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ABFM MODULE A

CHAPTER 1: Basics of Management (PART-I)

👉 Father of Modern Management Methods: Henri Fayol.

👉 Book "Principles of Scientific Management" written by Frederick Winslow Taylor.

👉 Scientific Management is also known as Taylorism.

👉Book "Management: Tasks, Responsibilities, Practices" written by Peter Drucker. He is famous

Management Guru.

👉4 Import elements of Directing:

1. Leadership.
2. Motivation.
3. Communication.
4. Supervision.

ABFM MODULE A

CHAPTER 1: Basics of Management (PART-II)

👉👉 Management thoughts and Approaches:

👉👉Classical or Traditional School:

👉The classical school believes in the use of technology for increasing efficiency of the employees,
and lays down more emphasis on the organisation, looks at the organisation as a machine and the
employees as its parts, who are important only as a means of production..

👉👉Neoclassical or Behavioural School:

👉This school is an extended version of the traditional school and developed because of the
weaknesses observed in the classical theory.

👉The behavioural thought process attempted to solve the problems faced by the classical theorists.

👉This school of thought propounded the influence of human actions on the very existence of an
organisation.

👉An organisation, according to this theory, comprises of both formal and informal forms of
organization, a fact which was overlooked by the Classical theorists.
👉👉 Maslow's Hierarchy of Need:
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👉Humans need can be put in a hierarchical order:

1. Physiological Needs.
2. Safety Needs.
3. Love and Belonging needs (Social Needs).
4. Self-esteem needs.
5. Self- Actualization needs.

👉👉 Douglas McGregor's X and Y theory:

👉 Theory X : Humans do not work without supervision. Average human is lazy by Nature and desire
to work as little as possible.

👉 Theory Y: Humans love to work and no need to force them.

👉👉 Motivation - Hygiene Theory:

👉It is given by Frederick Hertzberg.

👉It is also called two factor theory or Satisfier - Dissatisfied theory.

👉The two factors are:

👉 Motivation Factors.
👉 Hygiene Factors.

👉👉 Quantitative School or Management Science:

👉It was developed after World War II and emphasises on use of mathematical and statistical model
for finding solutions to managerial problems.

👉 Fredrick Winslow Taylor was founder of Scientific Management Technique. He also helped in
laying down the foundation of this approach.

👉👉 System School of Management:

👉This school of management thought was propounded by Daniel Katz, an American Psychologist,
and Ludwig Von Bertalanty, an Australian Biologist.

👉They advocated the concept of management being an open system, which is required to interact
with the environment constantly for getting resources, which are both valuable and limited.

👉For example, a bank provides financial services and products to its customers and the customers
react by liking or rejecting the product.
👉👉The Contingency School of Management:
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👉This school of management stated that there cannot be a unique way of managing an organisation
and which can be labelled as the best way to manage or lead a business.

👉The best or the optimal way shall always depend or be contingent on the internal and external
environment.

👉In other words, there cannot be a standard solution to various business situations faced by the
management.

👉Each leader might deal with the same situation in different ways, depending on his/her leadership
style.

👉👉 Contemporary School of Management:

👉 Latest development in management are

1. Total Quality Control.
2. Learning Organisation

ABFM MODULE A:

CHAPTER 1: Basics of Management (PART-III)

👉👉Total Quality Control:

👉Total Quality Management focuses on the management of an organisation for delivering high
quality goods and services to its customers.

The approach originated in Japan after the Second World war.

👉The four main elements of this approach are:

1. Employee Involvement.
2. Customer Focus.
3. Standardisation.
4. Continuous Monitoring.

👉Deming, Juran and Crosby were three main contributors to the Total Quality Management
approach.

👉William Edwards Deming considered the quality of people more important than the quality of
products.

👉He laid down the 14 principles of Total Quality Management.

👉👉 Learning Organisation:
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👉Major Contributor is Peter Senge.

👉Book " The fifth discipline: Art & Practice of Learning Organisation" is written by Peter Senge.

