Professional Documents
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21
1 �
Financial Needs of a
Classification of Financial Sources
Business
External Sources
K
\,
needs: Sourcesof Debtor
Finance Borrowed
Such requirements refer to
Mainly
-
Capital
__________
company need to be paid later
iv) can be redeemed after a
,...._ __.
specified period.
Ch 6 :- Types of Financing (Chart 6 .3)
Long Term Sources of Finance
____________
• Denominated in Japanese Yen
predetermined price market
bond or coupon bearing bond • normal floating rate note g) Yankee Bond • Issued in Tokyo
known as call price .__ __.
with a nominal maturity • denominated in dollars • Issuer Non- Japanese Company • can be used to fund
b) Puttable bonds c) Convertible Floating Rate Notes • holder can sell obligation • issued by non- US banks • Regulations : Japanese UK operation or to
It give investor a put • option for holder to convert it into back to trustee at: At par, Plus & non- US corporations • Purpose : Access of capital fund a company's
option back to longer term debt security with a accrued interest available in Japanese market local opportunities
• issued in USA
company before specified coupon • gives investor an option to • can also be used to hedge
_______
• to be registered in SEC
maturity foreign exchange risk
• protects an investor against falling • Time taken can be up to
___.
interest rate 14 weeks Interest rate is
• Capital gain is not applicable to FRN dollar LIBOR
Ch 6 :- Types of Financing (Chart 6.5)
Venture Capital Financing Lease Financing
Q)�
lh'J.:...... ·• Meaning
� ..
h'Jr:.r..... ,i;-r
a) It refers to financing a) It is basically an equity a) Securitisation is a process in a) It is a general contract
a) Masala Bond of new high risky finance in new companies which illiquid assets are pooled between owner & user of
• It is an Indian name used for Rupee venture promoted by b) It can be viewed as a long into marketable securities that can asset over a specified
denominated bond that Indian corporate qualified entrepreneurs term investment in growth be sold to investors period of time.
borrowers can sell to investors in who lack experience & oriented small/medium firms b) process leads to creation of b) asset is purchased
overseas markets funds to give shape to
financial instruments that initially by lessor (leasing
their ideas
• issued outside India but denominated represent ownership interest in, or company) & thereafter
in Indian Rupees are secured by a segregated income leased to user (lessee
b) In venture capital
producing asset or pool of assets company) which pays a
financing venture a) Equity financing
specified rent at periodical
b) Municipal Bonds capitalist make b) Conditional loan c) These assets are generally intervals
investment to purchase secured by personal or real
• used to finance urban infrastructure c) Income note
eq. or debt securities property such as automobiles, real
are increasingly evident in India d) Participating debenture c) leasing is an alternative
from in-experienced estate, or equipment loans but in to purchase of an asset out
entrepreneurs who some cases are unsecured
c) Government or Treasury Bonds of own or borrowed funds
undertake highly risky
• these bonds issued by Government of ventures with a
India, Reserve Bank of India, any state potential of success
Government or any other Government
department.
Ch 6 :- Types of Financing (Chart 6 .6)
Short Term Source of Finance
a) Trade Credit d) Commercial Paper f) Bank Advances g) Financing of Export Trade by h) Inter Corporate Deposits
• It represents credit granted by suppliers • It is an unsecured money Facilities provided by banks :- Banks companies can borrow funds
of goods, etc., as an incident of sale market instrument issued in i) Short Term Loans iv) Cash Credits i) Pre-shipment finance for a short period say 6 months
• duration of such credit is 15 to 90 days form of a promissory note. It is a single advance & given It is an arrangement under Types of Packing Credit
from other companies which
which a customer is allowed an • Clean packing credit have surplus liquidity
• it enhances automatically with increase • issued in denominations of against securities like shares,
in volume of business "5 lakhs or multiples thereof government securities, life advance up to certain limit • Packing credit against
& interest rate is generally insurance policies & FD receipts, etc against credit granted by bank hypothecation of goods
i) Certificate of Deposit (CD)
linked to yield on one-year
b) Accrued Expenses & Deferred Income
government bond -----------
ii) Overdraft limits are sanctioned against • Packing credit against pledge It is a document of title similar
• It represent liabilities which a co. has to
.__________ _,
Under this facility, customers are security of tradable goods by of goods to a time deposit receipt issued
pay for services which it has already allowed to withdraw in excess of
________
way
...._
of pledge or hypothecation
___, • E.C.G.C. guarantee
by a bank except that there is
no prescribed interest rate on
received like wages, taxes, interest &
dividends
e) Treasury Bills
• class of CG Securities.
credit balance standing in their
Current Account ---------- • Forward exchange contract
ii) Post-shipment Finance
such funds
v) Advances against goods
• these receipts increase a company's • meet short term borrowing iii) Clean Overdrafts provide a reliable source of • Purchase/discounting of
liquidity
._____________
requirements with maturities clean advance is granted for a short repayment. documentary export bills ii Public Deposits
____, ranging between 14 to 364 period & must not be continued for safe & liquid • E.C.G.C. Guarantee A company can accept public
________
________
days long. deposits subject to stipulations
c) Advances from Customers ...._ ___,
, Advance against export bills
.__ _,
a) Manufacturers & contractors engaged in Request for clean advances are vi) Bills Purchased/Discounted sent for collection of RBI from time to time
producing or constructing costly goods entertained only from parties maximum up to 35% of its paid
f) Certificates of Deposit (CD) These advances are allowed • Advance against duty draw
demand advance money from their which are financially sound & up capital & reserves, from
• It is basically a savings against security of bills which backs, cash subsidy, etc
customers at time of accepting their reputed for their integrity public & shareholders
certificate with a fixed may be clean or documentary
orders for executing their contracts or maturity date of not less than accepted for a period of 6
supplying goods 15 days up to a maximum of months to 3 years
one year
b I It is a cost free source of finance
Ch 6 :-Types of Financing (Chart 6.7)
Lease
Two Total Cash Flow = EMI (-) Tax savings on Interest
Prospective
Lessees Prospective
Financing
WDV Depreciation
Decision to procure the asset has
already been made.
i)Depreciation under WDV = Depreciation for the
The only decision pending is the previous year × ( 1 – Depreciation rate)
mode of procurement i.e. ii)WDV after n years =
Lease or Hire Purchase. Cost of the Asset × ( 1 – Depreciation rate)n
(Financing Decision)
Step 1 – Identify Discount Rate, Interest Step 1 – Find out the Lease amount
Rate & Tax Rate
Step 2 – Less Tax benefit
Step 2 – Identify value of Assets
Step 3 – Identify amount of bank installment Step 3 – Find out Present value by using
inclusive of Bank Interest Discounting factor (NPV)
B Operating Cycle
Raw Material Storage period + WIP holding period + Finished goods storage period +
Debtors collection period Creditors payment Period
C
Working Capital Estimation Approaches Rates of valuation of various items
Component Total Approach Cash Cost Approach
Raw Materials Purchase price net of Discount Purchase price net of Discount
Raw Materials + 50% of (Direct Labour +
Work – in Raw Materials + 50% of (Direct Labour +
Progress Direct Expenses + Production OH
Direct Expenses + All production OH) excluding depreciation)
Finished Goods Cost of Production Cost of Production Less Depreciation
Sundry Debtors Selling Price Selling Price Less Profit Margin Less
Depreciation
Sundry Creditors Purchase price net of Discount Purchase price net of Discount
Note – For WIP valuation, it is assumed that materials are fully issued and conversion (i.e. Labour and
POH) is 50% complete.
D BAUMOl Model
E
Debtors Decision Making
F
Working Capital Funding Approach