|Group ‘A’||Group ‘B’|
|a. Financial management|
b. Overdraft facility
c. Transmission of shares
d. Depository Act
e. Debenture holders
|1. Savings Account|
2. Sale or gift shares to another person
3. Management of business funds
4. Owners of the company
6. Management of business activities (1)
7. Current Account (2)
8. 1996 (4)
9. Transfer of shares due to operation of law (3)
10. Creditors of the company (5)
Sol: – Preference Shares.
Sol: – Interim Dividend
Sol: – Regret Letter
Sol: – SEBI
Sol: – Dematerialization
|Fixed Capital||Working Capital|
Fixed capital refers to any kind of physical capital. i.e. fixed assets.
It stays in business almost permanently i.e. for more than one accounting year.
It is not used up in production of product but invested in fixed assets such as land, building, equipments, etc.
Fixed capital fund can come from selling shares, debentures, long term loans, bonds, etc.
Objective of investment
Investor invests money in fixed capital hoping to make future profit.
Investment in fixed capital implies a risk.
Working capital refers to current assets minus current liabilities.
Working capital is circulating capital.
Working capital is invested in short term assets such as cash, account receivable, inventory, etc.
Working capital can be funded with short term loans, deposits, trade credit, etc.
Investor invests money in working capital for getting immediate return.
Investment in working capital is less risky.
|SHARES (HOLDER)||DEBENTURES (HOLDER)|
A Companies owned capital which is spilt into large number of equal parts each such part is called as shares.
Return on investment
Monetary return on shares is called as dividend and it is paid at fluctuating rate.
The Shareholders have voting rights through which they can participate in the management.
Status of holders
The shareholders are the owners of the company.
Equity shares are not redeemed throughout 7 the life of the company.
Shareholders do not have any priority while receiving return on investment or return of capital.
Market values of the shares keep changing as per the financial condition of the company.
No security is offered for investing money in share capital.
|Debenture is an acknowledgement of debt. It is a source of borrowed capital.|
Monetary return on debentures is called as interest and it is paid at a fixed rate.
The Debenture holders do not enjoy normal voting rights, except on those matters which affect their interest
Debenture holders are the Creditors of the company.
Redeemable debentures are paid back after its maturity.
Debenture holders have prior claims for repayment of capital and for receiving interest on their investments.
Market value of the debentures remains constant.
Company can offer any asset as a security to debenture holder
|INTERIM DIVIDEND||FINAL DIVIDEND|
Interim dividend is the dividend which is declared between two annual general meetings of a company.
Interim dividend is declared when the company makes good profit in the first half of the financial year. I.e. declared before the end of the financial year.
Interim dividend is declared by the Board by passing a resolution if they are authorised by articles.
Rate of Dividend
The rate of interim dividend is less than final dividend.
Declaration of interim dividend becomes risky and illegal, if company incurs loss at the end of the year.
Authorization of Articles
Authorization of Articles is necessary for declaration of interim dividend.
Sources for declaration
An interim dividend is declared on the basis of the better financial prospective results may it to be quarterly, half yearly etc.
|Final dividend is the dividend which is declared at the annual general meeting of the company.|
Final dividend is declared at the completion of financial year in Annual General Meeting of the company.
Final dividend is recommended by the Board and declared by the shareholders by passing ordinary resolution (decision) at Annual General Meeting.
The rate of final dividend is generally more than interim dividend.
Declaration of final dividend is always legal, as it is declared only after ascertaining (discover) the correct profit on the basis of the audited accounts.
Authorization (approval) of Articles is not necessary for the declaration of final dividend.
There are number of sources available for declaring the final dividend. It can be declared out of current profits or profits of the previous years or out of reserves or out of capital profits out of the financial assistance specifically provided by Government for dividend.
A share certificate is the registered document of title to the shares, issued by the company under its common seal.
Who issue the document?
It is issued by public as well as private company.
Nature of Shares as regards paid up value?
A share certificate can be issued for fully paid as well as partly paid shares.
Time of Issue
A company initially (at first) has to issue share certificate.
Sanction of government
Central Government’s sanction is not required to issue share certificate.
Provision in the Articles
Provision to issue share certificate is not necessary in Articles.
The stamp duty on issuing share certificate is nominal.
Share Certificate is not a negotiable (transferable) document.
|A share warrant is a document issued under a common seal of a public company stating that the bearer of instrument has the title of the shares mentioned there in.|
Only Public limited companies can issue Share warrants.