👉As per Senge the learning organisation is " organizations where people continually expand their
capacity to create the results, they truly desire, where new and expansive patterns of thinking are
nurtured, where collective aspiration is set free, and where people are continually learning to see
the whole together".

👉The 5 disciplines of learning organisation:

1. Personal Mastery.
2. Shared Vision.
3. Mental Model.
4. Team Learning.
5. System Thinking.

ABFM MODULE A:

CHAPTER 1: Basics of Management (PART-IV)

👉👉SDG:
👉Sustainable Development Goals(SDG) are set by UN
👉There are total 17 SDG.
👉SDG was established in 2015.
👉From 06-07-2017 it was made actionable.
👉Most targets or goals to be achieved by 2030.

👉👉 Strategic Management:

What do you mean by mission/ vision/clientele of an organisation?

👉 Mission:
It's core purpose (mission) and how if at all it's mission will (or must) change in future.

Vision:
An image of its future direction and what it intends to achieve.

👉 Clientele:
Its scope, meaning, thereby, its main clientele now and those in the future (and consequently the
potential clienteles that are and will remain outside its scope).

👉Resources:
The resources and competences that create value for its clientele and how these will (or must)
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change to maintain and enhance the future value created.

👉Present and Future:

The foundations of its present competitive standing and future sustainability.

👉👉3 Different types of Strategy:

👉👉 Corporate Strategy:

👉Corporate strategy of a company covers he overall direction followed by the company.

It would spell out general attitude of the company towards growing and managing its different
business lines, products and services.

👉 👉Business Strategy:

👉Business strategy would normally be prepared at the level of the business unit or at the level of
Product or service.

👉It normally highlights the improvement in the specific industry or market ranking of the business
entity's products or services produced or delivered by that business unit.

👉A business strategy could be competitive or cooperative.

👉👉Functional strategy:

👉Functional strategy refers to the approach adopted by functional areas for achieving the
objectives of the business unit and the company by maximizing the productivity of available
resources.

👉It involves the development and fostering a distinctive capability to create a competitive
advantage.

👉👉SWOT Analysis:
S: Strengths
W: Weakness
O: Opportunities
T: Threats
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ABFM MODULE C:

CHAPTER 6: Controlling (PART-I)

(Page 145)

👉👉TYPES OF CONTROL MANAGEMENT:

Broadly, the control management can be of 3 types, based on the timing of the control:

👉Feedback control: These controls are based on the feedback received after the activity has taken
place. So, the corrective action can be taken only for carrying out similar activity in future.

👉Proactive control: These are future-directed controls which anticipate problems well in advance
and the corrective action is taken accordingly.

👉Concurrent control: These controls are based on the real-time engagement of the controller as
the activity is being carried out. So, the corrective action can be taken simultaneously with carrying
out the activity, to take care of any deficiencies observed.

👉👉STEPS in Control Process:

1. The process of establishing goals and standards.

2. Comparing the actual performance to the predetrimental goals and criteria.

3. Taking steps to make necessary corrections.

4. Continuing to monitor the effect of corrective actions

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ABFM MODULE C:

CHAPTER 6: Controlling (PART-II)

(Page 148)

👉👉TYPES OF CONTROL MANAGEMENT:

👉👉Two categories under which techniques of controlling fall are:

1. Traditional Technique.
2. Modern Technique.

👉👉 Traditional Techniques:

👉Personal Observation.
👉Break Even Analysis.
👉Statistical Analysis.
👉 Budgetary Control.

👉👉Modern Techniques:

👉 Return on investment (ROI).

👉 Financial Statement and Ratio Analysis.
👉 Responsibility Accounting.
👉PERT & CPM.
👉 Management Information System (MIS).
👉 Management Audit.
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CHAPTER 6: Controlling (PART-III)

(Page 156,157)

👉👉Internal Control Framework:

👉COBIT (Control Objectives for Information and Related Technology).

The COBIT Framework, also known as the Control Objectives for Information Technology
Framework, is a framework that has seen widespread adoption and was developed by the IT
Governance Institute.

👉This framework defines a variety of ITGC (IT General Controls) and application control objectives
as well as recommended evaluation approaches.

