A Case Study On

Sources OF FinancingIISWBM, Batch 4th Semester

A Case Study On

Sources OF FinancingIISWBM, Batch 4th Semester

A case Study on Source of Financing

Presented By: PGDBM , Batch 2012-2015

Abir Roy Chowdhury Roll:24/2015

Amitava Sengupta Roll:22/2015

Ayan Bhattacharaya Roll:31/2015

Debasis Kundu Roll:17/2015

Dibyendu Ghoshal Roll:10/2015

Mustafa Alam Roll:19/2015

CASE STUDIES:Given below is the summarised Balance Sheet of an Industrial Gases Company as on 31 December 2007. Sources of Funds Rs in Crs Share Capital 49

Reserve & Surplus 325 Loan Funds 267

------------ 641 Application of Funds Net Fixed Asset 624 Investment 15

Net Working Capital 2 ------------- 641The company has a turn over of Rs.550 Crores and a profit before tax of approximately Rs 80 crores. Net Working Capital includes Sundry Debtors of Rs. 57 Crs. Loan funds Outstanding Commercial paper Rs 15 CrsThe company is a subsidiary of a multi national company, which holds 54% shares of the company and would not like to dilute its share-holding in the companyThe market price of a Rs.10 Shares of the company is approximately company is rated AA by CRISIL.The company has bagged a very large contract to supply piped oxygen to a very Rs 150. The large steel plant ( Rated AAA)The Assured cash flow from the contract is minimum of Rs.10 Crs per month (Take or Pay clause).To Cater to the steel plant as well as to supply to other companies, the Company needs to install a large oxygen plant, which will cost around Rs 500 Crs.

You are a Finance Manager of a Gases company and you have to give a report to the Board of Directors suggesting various options for funding the project and your recommendations.

Case StudyCase Study

• We may Consider Following source of financing in for the solution of our case study in our successive slides

• An important task of the Central Management is to see the capital necessary to execute the corporate strategy is provided at a reasonable cost and with minimum risk. In financing strategy, a finance manager has to decide about optimal financing mix or make up of the capitalisation in order to maximise earnings per share and so also market value per share.

• Now, while going in for Financing, a Finance Manager should keep in mind the following :

• Cheap sources available for financing

• Low risk involvement

• Control of Management should not be diluted

• Flexibility of capital structure & repayment

• In our case, we have to keep all these in mind as these are the things which are required by the management of the company.

• The company can opt for 3 kinds of Funding as per their requirements.

Let us have a brief discussion over the source of funding

for over all analysis foe decision making.

• Finance is the life blood of a business

Sources of finance:-

• Short term sources • Long term sources

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

 

Factors determining long term sources of finance:-

• Nature of business

• Nature of goods produced

• Technology used

Here we considered retained earning for funding of project

EQUITY CAPITAL

TERMS: Authorized, Issued, Subscribed &

Paid- up Capital.

Par/ face Value, Issue Price, Book Value, Market Value.

Rights Of Equity Share Holders:

Right to Income

Right to Control

Pre – emptive Right

Right in Liquidation

EQUITY CAPITALEQUITY CAPITAL

PREFERENCE CAPITAL

• Hybrid form of Financing• Equity Features:

-out of distributable profits-dividends not tax deductible-Priority over Equity shares in case of bankruptcy

• Debenture features:-dividend rate is fixed-capital is redeemable-normally no right to vote

PREFERENCE CAPITAL PREFERENCE CAPITAL

PREFERENCE CAPITALPREFERENCE CAPITAL

Retained Earnings Depreciation

INTERNAL ACCRUALSINTERNAL ACCRUALS

ITERNAL ACCRUALSITERNAL ACCRUALS

Term LoansTerm Loans

• TERM LOANS

• Maturities • Security• Provided by Foreign Institutes/

Bank• Repayment schedule• Restrictive Covenants• Convertibility

Term Loan Contd…Term Loan Contd…

DEBENTURES

• Interest •Security•Maturity & Redemption•Options•Convertibility

DEBENTURESDEBENTURES

Few types of Debenture

• Non – convertible debentures

• Fully convertible debentures

• Partly – convertible debentures

Debentures Contd…Debentures Contd…

• Leasing• Hire Purchase• Asset Securitization• Government Subsidies• Lottery funding• Selling asset• Convertible bonds eg:British Airways has

announced that it is to raise £300m of new funding via a convertible bond issue, as part of a £600m refinancing.

