Financial Management

and
Accounting
 Financial Management
and Accounting
Test 1: 17.09.2022
Test 2: 27.09.2022, 20:00-21:30

Computer class ROOM 316 (work with Excel):

27.09.2022
30.09.2022
01.10.2022

Exam: 01.10.2022

2
 Office hours

Thursdays, 16:00-17:30
room 527 (5.floor) or MS Teams

Appointment email:
inna.romanova@lu.lv

3
 Course Outline

1. The Context of Financial Management and

Accounting
2. Fundamental Concepts in Financial Management
and Accounting
3. The Investment Decision
4. Using Cost Information to Make Special Decisions
5. Raising Capital. Sources of Financial Capital
6. Financial Markets and Institutions
7. Trading and Market Integrity. Issuer Disclosure
Regulation
8. Financial Planning
4
 Raising Capital
Sources of Financial Capital

5
 Financing decisions

Why does a company need additional capital?

To expand, to buy more to reduce costs

In case of some problems

6
 Financing decisions

Sources of Financial Capital:

1. Debt Capital
• Bank loans
• Corporate bonds
2. Equity Capital

7
Raising Debt Capital

8
 Bank Loan

The process of obtaining a bank loan:

• loan application, submission of documents
• interview (bank manager  company)
• fee/commission (?)
• loan application assessment
• loan offer
• agreement
• money…

9
 Bank Loan

Lenders' criteria:
 the creditworthiness (credit standing) of the company;
 credit history;
 own contribution to the project;
 current business circumstances;
 business plan and long-term financial projections etc.

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 Bank Loan
Discussion (private loan):
-collateral
-why?
-when will you repay
-source of income
-if you can pay back
-have you taken money from somebody else
-guarantee
-ID card
-written confirmation with signatures
-how much will I get back
-ask the others 11

-social network
 Bank Loan
Discussion (private loan)  bank loan:
-collateral  collateral
-guarantee  collateral
-why?  business plan
-when will you repay  maturity
-source of income  financial statements (cash flow)
-if you can pay back  creditworthiness
-have you taken money from somebody else  credit history
-ID card  legal documents
-written confirmation with signatures  loan agreement
-how much will I get back  interest rate
-ask the others  databases, reputation 12

-social networks
 Bank Loan

Lenders' criteria:
 the creditworthiness (credit standing) of the company;
 credit history;
 own contribution to the project;
 current business circumstances;
 business plan and long-term financial projections etc.

13
 Bank Loan

Creditworthiness (credit standing) represents the

borrower’s ability and willingness to meet his
obligations in due time in compliance with the
contract provisions

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 Bank Loan

Each bank determines its own set of financial indicators and

other factors to assess the creditworthiness (credit standing)
of the borrower:

 financial statement analysis (incl. financial ratios)

 qualitative factors

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 Bank Loan

Major financial ratios:

• Capital structure ratios (min.equity capital ratio 0.2)
• Profitability ratios
• Liquidity ratios
• Turnover ratios

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 Bank Loan

 Cash flow forecast is very important!

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 Bank Loan

Which qualitative factors can influence the assessment

of the financial standing of the borrower?

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 Bank Loan

Qualitative factors:
• competitive position (sales of the company/sales in the
industry)
• management of the company
• prospective industry development
• credit history
• reputation
etc.

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 Bank Loan

Lenders' criteria:
 the creditworthiness (credit standing) of the company;
 credit history;
 own contribution to the project;
 current business circumstances;
 business plan and long-term financial projections etc.

Equipment 100 000 EUR

I company. Loan: 80 000 EUR (own contribution 20%)
II company. Loan: 40 000 EUR (own contribution 60%)

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 Bank Loan

Types of loans (1):

• loan (short-term, medium-term, long-term)
• line of credit (credit line)
• overdraft
• factoring
• leasing

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 Bank Loan
Types of loans (2):
• fixed rate loans (7%; 5.2% etc.)
• variable rate loans (fixed component+ floating part)
4% + 3 months EURIBOR  4 times per year the rate will change
4% + 6 months LIBOR  2 times per year the rate will change

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 Bank Loan
Types of loans (2):
• fixed rate loans (7%; 5.2% etc.)
• variable rate loans (fixed component+ floating part)
3.2%+3 months EURIBOR
%: fixed costs of the bank +bank profit margin+ borrower credit risk
(creditworthiness)+price of money (e.g., EURIBOR)

The difference between the fixed rate and the variable rate  risk of EURIBOR
increase + term of the loan

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6,000
Bank Loan
EURIBOR rates (3 months), 2001-09.2022
5,000

4,000

3,000

2,000

1,000

0,000

Source: www.bank.lv 24

-1,000
7,000
Bank Loan
LIBOR rates (6 months, USD), 2001-02.2022
6,000

5,000

4,000

3,000

2,000

1,000

Source:
0,000 www.bank.lv 25
 Bank Loan

 LIBOR is the London Interbank Offered Rat

 EURIBOR is the Euro Interbank Offered Rate

a daily reference rate based on the interest rates at which

banks borrow unsecured funds from other banks in the
international interbank market

For more info see:

LIBOR http://www.bbalibor.com
EURIBOR http://www.euribor.org/

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 Bank Loan

Which interest rate to choose – fixed or floating?