👉The Chief Information Officer (CIO) of an organisation is typically the person in charge of the IT
department.

👉COBIT outlines the design considerations that need to be made by an organisation before
constructing a governance system that is optimal for its needs.

👉COBIT addresses governance problems by combining the various relevant governance

components into governance and management objectives that can be managed to the necessary
capability levels.

👉👉COSO:

👉The Committee of Sponsoring Organizations of the tread way commission (COSO) identifies five
components of internal control:

1. Control environment.
2. Risk assessment.
3. Control activities.
4. Information and Communication.
5. Monitoring.

👉In order to accomplish the goals of financial reporting and disclosure, it is necessary to have these
components in place.

👉COBIT offers comparable and detailed guidance for information technology, while the interrelated
Val IT focuses on higher-level IT governance and value-for-money concerns.

👉The five aspects of COSO can be represented mentally as the horizontal layers of a three-
dimensional cube, and the objective domains of COBIT can be thought of as applying both to each
one separately and to the whole.

👉The four COBIT major domains are:

1. Planning and organising.
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2. Acquiring and implementing.

3. Delivering and supporting.
4. Monitoring and evaluating

.
Chapter 7: Sources of Finance

Bullet Points:

👉The person who moot the idea of business is called Promoter or owner.

👉Owner is going to stay in business for long so his finance is called Long term finance.

👉For business safe norm is if Equity is 100 Rs then then he can safely borrow up to 200 Rs.

👉 Finance required for running the business is WORKING CAPITAL FINANCE.

👉 Current Assets are those which are created and extinguished (finished) in an Operational cycle.

👉Operational Cycle is the time or period in which cash, after going through various forms is
converted back into cash.

For example, with cash you buy raw materials that are converted into finished goods through work
in process and later when the finished goods are sold, they are converted into debtors or receivables
and upon realisation or debt collection, the cash comes back into the business.

👉👉 Preference Capital:
👉 Companies Act prohibits the companies limited by share to issue preference share which are not
redeemable.

👉Preference share need to be redeemed within 20 years.

👉 👉 Debenture is defined in Companies Act 2013 Section 2(30).

👉Section 71(2) of companies Act 2013 prohibits giving any voting rights to a debenture holder.

👉👉 Private Equity:

👉Lerner has broadly defined private equity organization as partnerships specializing in venture
capital, leveraged buyouts (LBOs), mezzanine investments, build-ups, distressed debt and other
related investments.
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👉👉Pratt has tried to categorise types of private equity activities in terms of the stages of corporate
development, where Private Equity (PE) financing is called for.

👉Seed Financing: Providing small sums of capital necessary to develop a business idea.

👉Start-up financing: Providing capital required for product development and initial marketing
activities.

👉First-stage: Financing the commercialization and production of products.

👉Second-stage: Providing working capital funding and required financing for young firms during
growth period.

👉Third-stage: Financing the expansion of growth companies.

👉Bridge financing: Last financing round prior to an initial public offering of a company.

👉PIPE deals: A private investment in public equity, often called a PIPE deal, involves the selling of
publicly traded common shares or some form of preferred stock or convertible security to private
investors.

👉Leveraged Buyout (LBO): It entails the purchase of a company by a small group of investors,
especially buyout specialists, largely financed by debt.

👉Management Buyout (MBO: It is a subset of LBO whereby incumbent management is included in

the buying group and key executives perform an important role in the LBO transactions.

👉👉 Foreign Direct Investment (FDI)

👉foreign Investment in India is governed by the FDI policy announced by GOI and the provision of
FEMA 1999.

👉Foreign Direct Investments (FDI) can be made under two routes - Automatic Riese and
Government Route.

👉Under the Automatic Route, the foreign investor or the Indian company does not require any
approval from RBI or Government of India.

👉Under the Government Route, prior approval of the Government of India, Ministry of Finance,
Foreign Investment Promotion Board (FIPB) is required.

👉A foreign investor can invest in an Indian company which is a small scale industrial unit (SSI).