Other Important Sources of financing

• Foreign Collaborators

• International Financial Institutions:

• Non-Resident Indians

Foreign Sources

Raising Long Term Finance

• Initial Public offering• Right Issue• Private Placement• Preferential Allotment• Obtaining a Term Loan• Venture Capital

Initial Public Offering

• Decision to go Public• Benefits• Cost• Eligibility• Book Building process

Right Issue

• Issue of capital to existing shareholders• Offer made on pro rata basis• Right shares are tradable, may be sold

in open market.• Comparison with Public issue: familiar

investors, hence likely to be more successful

• Less floatation costs• Lower pricing to benefit shareholders

Private Placement

• Sale of securities directly to wholesale investors like FIs, banks, MFs, FIIs, PE funds etc.(QIP’s)

• Called private placement in equity/equity related instruments, in unlisted companies and in all cases of debt

• Called preferential allotment in case of unlisted companies for equity/equity related instruments

• Different from reservations made for such QIBs out of a public issue

• Subject to SEBI regulations on pricing, lock in period, open offer to be made to public

• QIB placement guidelines recently issued by SEBI for compliance and disclosures

Obtaining a term loan

• Submission of loan application• Initial processing of loan application• Project Appraisal• Issue of Letter of Sanction• Acceptance of terms and conditions

by the borrowing unit• Execution of loan agreement• Disbursement of loan• Creation of security• Monitoring

Venture Capital

• Equity Participation

• Long term investment

• Participation in management

AS the company would not like to dilute its share-holding in the company we opt for Equity with DVR (Differential Voting Right).

As per company Act 2013 issuance of Equity with DVR should not exceed 25%of the total issued shares 75% of issued share = 49 Crs (given) 1% of issued share = 49/75 100% of issued Shares = (49/75)*100 = 65.3Crs.

Hence 25% of total issued shares would be, [(25/100)*65.3] =16.32 Crs. can beissued for fund collection.

Equity with DVR

Mid term LoanMid term Loan

• Next We opt for Mid term Loan

Loan Fund available is 267 Crs (given)

As per the statement available there is commercial paper of Rs. 15 Crs

Hence Loan against asset is (267-15=252) Crs. available.Assuming 75% of the principal asset value is paid by Financial bank or institution.

Therefore 75% of principal asset = 252 Crs

1% of principal asset = 252/75

100% of principal asset = (252/75)*100= 336 Crs.

Hence Net Fixed Asset is 624 Cr, Asset available without loan is

625-336= 288 Crs.

Applicable Source of loan will be 75%x288 Crs= 216 Crs.

Retained EarningRetained Earning

• Next We opt for Retained EarningProfit before tax of approximately Rs 80 Crs given.

Tax payable is assumed 30%

Net tax payable is (80x30%) = 24 Crs.

Hence Profit after tax is (80-24)= 56 Crs.

Assuming 28% is retained profit and 22% is fixed liabilities ( rent, taxes and interest etc.)

Hence 50% has of the profit has been consumed, rest 50% will be available for Funding

Hence 50% of 56 Crs = 28 Crs available for funding.

FactoringFactoring

• Next we Opt for Factoring

Total Sundry Debtors is 57 Crs available.

Usually 80%of Sundry Debtors are utilised for collecting funds.

Hence (57x80/100)= 45.6 ~ 46 Crs fund can be collected through factoring.

Normally commercial banks facilitates factoring services are

(1) SBI Factors Ltd

(2) CAN Bank Factors Ltd.

SecuritizationSecuritization

• Next we opt for SecuritizationThe assured cash flow from the contract with AAA rated Company is 10 Crs per

month.

Annual Cash flow will be 12x10 = 120 Crs.

Profit after tax = 80 Crs. And net cash flow 550Cr

Percentage Profit will be (80/550)x100= 14.4

Projected Profit will be 120x14.5/100= 17.4 Crs.

Tax deduction is equal to 17.4x30/100= 5.22 Crs.

Profit after tax = 17.4-5.22= 12.18 Crs.

Assuming 70% of PAT can be available for securitization.

Hence Fund amount 12.18x70/100 = 8.6 Crs will be available from securitization.

Preferential SharePreferential Share

• Next we opt for Rights Share Company has total share capital is 49 Crs.

If we issue rights share in 4:1 ratio then our problem is solved.

The total share which can be issued will amount to 49CrsX4=196 Crores.

By doing so the holding company gets to get in shares and if need be can increase their

holding share ratio, thereby increasing the hold on the company.

Company has total debt amounting Rs. 267 Crs.

Now if that happens then the share capital becomes (49+196)=245 Crs.

The Debt/Equity ratio becomes 267:245 = 1.09:1

Case study solutionCase study solution

• Net Result:

Equity With DVR = 16.32 Crs

Mid Term Loan = 216 Crs

Retained Earning = 28 Crs

Factoring = 45 Crs

Securitization = 12.18 Crs

Rights Share = 196 Crs

--------------------------------------------------------------

Total = 513.5 Crs.

Target amount is 500 Crs. Hence target fulfilled.

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

Rights Share Capital

High No Negligible No

Term Loans Low No High Moderate

Debentures Low No High Some

ConclusionDuring the research of this assignment we

haveconcluded that • many type of finance can be used at one

particular time.• Depending on the type of company and they

should try to get the best possible finance deal

• to save the borrower on the risk of borrowing high amount and

• also to pay high amount on the interest rate.

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