value that are expected to be consumed or converted into cash within
the next 12 months. Examples include cash, inventory that is turning over
regularly and accounts receivable.
Non-current assets:
are not expected to be consumed or converted into cash within the next 12
months. Examples include assets that the business would generally keep for
more than one year such as plant and equipment, cars and buildings.
Liabilities

Liabilities are the financial obligations or debts of the business and include claims
that creditors have on the businesss resources such as accounts payable, bank
overdrafts, provision for employees annual leave and long service leave, tax
liabilities, and loans payable. Essentially, liabilities are amounts owed by the

business to external parties. Liabilities are categorised as either current or noncurrent liabilities.
Current liabilities:are expected to be paid within the next 12 months and include
creditors, (accounts payable), inventory purchases, overdraft, short-term loans
and credit card debts.
Non-current liabilities:are not expected to be settled within the next 12 months
and include mortgages on buildings and equipment, and long term loans.
Owners equity
Owners equity is the residual interest in the assets of a business after liabilities
are deducted. It is the net worth of a business and equals the difference between
assets and liabilities. Equity represents the amount belonging to the owner once
all financial obligations have been met.
Equity includes the initial and ongoing capital investments made by the owners,
retained earnings (or accumulated losses), and reserves. Capital is any cash or
assets the owner has contributed to the business. Retained earnings are any
profits that are reinvested in the business. Reserves are profits set aside for
particular purposes such as asset replacement, or major building maintenance.
Owners equity is also referred to as proprietorship, members funds, capital, or
shareholders equity.
WHAT IS CAPITAL OR SHARE MARKET? 2 MAJOR STOCK MARKETS IN INDIA?
Capital markets are a broad category of markets facilitating the buying and selling
of financial instruments. In particular, there are two categories of financial
instruments that capital in which markets are involved. These are equity securities,
which are often known as stocks, and debt securities, which are often known as
bonds. Capital markets involve the issuing of stocks and bonds for medium-term
and long-term durations, generally terms of one year or more.
Capital markets are overseen by the Securities and Exchange Commission in the
United States or other financial regulators elsewhere. Though capital markets are
generally concentrated in financial centers around the world, most of the trades

occurring within capital markets take place through computerized electronic trading
systems. Some of these are accessible by the public and others are more tightly
regulated.
Other than the distinction between equity and debt, capital markets are also
generally divided into two categories of markets, the first of which being primary
markets. In primary markets, stocks and bonds are issued directly from companies to
investors, businesses and other institutions, often through underwriting. Primary
markets allow companies to raise capital without or before holding an initial public
offering so as to make as much direct profit as possible. After this point in a
companys development, it may choose to hold an initial public offering so as to
generate more liquid capital. In such an event, the company will generally sell
its shares to a few investment banks or other firms.
At this point the shares move into the secondary market, which is where investment
banks, other firms, private investors and a variety of other parties resell their equity
and debt securities to investors. This takes place on the stock market or the bond
market, which take place on exchanges around the world, like the New York Stock
Exchange orNASDAQ; though it is often done through computerized trading systems
as well. When securities are resold on the secondary market, the original sellers do
not make money from the sale. Yet, these original sellers will likely continue to hold
some amount of stake in the company, often in the form of equity, so the companys
performance on the secondary market will continue to be important to them.
Capital markets have numerous participants including individual investors,
institutional investors such as pension funds and mutual funds, municipalities and
governments, companies and organizations, banks and financial institutions. While
many different kinds of groups, including governments, may issue debt through
bonds (these are called government bonds), governments may not issue equity
through stocks. Suppliers of capital generally want the maximum possible return at
the lowest possible risk, while users of capital want to raise capital at the lowest
possible cost.
Capital market deals with medium term and long term funds. It refers to all facilities
and the institutional arrangements for borrowing and lending term funds (medium
term and long term). The demand for long term funds comes from private business
corporations, public corporations and the government. The supply of funds comes

largely from individual and institutional investors, banks and special industrial
financial institutions and Government.
he National Stock Exchange (NSE) is a stock exchange in India.
Set up in November 1992, NSE was India's first fully automated electronic
exchange with a nationwide presence. The exchange, unlike Bombay
Stock Exchange (BSE), was the result of the recommendations of a highpowered group set up to study the establishment of new stock exchanges,
which would operate on a pan-India basis. Its shareholders consist of 20
financial institutions including state-owned banks and insurance
companies.
Headquartered in Mumbai, NSE offers capital raising abilities for
corporations and a trading platform for equities, debt, and derivatives -including currencies and mutual fund units. It allows for new listings,
initial public offers (IPOs), debt issuances and Indian Depository Receipts
(IDRs) by overseas companies raising capital in India.
S&P CNX Nifty is the benchmark index introduced by NSE. Some of its
other indices are CNX Nifty Junior, India VX, S&P CNX Defty, S&P CNX 500,
etc.
The Bombay Stock Exchange (BSE) is Asia's oldest stock exchange. Based
in Mumbai, India, BSE was established in 1875 as the Native Share &
Stock Brokers' Association. Prior to that brokers and traders would gather
under banyan trees to conduct transactions.
BSE functions as the first-level regulator in the securities market,
providing monitoring and surveillance mechanisms that are able to detect
irregularities and manipulations in stock prices. The Exchange also
provides counter-party risk management in all transactions that take place
on its trading platform through its clearing and settlement services.
Shares of more than 5,000 companies are traded on BSE. In addition to
equity and debt, the Exchange allows for trading of mutual fund units and
derivatives.
Bombay Stock Exchange was recognized as an exchange under the
Securities Contracts (Regulation) Act in 1957. Its benchmark index, the
Sensitive Index (Sensex) was launched in 1986. In 1995, the BSE launched
its fully automated trading platform called BSE On-Line Trading system
(BOLT) which fully replaced the open outcry system.