👉Such investments are subject to a limit of 24% of paid-up capital of the Indian company/SSI Unit.
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Chapter 8: Financial and Operating Leverage: (PART - I)

Bullet Points:
👉👉 Financial Leverage:

👉The owners of a business (equity shareholders), aim to enhance return on their investment. The
measure of this return is Earning Per Share (EPS).

👉Financial leverage means enhancing EPS without shareholders bringing money themselves but by
borrowing.

👉In short, financial leverage is a strategy to use borrowed funds to enhance return on the
investment of equity investors.

👉As the use of more borrowings increases return on equity, there will be a temptation to keep on
increasing the borrowings without increasing the quantum of equity itself.

👉But this will be constrained by two factors.

👉First, as the ratio of debt in relation to equity rises, the lender will not be willing to further lend at
all or will lend at such a higher interest rate which will affect the additional value generation.

👉Second, as the borrowings increase, the cushion to absorb adverse business events decreases and
the surplus through additional assets may actually be less than the cost of borrowings, resulting in
reduction in EPS. The owners, therefore, will impose a limit on borrowings, as a prudential measure.

👉👉Calculating Financial Leverage:

There is no one standard formula to calculate financial leverage.

The important common methods to calculate it are as under:

👉a. Debt- to- Assets ratio

This is calculated as Total Debt / Total Assets

👉b. Debt- to- Equity ratio

This is calculated as total Debt / Total Equity

👉c. Debt-to EBIDTA ratio

This is calculated as Total Debt /EBIDTA

👉d. Du-Pont analysis uses the "equity multiplier" as a measure of financial leverage.
This is calculated as:
Equity Multiplier = Total assets / Total Equity

👉e. Interest Coverage ratio.

This is calculated as EBIT/Interest expense
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Chapter 8: Financial and Operating Leverage: (PART - II)

Bullet Points:

👉👉 Degree of Financial Leverage (DFL):

👉 DFL is more than 1 , financial leverage becomes relevant.

👉More the DFL, higher is the financial leverage.

👉A positive DFL means that the firm is operating at a level higher than the break-even point and
EBIT and
EPS also move in the same direction (postive).

👉Negative DFL indicates that the firm is operating at lower than the break-even point and EPS is
negative...

👉DFL Situation 1: If no fixed Interest is charged:

DFL = 1

👉DFL Situation 2: If positive financial leverage:

DFL > 1 ( DFL will be greater than 1)

👉DLF Situation 3: When business is operating AT the Break- Even level:

EBT = NIL
EBIT = Fixed Interest

DFL= EBIT/ EBT = EBIT/NIL = Undefined

So DFL = Undefined

👉DLF Situation 4: When business is operating BELOW the Break- Even level:
EBT is NEGATIVE

DFL= EBIT/EBT = will be negative.

DFL = Negative
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Chapter 8: Financial and Operating Leverage: (PART - III)

Bullet Points:

👉👉 Degree of Operating Leverage (DOL):

👉 DOL is more than 1, operating Leverage is relevant.

👉A positive DOL means that the firm is operating at a level higher than the break-even point and
both Sales and
EBID also move in the same direction (postive).

👉Negative DOL indicates that the firm is operating at lower than the break-even Sales and EBIT is
negative...

👉DOL Situation 1: If no cost:

DOL = 1

👉DOL Situation 2: If positive operating leverage:

DOL > 1 ( DOL will be greater than 1)

👉DOF Situation 3: When EBIT is NIL:

Contribution= Fixed Cost

DOL= Contribution/ EBIT = Contribution/NIL = Undefined

So DOL = Undefined

👉👉 Relationship between Leverage and Break Even Point:

👉 Higher Break Even Point = High Leverage

👉 Lower Break Even Point = Low Leverage

👉👉 Relationship between Leverage and Fixed cost:

👉 Higher Fixed Cost = High Leverage

👉 Lower Fixed Cost = Low Leverage
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Chapter 9: Capital Investment Decision: (PART - I)

Bullet Points:

👉👉While estimating the project cash flow:

👉There are four principles to be kept in mind.

👉The first is the separation principle which means we have to separate the investment side from
finance side which simply means separating assets for servicing cost of it. Cost flows in to investment
side and the interest flows in to financing side.

