banking ppt3

8/8/2019 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


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


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!

banking ppt3

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