banking ppt3
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A
PRESENTATIONON
SOURCES OF FINANCE}
A
PRESENTATIONON
SOURCES OF FINANCE}
Presented by:
Pramil Kumar Gupta
Anchal Mathur
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Finance is the life blood of abusiness
Sources of finance:
Short term sources
Long term sources
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SOURCES OF LONG TERM
FINANCE
SOURCES OF LONG TERM
FINANCE
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Purpose of long term finance:
To finance fixed assets
To finance the permanent part of
working capital
To finance the growth and expansion of a
business
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EQUITY CAPITAL
TERMS:
Authorized, Issued, Subscribed & Paid up
Capital.
Par/ face Value, Issue Price, Book Value,
Market Value.
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EQUITY CAPITALEQUITY CAPITAL
Advantages
No fixed maturity, no obligation toredeem
No compulsion to pay dividends
Provides leverage capacity
Dividends tax exempt forinvestors
Disadvantages
Dilution of control
High Cost
Dividends are not taxdeductible: hence cost is higher
Issue costs higher:
Higher servicing costs
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PREFERENCE CAPITAL
Hybrid form of Financing
Equity Features:
out of distributable profitsdividends not tax deductible
Priority over Equity shares in case ofbankruptcy
Debenture features:
dividend rate is fixed
capital is redeemable
normally no right to vote
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PREFERENCE CAPITALPREFERENCE CAPITAL
Advantages
No obligation to pay dividend, nobankruptcy or legal action for non
payment
Financial distress of redemption
obligation not very high
Part of net worth, hence increasesits creditworthiness
No dilution of control
No pledging of assets required
Disadvantages
Expensive source since dividendsnot tax deductible
Though no legal consequences,liability to pay dividends stands,
can spoil companys image
Can acquire voting rightsin some cases
Have claim prior to
equity holders
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Retained Earnings Depreciation
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INTERNAL ACCRUALSINTERNAL ACCRUALS
Advantages
Readily available
Effective additional equity capital
No dilution of control
Disadvantages
Quantum very limited
High Opportunity costs: dividendsforgone by equity holders
Requires careful attention toNPV of projects
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TERM LOANS
Maturities
Security
Provided by Foreign Institutes/ Bank
Repayment schedule
Restrictive Covenants
Convertibility
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TERM LOANSTERM LOANS
Use to finance your permanent working capital, purchaseof new equipment, construction of buildings, business
expansion, refinance existing debt and business
acquisitions.
Term loans are repaid from the long-term earnings of the
business.
Therefore, projected profitability and cash flow from
operations are two key factors lenders consider when
making term loans.
Generally, interest rates on long- term loans are higherthan for short-term loans.
Mustapha Olalekan Ojo
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Term Loan ContdTerm Loan Contd
Advantages
Interest on debt is tax deductible
No dilution of control
Interest cost is fixed
Dividends tax exempt for investors
Disadvantages
Fixed obligation for interest and principal
Debt contracts impose restrictions onfirms financial and operational flexibility
Dividends are not tax deductible: hencecost is higher
Increases financial leverage, excessraises cost of equity to the firm:
If inflation rate dips, cost of debthigher than expected
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DEBENTURES
Interest
SecurityMaturity & Redemption
Options
Convertibility
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Debentures ContdDebentures Contd
Advantages
Low cost
No ownership dilution
Fixed payment of interest
Reduced real obligation
Disadvantages
Obligatory payments
Financial Risk
Cash outflow
Restricted Covenants:
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Foreign Collaborators
International Financial Institutions:
NonResident Indians
Foreign Sources
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Comparison of Various sources of Long term Financing
Cost Dilution of
Control
Risk Restraint on
managerial
freedom
Equity
Capital
High Yes Nil No
Retained
Earning
High No Nil No
PreferenceCapital
High No Negligible No
Term Loans Low No High Moderate
Debentures Low No High Some
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Short TermShort Term
FinancingFinancing
May 11, 2009
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Learning ObjectivesLearning Objectives
The need for short-term financing.
The advantages and disadvantages ofshort-term financing.
Three types of short-term financing.
Computation of the cost of trade credit,commercial paper, and bank loans.
How to use accounts receivable and
inventory as collateral for short-term loans.
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Why Do Firms Need Short-term Financing?Why Do Firms Need Short-term Financing?
Cash flow from operations may not be
sufficient to keep up with growth-related
financing needs.
Firms may prefer to borrow now for their
inventory or other short term asset needs
rather than wait until they have saved enough.
Firms prefer short-term financing instead of
long-term sources of financing due to:
easier availability
usually has lower cost (remember yield curve)
matches need for short term assets, like
inventory
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Sources of Short-term FinancingSources of Short-term Financing
Short-term loans.
borrowing from banks and other
financial institutions for one year orless.
Trade credit.
borrowing from suppliers Commercial paper.
only available to large credit- worthy
businesses.
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SHORT TERM LOANSSHORT TERM LOANS
Use for seasonal build-ups of inventory and receivables,
as well as to take advantage of supplier discounts or pay
lump-sum expenses, such as taxes or insurance.
Repayment is usually in a lump sum with interest atmaturity
Short-term loans are generally made on a secured (or
collateralized) basis and are for a term of a year or less.
Mustapha Olalekan Ojo
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Types of short-term loans:Types of short-term loans:
Promissory note
A legal IOU that spells out the termsof the loan agreement, usually the
loan amount, the term of the loan andthe interest rate.
Often requires that loan be repaid in
full with interest at the end of the loanperiod.
Usually with a Bank or FinancialInstitution; occasionally with suppliers
or equipment manufacturers
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Trade CreditTrade Credit
Trade credit is the act of obtaining funds bydelaying payment to suppliers, who typically
grant 30 days to pay.
The cost of trade credit may be some interest
charge that the supplier charges on the unpaidbalance.
More often, it is in the form of a lost discount
that would be given to firms who pay earlier. Credit has a cost. That cost may be passed
along to the customer as higher prices,
(furniture sales, Office Max), or borne by the
seller as lower profits, or some of both.
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The EndThe End
The End!
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