👉Incremental principle which means estimate separately the cost which will be incurred even if the
project is not run from the cost which we incur while running it. We can also say it is fixed versus
variable cost.

👉While considering the cash flows, considering the post - tax cash flows always, is advisable since
the tax payments cannot be ignored. This is the third principle.

If you ignore, you will have to discount pretax flows with a discount rate which may or may not be
reliable. The last principle is consistency principle.

👉👉Payback Period: Payback Period is period at the end of which the initial investment is entirely
returned to the investor.

👉It does not require computation of cost of capital for decision making.

👉It considers cumulative cash flow.

👉 Both the negative and positive cash flows are added till the total cash flow is not equal to initial
investment.

👉It doesn't take time value of money into account unless it is discontinued payback period method.

👉 Shorter the period of recovery of initial investment, lesser is the risk and better imie quicker is
probability to earn profit.
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Chapter 9: Capital Investment Decision: (PART - II)

Bullet Points:

👉👉 Accounting Rate of Return:

👉ARR method calls for estimates for the entire project life making it more uncertain.

👉 This method is profit centric and not cash flow centric.

👉This method consider the Depreciation.

👉It does not take into account time value of money.

👉👉Net Present Value (NPV):

👉It does take into account time value of money.

👉If NPV = 0 , project will neither add value nor you are likely to lose..

👉If NPV is postive means go ahead with project.

👉If NPV is negative it's a red signal (you will get loss in project)

👉👉Capital rationing: Rationing implies restriction on use or supply. In terms of capital budgeting,
this is based on the universal truth that resources are limited.
Capital available for investment is no exception.
Capital rationing therefore takes various forms e.g. no fresh investments during a year or for a period,
no use of retained profits for investment, not to borrow or seek external funds for capital investment.

To trigger the rationing, certain norms are fixed like not to take up part of a project, enforce higher
IRR or profitability index, fixed money discount rate, inflation linked rate, risk free interest rate etc.

👉👉Equivalent Annual Costs (EAC): This cost of the asset is other than that for acquisition.

In other words, it is an annual cost of owning, operating and maintaining an asset over its life time. In
terms of capital budgeting and cost analysis, EAC enables us to compare the cost effectiveness of two
or more assets with different lifespans. Price of the asset, expected life span and the discount rate
used to work out the EAC.

👉👉Net present value = Present value of net cash inflow - Total net initial investment.

👉👉If NPV => 0 : Accept the proposal.

👉👉If NPV <= 0 : Reject the proposal.

👉👉If two proposal have Postive NPV then Proposal with high NPV will be selected.
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Chapter 9: Capital Investment Decision: (PART - III)

Bullet Points:

👉👉Internal Rate of return (IRR):

👉An Internal Rate of Return means an annual rate of growth in investment a business is going to
generate.

👉The concept of calculating NPV and IRR is the same. However, while calculating IRR the NPV is set
to zero.

👉👉Modified internal Rate of Return (MIRR):

👉The formula used for calculating IRR presumes that the net cash inflows of the project during the
intermediate years are reinvested at the IRR of the project.

👉This presumption is not realistic as the market is not concerned with what the IRR of our project
is. Therefore, a Modified IRR(MIRR) approach is applied.

👉MIRR also takes care of the problem faced in IRR method regarding more than one value of IRR for
projects with alternating positive and negative cash flows leading to confusion and ambiguity.MIRR
method finds only one value for the project.

👉If IRR is less than the Cost of Capital : Reject the project.

👉If IRR is greater than the Cost of Capital: Accept the project.

👉👉 Probability Index (PI):

👉 Higher the index better is the profitability of project.

👉If value of PI is less than 1 then the project is unprofitable.

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Chapter 9: Capital Investment Decision: (PART-IV)

Bullet Points:

👉👉SOCIAL COST BENEFIT ANALYSIS (SCBA):

👉Central and State Governments and local bodies or designated corporations take up many
projects of infrastructure developments, airports, ports, bridges, dams etc.