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 Bank Loan

Loan repayment plans:

• equal principal payments per time period
(descending, decreasing payment scheme) 
principal amount in equal installments + interest
• equal total payments per time period (regular,
annuity, uniform payment scheme)  each
month in equal installments
• equal payments over a specified time period with a
balloon payment due at the end to repay the
balance

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 The Interest. Repayment Principles

• equal principal payments per time period

(descending, decreasing payment scheme)

⅀ %

• equal total payments per time period (regular,

annuity)
%
⅀
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 The Interest. Repayment Principles

The equal principal payment plan (descending plan):

I=rxR

where:
I – Interest payment
r – interest rate
R – unpaid balance

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 The Interest. Repayment Principles

The equal total payment plan (regular plan):

A=K*r/(1-(1+r)-n)
where
A – monthly payment
K – loan principal
r – monthly interest rate
n – number of months (periods)

monthly interest rate = annual percentage rate

divided by 1200

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 Repayment Schedule. Example 1

1. Company ABC was granted a loan EUR 6’000 for

1 year. Interest rate is 12% p.a. Calculate the
monthly loan payment, if the company has chosen
the descending loan repayment plan.

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 Repayment Schedule. Example 1
E
U Loan principal Interest Monthly payment Loan residual value
R (monthly) (monthly) (principal+%) (unpaid balance)
6000/(1 year*12) 6000*12%/12 500+60
1 =500 =60 =560 6000-500=5500

2 500

3 500
4
5
6
7
8
9
10
11
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12
 Repayment Schedule. Example 1
E
U Loan principal Interest Monthly payment Loan residual value
R (monthly) (monthly) (principal+%) (unpaid balance)
6000*12%/12
1 6000/(1 year*12)=500 =60 500+60=560 =6000-500=5500
5500*12%/12
2 500 =55 500+55=555 5500-500=5000
5000*12%/12
3 500 =50 500+50=550 5000-500=4500
4 500
5 500
6 500
7 500
8 500
9 500
10 500
11 500
12 500
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 Repayment Schedule. Example 1
Loan residual value
Monthly (unpaid
Loan principal Interest payment balance)
1 500.00 60.00 560.00 5500
2 500.00 55.00 555.00 5000
3 500.00 50.00 550.00 4500
4 500.00 45.00 545.00 4000
5 500.00 40.00 540.00 3500
6 500.00 35.00 535.00 3000
7 500.00 30.00 530.00 2500
8 500.00 25.00 525.00 2000
9 500.00 20.00 520.00 1500
10 500.00 15.00 515.00 1000
11 500.00 10.00 510.00 500
12 500.00 5.00 505.00 0
6000.00 390.00 6390.00 35
 Repayment Schedule. Example 2

2. Company ABC was granted a loan EUR 6’000 for

1 year. Interest rate is 12% p.a. Calculate the
monthly loan payment, if the company has chosen
the regular loan repayment plan.

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 Repayment Schedule. Example 2

A=K*r/(1-(1+r)-n)

1) The monthly interest rate would be 0.01

2) The months would be 12 × 1 = 12
3) The monthly Payment:

A=6’000*0.01 / (1-(1+0.01)-12) = 533.09

12%/12=1% (0.01)
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 Repayment Schedule

The Excel PMT() function is used to calculate the

monthly repayment

PMT(InterestRate, NumberOfPeriods, Principal,

FutureValue, PaymentsDue)

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 Repayment Schedule. Example 2
Month Loan Interest Monthly payment Loan residual
principal value
(unpaid
balance)
1 473.09 60.00 533.09 5526.91
=533.09-60 =6000*12%/12 =6000-473.09
2 477.82 55.27 533.09 5049.09
3 482.60 50.49 533.09 4566.49
4 487.43 45.66 533.09 4079.06
5 492.30 40.79 533.09 3586.76
6 497.22 35.87 533.09 3089.54
7 502.19 30.90 533.09 2587.35
8 507.22 25.87 533.09 2080.13
9 512.29 20.80 533.09 1567.84
10 517.41 15.68 533.09 1050.43
11 522.59 10.50 533.09 527.84
12 527.84 5.28 533.12 0.00
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6000.00 397.11 6397.11
 The Interest. Repayment Principles

• equal principal payments per time period

(descending, decreasing payment scheme)
-

⅀ %

• equal total payments per time period (regular,

annuity, uniform payment scheme)
-
%
⅀
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 Bank loan

THE LOAN AGREEMENT

-the company cannot increase liabilities without the bank allowance
(e.g., take loan, leasing etc.)
-the company cannot pay the dividends without the bank allowance
-list of documents the borrower has to submit (e.g., financial
statements, usually x3 months)
and
THE GENERAL TERMS AND CONDITIONS
OF THE LOAN AGREEMENT

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 Bank loan

THE LOAN AGREEMENT

Grace period?

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 Bank loan

THE LOAN AGREEMENT

Grace period?
-Pay only % for e.g., 2 months  higher interest
payments
-Pay 0 for 1 month  higher interest payments+
calculated (unpaid) interest payments for the month
will be capitalized (will be added to the loan
principal)

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 Bank loan
The bank loan can have different collaterals:
• real estate
• assets
• goods, materials, raw materials and goods in
production, receivables, other current assets
• securities, depending on their liquidity
• deposit with the bank
• guarantees etc.

 Insurance is usually necessary!

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