It is issued only in case of fully paid shares.
After collection of the amount if the shareholder wishes, company can issue share warrant against the share certificate.
The Sanction of Central government is required to issue share warrant.
Articles must provide for issue of share warrant.
Heavy stamp duty is to be paid on the issue of share warrant.
Share Warrant is a negotiable document. Anyone holding the instrument can get the ownership of shares
|PRIMARY MARKET||SECONDARY MARKET|
The market is utilized for raising fresh capital in the form of shares and debentures.
The function is to raise long term funds through fresh issue of securities.
The participants are financial institutions, mutual fund, under writer, individual investor.
Listing is not required in the case of primary market.
Determinants of Prices
The prices are determined by the management of the corporate houses with due compliances with the SEBI requirements for new issue of securities.
It is a market where existing securities are resold or traded.
The function is to provide continuous and ready market for existing long term securities.
The participants of primary market as well as the stock brokers and the members of the stock exchange are the participants.
Only listed securities can be dealt in the secondary market.
in case of secondary market the prices are determined by forces of demand and supply in the market and they keep on fluctuating.
Meaning: -Capital structure constitutes two words i.e. capital and structure. Capital refers to investment of funds in the business while structure means arrangement of different components in proper proportion. Thus capital structure means’ mix-up of various sources of funds in desired proportion’.
Definition: -” The long term sources of funds employed in a business enterprise.” (R.H. Wessel)
Components / parts of Capital Structure
There are four basic components of capital Structure. They are as follow:
1. Equity Share capital: -It is the basic of financing activities of business. Equity share capital is provided by equity shareholders. They buy equity shares and help a business firm to raise necessary funds. They bear ultimate risk associated with ownership. Equity shares carry dividend at fluctuating rate, depending upon profit.
2. Preference Share Capital: –Preference shares carry preferential right as to payment of dividend and have priority over equity shares for return of capital when the company is liquidated. These shares carry dividend at a fixed rate. They have limited voting rights.
3. Retained earnings: -it is an internal source financing. It is nothing but ploughing back of profit.
4. Borrowed Capital: –
(a) Debentures: –A debenture is an acknowledgement of loan raised by company. Company has to pay interest at an agreed rate.
(b) Term loan: -Term loans are provided by bank and other financial institutions. They carry fixed rate of interest.
To understand above concept thoroughly, we shall consider following balance sheet.
5000 Equity Shares of Rs 10 each fully paid
1000, 10% Preference Shares of 100 each
Plant & Machinery
|Reserves & Surplus|
General Reserves & Surplus
Cash in hand
Cash at bank
1000, 12% Debentures of Rs. 100 each fully paid
Meaning: – Financial Management is a specialised function of general management. It refers to management of business funds. It is mainly concerned with raising of finance and its effective utilization for achievement of goals of the organization.
Definition: -“financial Management is concerned effective use of an important economic resource, namely capital funds.”
Function of Financial Management: The functions of financial management can be divided into two:
(A) Routine functions
(B) Executive FunctionRoutine functions
1. Record keeping and reporting…Preparation of various financial statements…Cash planning…Credit management
2. Providing information to Board of Directors on current financial position for making decisions of purchases, marketing, pricing, etc.
(B) Executive Function
1. Forecasting Financial requirements: –Financial needs have to be carefully estimated in business. Money may be required for long term purpose i.e. fixed capital and for short term purpose i.e. working capital. Forecasting is not only concerned with amount of money required for a programme but also includes:
a) Duration of funds (5 years, etc)
b) Timing of supply of funds.
c) Kinds of funds (owned or borrowed, etc)
2. Deciding sources of funds: –Once the need of finance is revealed, various sources of funds must be considered. Different type of securities like shares, debentures, etc. can be issued to raise funds. Funds may also be borrowed from financial institutions and lenders. There should be a proper balance between long term funds and short term funds.
3. Investment decisions: –Investment decisions refer to the decisions regarding utilization of funds raised by the firm. It relates to the selection of assets in which funds are to be invested. The funds can be invested in two types of assets, mainly
a) Long term assets or Fixed assets
b) Short term assets or current assets
4. Dividend Policy: –A business firm is basically a profit earning organization. The earnings of a firm depend upon efficient utilization of funds. Financial management is also concerned with the decision to declared dividend. A finance manager has to decide what portion of profit is to be retained in the business and balance is to be distributed among shareholders.
5. Checking and analysis of financial performance: –The checking and analyzing financial performance is very essential to carry out financial functions smoothly. For this various financial statements are prepared and analysed. This is of great value in improving techniques of financial control.