👉To support decision making process, SCBA is carried out. On one hand we have total cost of the
project and on the other hand the social cost as well as benefits.

👉One has to attach or allot value to each such impact or benefit.

👉Adverse impact will have negative value and the benefits will have positive value.

👉Adverse impact is the social cost.

👉Loss of mangroves, generation of pollution, impact on plants, extinction of some birds and rare
species, water level going down, health hazards are some of the social cost and environment impact.

👉Benefits are ease of travel, fuel savings, time savings, employment generation, uplifting of living
standards and bringing order in traffic management and safety, among others.

👉It net result of positive and negative values if value is positive and it is equal or more than the cost
of the project, the project is considered as beneficial.
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CHAPTER 11: Adjustments of the Risk and Uncertainty in

Capital Investment (PART-I)
(Page 236)

👉👉HILLIER MODEL:

👉An investor applies various techniques of analysing the risk involved in any particular investment
decision.

👉Hillier's Model is one amongst many of these risk analysis techniques.

👉This model is also based on NPV like earlier methods. Prof. Fredrick. S. Hillier of Stanford
University suggested this model.

👉Hillier's view was that the risk associated with the cash inflows is reflected in the standard
deviation of the cash inflows.

👉Lesser the deviation of cash flows from the mean value, the lesser would be the risk and vice
versa.

👉He argued that for risk analysis, value of standard deviation of net present value may be obtained
through analytical deviation of the cash inflows.

👉Two cases can be considered for such analysis viz. no correlation among cash flows and perfect
correlation among cash flows.

👉When cash flows for different years are perfectly correlated, the behaviour of cash flows in all
years is alike.

👉But, if they are not correlated, it implies that cash inflow in any particular year will be
independent of the cash inflows in any other year during the life of the project.
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CHAPTER 11: Adjustments of the Risk and Uncertainty in

Capital Investment (PART-II)
(PAGE NO. 238)

👉👉DECISION TREE ANALYSIS:

👉Decision Tree method is a graphical representation of possible outcomes (with their associated
probability), attached to each decision.
So, there are two elements in a decision tree:
1. Branch, which represents a decision (which is an alternative course of action) and
2. Node, at the end of the branch, which represents the reward of the decision along with the
probability attached to that reward.

👉Example: A finance manager has to select either project A or project B.

👉The reward of project A (NPV) IS Rs. 5 lakh and the probability attached to it is 40%.

👉The reward of project B (NPV) is Rs. 4 lakh and the probability attached to it is 40%.

👉it is graphically represented by a simple decision tree which has only two branches.

👉First branch represents the decision to go for project A and the second branch represents the
decision to go for project B.

👉The nodes at the end of each branch represent the outcome (NPV) and the probability.

👉This decision tree will further grow, i.e. there will be more branches emanating from node of first
and or second branch, if there are further uncertainties associated with each decision (represented
by branch).

👉As further uncertainties are taken into account, the decision tree will grow bigger and bigger.

👉The management has to decide the factors to be taken into account depending upon the size and
importance of the project.

👉The above process of preparing the tree is called "Drawing (or delineating) the decision tree".

👉This is first of the two steps involved in the whole process of "Decision Tree Analysis".

👉The other step is "Evaluating the outcome".

👉This process of evaluation starts from the last branch of the tree till we come to the starting point
of the tree. We have already learnt in Scenario Analysis, the way to evaluate a situation.

👉For example, if the probability associated with NPV of Rs. 5 lakh is 40% and that associated with
NPV of Rs. 4 lakh is 60%, the estimated NPV is: (5 * 0.4) + (4 * 0. 6) = Rs. 4.4 lakh.
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CHAPTER 11: Adjustments of the Risk and Uncertainty in

Capital Investment (PART-III)
(Page 242)

👉👉Certainty Expectations Or Certainty Equivalent Method:

👉When we face uncertainty or odds while expecting certain returns, it is possible that we may
prefer certainty and settle down for a lower return.

👉For example, we have two options on investments one 11% returns on 10000 invested and second
20% return on 100000 invested.

👉Though both look good, we may settle down for a certain return of say 10% on any investment
not exceeding 25000.

👉This is called certainty equivalent method.

👉This method deals with variability of outcomes and our attitude towards risk and we decide about
an amount of return which is equivalent to certainty.

👉For calculating NPV using the above formula, we need to first calculate the certainty equivalent
coefficient for the project.

👉For this, we have to know the probability attached to each set of cash inflows and that amount of
cash inflows with high certainty, which is acceptable for the project.

👉Suppose, the first set of cash inflows of Rs. 10,000 has a probability of 0.6 and the second set of
Rs. 15,000 has a probability of 0.4, and the cash inflow acceptable with high certainty is Rs. 11,000,
then the certainty equivalent coefficient will be calculated as under:

11,000 / (10,000 * 0.6 + 15,000 * 0.4) = 11,000 / 12,000 = 0.92.

👉The certainty equivalent method does not assume that risk increases with time at a constant rate.

👉It is, therefore, conceptually better than the risk-adjusted discount rate method.

👉In certainty equivalent method, each year's certainty equivalent coefficient is calculated based on
the level of risk characterising that particular year's cash flow.
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ABFM MODULE C:

CHAPTER 15: (PART - I)

👉👉STOCK AND DEBT APPROACH:

👉When a company's securities are traded on a public exchange, the value of the company can be
determined by simply adding up the current market value of all of the company's outstanding
securities.

👉Appraisers of properties use a straightforward methodology that they refer to as the stock and
debt approach.

👉Another name for this strategy is the market-based approach.

👉An illustration of a stock and debt approach is provided by the analysis of BML Limited 's
valuation.

👉As of the 31st of March in 2022, the company had a total of 25 crore shares in circulation.

👉The market value of BML's equity was Rs. 3,000 crores at the day's closing price of Rs. 120.

👉In addition, the company had outstanding debt that had a market value of Rs. 1100 crore as of the
31st of March, 2022.

👉When the market value of the firm's equity and its market value of its debt are added together,
the result is a total firm value for BML Limited as of March 31, 2022 that is equal to Rs. 4,100 crore.
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ABFM MODULE C:

CHAPTER 19: HYBRID FINANCE (Part - I)

👉👉Conversion Ratio and Conversion Price: (page 442)

👉the conversion ratio, often known as CR, is the most essential characteristic of a convertible asset.

👉This ratio can be defined as the number of equity shares that can be obtained in exchange for one
debenture upon conversion.

👉A number that is related to this one is called the conversion price, and it is denoted by the letter P.

👉The conversion price is the price per share that the holder really pays when the conversion takes
place.

Example:

👉In January 2016, AB Limited issued convertible debentures at a par value of 100 rupees each. The
holder of a debenture
has the ability to convert one debenture into five equity shares at any time prior to the maturity
date of January 1, 2022.

This results in a conversion ratio of 5, denoted by CR.

When the par value of Rs. 100 is divided by S, the resulting number is the price per share, &, which is
Rs. 20.

👉the conversion price is equal to the par value of the debenture divided by the number of shares
received, which is equal to 20 rupees.
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ABFM MODULE C:

CHAPTER 19: HYBRID FINANCE (PART-IV)

(Page 434)

👉👉Section 43 of the Companies Act, 2013, pertains to the kinds of share capital a company limited
by shares can have.
It specifies that the share capital shall be of two kinds:

1. Equity Share Capital

2. Preference Share Capital

👉👉 Section 47 of Companies Act 2013 guide us that

If dividend in respect of preference shares has not been paid for a period of two years or more, such
class of preference shareholders shall have a right to vote on all the resolutions placed before the
company.

👉👉Section 55 relating to the issue and redemption of preference shares by a company limited by
shares.

👉It further states that issue of irredeemable shares is prohibited.

👉Also it puts an outer limit of a period not exceeding twenty years from the date of their issue.
(Max 20 years)

👉But permits issue of preference shares for a period exceeding twenty years for infrastructure
projects subject to the redemption of such percentage of shares as may be prescribed on an annual
basis at the option of such preferential share holders.

Note: Section 47 and 55 both asked in June 2023 exam.