6. Advising Board of Directors: A finance manager provides advice to Board of Directors in respect of financial matters. He suggests various solutions for any financial difficulty; normally finance manager gives advice on important matters such as pricing, expansion, acquisition (gaining), dividend policy, etc.
Meaning: – A company following conservative dividend policy accordingly shall transfer a large portion of divisible profits to the reserves every year. The accumulation of such retained may enable the company to capitalise its profits so as to establish proper balance between the paid-up capital and reserves. However, the capitalisation of profits is termed as issue of bonus shares.
Bonus shares can be defined as shares issued by the company to its existing equity shareholders out of accumulated reserves. The bonus shares are equity shares that are issued to existing equity shareholders free of cost or as a gift by the company.
1. The issue of bonus shares must be authorized by Articles of Association of the company. If it is not provided, the company should pass a resolution in its shareholders meeting making provision in the Articles for issuing bonus shares.
2. It must be recommended by a board resolution and then approved by the shareholders in general meeting.
3. The bonus issue is made out of free reserves built out of genuine profits or share premium collected in cash.
4. Reserves created by revaluation of fixed assets are not capitalized for bonus shares.
5. The bonus issue is not made unless the partly paid-up shares, if any existing is made fully paid-up.
6. There can be issue of bonus shares only twice in a period of 5 years.
7. The company issuing bonus shares should not have defaulted in payment of statutory dues such as contribution to provident fund, gratuity, and bonus.
8. Consequent to the issue of Bonus Shares, if the subscribed and paid-up capitals exceed the authorized capital, a resolution should be passed by the company at its general body meeting for increasing the authorized capital.
9. No bonus shares issue can be made by the company which will dilute (reduce in strength) the value or rights of the share holders of convertible debentures, fully or partly.
10. Bonus shares cannot be issued within 12 months of any public right issue or right issue.
Meaning: -The depositor may renew the deposit on completion of the term of deposit. The term ‘Renew’ implies, ‘to acquire again’. Accordingly, the renewal of deposit means acceptance of the deposits by the company for further period.
Thus, the renewal of deposit refers to issuing new deposit receipt in cancellation receipt for old deposit on maturity of old deposit on repayment. The depositor has to submit the application in writing to renew the deposit. He has to also give a declaration to the effect that the amount is not being deposited out of the funds acquired by him by borrowing or accepting deposits from any other person.
Renewal of deposit must need the following procedures to be completed.
1.Board Resolution: -If the company intends to renew deposits instead of refunding it. The resolution in the Board Meeting in this regard is to be passed.
2.Approval from Depositors: -The secretary has to prepare printed application forms for Renewal of Deposits and the same forms are to be sent to all depositors at least one month before the maturity date.
3.Renewal Receipts: -After receiving the application form for renewal, the secretary has to prepare renewal receipts and is to be sent to the depositors.
4. Entries in register of Depositors: -The secretary has to make the entries of renewal of deposit in the Register of Depositors.
(5) Legal provisions regarding unclaimed / unpaid dividend.
(i) Meaning: The dividend which has not been paid to the shareholders within 30 days of its declaration is called ‘unpaid dividend’. If the declared dividend is not claimed by the shareholders and remains unpaid with the company’s bankers, it is called ‘unclaimed dividend’ The amount of final dividend as well as interim dividend may remain unpaid/unclaimed.
(ii) Provisions: The provisions in respect to unpaid or unclaimed dividend as incorporated under section 205 of the Companies Act, 1956 are stated as follows:
a. Unpaid dividend account: When dividend is not paid to or claimed by shareholders within a period of 30 days from the date of its declaration, the company is required to transfer the amount of unpaid or unclaimed dividend to a separate account called “Unpaid Dividend Account of ……… Company Limited/Company (Private) Limited.” In any scheduled bank within 7 days after the expiry of 30 days of declaration of dividend.
b. Penal Interest: If a company fails to deposit the amount of unclaimed dividend into a separate bank account within a period of 7 days from the date of expiry of declaration of dividend, it is liable to pay interest on the amount not transferred @ 12% p.a. Such amount of interest is paid to the members who have not been paid or claimed dividend in proportion to their dues.
c. TransferofInvestors’EducationandProtectionFund: According to the provision of Section 205(A) of the Companies Act, 1956, if the amount of unpaid dividend remains in the account for 7 years from the date of transfer to this account, a company is required to transfer such amount together with interest due on it to “Investors’ Education and Protection Fund” (IEPF), as established by the Central Government.
d. Payment of unpaid /unclaimed dividend: Any person entitled to any amount transferred to IEPF is required to make application for refund to the authority or committee appointed by the Central Government. On verifying the evidences or documents. If the authority or committee is satisfied that such person is legally entitled to receive refund, it makes an order for payment of such amount due.
e. Penalty: If any company commits default in compliance of above requirements, such company and every officer of the company responsible for the lapse or default shall be punishable with fine upto Rs. 5000 per day during which the default continues.