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ABFM MODULE C:

CHAPTER 19: HYBRID FINANCE (PART-V)

👉👉 Hybrid Finance:

👉Two extremes of the finance are known as equity and debt, respectively.

👉In the middle are hybrid forms of finance, which can be thought of as a combination of equity and
debt in their make-up.

👉Preference capital, warrants, convertible debentures, and inventive hybrids are some of the key
forms of hybrid financing.

👉👉A Hybrid security is considered to be innovative if the reward of the security is connected to
some general economic variable such as the interest rate, exchange rate, or commodities index.

👉👉 Perpetual Non-Cumulative Preference Share (PNCPS):

👉PNCPS is prefence share and it is Non-Cumulative so arrear will be paid.

👉PNCPS is issued by Indian Bank as part of Additional Tier-I Capital (AT-1).

👉PNCPS is issued only in Rupees.

👉 PNCPS in AT-1 can't exceed 1.5% of RWA.

👉 Excess PNCPS can be considered Tier II capital if less than 2% of RWA while meeting minimum
total capital of 9% or RWA.

👉👉FIIs can total invest upto 49% of issue (each investor limit is 10%).

👉👉NRIs can total invest upto 24% of issue (each investor limit is 5%).
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ABFM MODULE C:

CHAPTER 19: HYBRID FINANCE (PART-VI)

👉👉 Warrant:

👉The warrant do not carry any dividend or voting rights.

👉 Only after warrant are converted into equity shares then only the investor gets these rights.

👉👉To protect the interest of the minority shareholders, the pre-determined price of warrant
conversion in cases of preferential allotment cannot be less than either:

1) The average of the weekly high and low of the closing prices of the related shares quoted on the
stock exchange during the six months preceding the relevant date.
or
2) The average of the weekly highs and lows of the closing prices of the related shares quoted on a
stock exchange during the two weeks preceding the relevant date.

👉👉The following variables have an effect on the gap that exists between the current market price
of the warrant and its minimum acceptable level:

1.The fluctuation in the prices of the stocks.

2. Remaining time before expiration.
3. Risk Free interest rate.
4. The Value of the Stock
5. Exercise Price.

👉👉 Black Scholes Model:

It is used for valuation of Options.
As warrant is like Call Option so this model can be use for valuation of warrant also.

👉👉MEZZANINE FINANCING:

👉This is another hybrid type of debt and equity financing.

👉It gives the lender the right to convert the debt in to equity of the company in case of default.

👉Mezzanine financing is normally for raising funds for specific projects or to finance an acquisition.

👉Mezzanine financing can provide higher returns to investors compared to normal debt
instruments.

👉However, for the issuing company, its cost is lower than the cost of equity capital

Therefore, it can be considered as very expensive debt or cheaper equity.

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👉Mezzanine debt is often an unsecured debt.

👉It may be structured with partially fixed and partially variable interest rates. It typically matures in
more than five years.

Note: Black Scholes Model and Mezzanine Finance both asked in June 2023 exam.
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Chapter 25: Special Purpose Acquisition Companies:

Bullet Points:

👉Renew Power (Indian) & RMG Acquisition Corporation II (US) ,RMG is SPAC company or Blank
Cheque company and these two India's first SPAC overseas Listing on NASDAQ (US stock exchange)

👉As per companies Act 2013 if a company does not commence operation within a year of it's
incorporation then Registrar of Company can strike off it (means close the company)

👉 Videocon d2h and online travel agency Yatra had SPAC deal.

👉SPAC need to find a target company within 24 months or less.

👉👉Stake holder in SPAC :

1.Sponsor
2.Investor
3.Target

👉 Sponsor typically have 20% of stake in SPAC through founder share in addition to warrant.

👉 SPAC is also know as blank Cheque company.

👉👉DE-SPAC Process:
20% sponsor share + 37.5% of public share = 57.5% vote is needed for majority vote.

👉SPAC deals are complex and must be expected on tight timeline.

👉The Target company's enterprise value value at the time time of acquisition should represent
atleast 80% or more of trust's total assets.