Ans. This statement is False.
According to Webster’s Dictionary, a bond is an interest bearing certificate issued by a government or business, promising to pay to the holder specified sum at a specified date. In fact there is no difference between bonds and debentures.
(1) Bond is a loan taken by company for medium to long period. Bond holder therefore is the creditor of the company.
(2) Bond capital is returnable and therefore has no permanency. Bond holder earns interest as return.
(3) Bond holder cannot participate in management of company. They cannot take any decision on matters of the company.
(4) Bond holder has no voting rights on matters related to company like he cannot appoint Directors / Auditors of the company.
(5) The real owner of the company is the equity shareholder. Equity shareholders are risk bearers of the company and they are having the voting rights and taking participation in management of the company. Hence bond holders are not the owners of the company.
Ans. This statement is False.
1. When a member sells or gives his shares to another person voluntarily, it is known as transfer of shares. Transfer of shares is a voluntary act on the part of the shareholder.
2. The shares cannot be transferred by mere delivery. The transfer has to be place in the manner as specified in this respect. The transfer is effected by registering an instrument called ‘Instrument of Transfer’ with the company.
3. The application for transfer of shares may be made in the prescribed printed form either by the transferor or by the transferee. Such transfer instrument or form must be signed by the transferor, transferee and a witness. Such duly filled in form, stamped and signed must be submitted to the company’s office along with original share certificate.
4. In respect of transfer of partly – paid shares, a notice must be given by the company to the transferee mentioning therein that the shares to be transferred are partly paid up.
5. If an application for transfer of partly – paid shares is made by the transferee, such a notice is not required to be given by the company to the transferee.
Ans. This statement is false.
1. According to Provision of Section 58 (A) of the Companies Act, 1956 and Rules (2) of the companies Rules, 1975, the term ‘deposit’ means any deposit of money accepted and includes any amount borrowed by the company. The term ‘deposit’ however, does not include specific type of borrowings and security deposits.
2. Receiving the amount of deposits along with duly filled prescribed application by a company from the interested public in response to the advertisement given to invite deposits is called ‘acceptance of deposits’.
3. A public company can accept deposits from the public at large. The term ‘deposit’ is usually taken as ‘public deposit’ because the deposits are invited and accepted by the public company from the general public.
4. A private company cannot invite and accept deposits from the general public. However, it can accept deposits from its directors, relatives of directors and members provided it has satisfied certain conditions required by law.
Ans. This statement is False.
1. Share certificates, when converted from a physical form into an electronic form are called demat shares.
2. The depository system eliminates the handling of huge paperwork involved in the transfer of securities. Under this system, the securities are transferred by means of entries in the ledger of Depository System without physical movement of the security certificates.
3. Under the depository system, the process of transfer of securities is very simple and easy. The transfer of securities from one investor to another under this system is virtually automatic, speedy and all hurdles in the transfer of securities are removed.
4. As this system reduced the settlement time of transactions, the investor gets immediate payment from the purchaser or broker of the securities.
DISHA INDUSTRIES LIMITED
50/A Bandra-Kurla Complex
Tele No.: 24761524
Ref.: Disha/96/2011-12 Date : 24th Jan, 2012.
Mr. Ramchandra Bohare
H-4, Anil Housing Society,Bhadkamkar Marg,
Sub : Payment of interest on debentures
Dear Sir,I am directed to inform you that the interest on your 100, 10% non convertible debentures of Rs. 100 each is due for payment.The details of amount of interest payable to you are as follows :
|folio no.||Number of Debentures||Distinctive Nos.||Gross Amount of Interest Rs.||T.D.S.||Net Amount of Interest Rs.||Interest warrant No.|
The interest warrant is enclosed herewith.Please acknowledge the receipt and oblige.
Thanking you. Yours faithfully, For Disha Industries Ltd. Sd/-
Encl : Interest warrant
Disha Industries Ltd
50/A, Bandra Kurla Complex, Bandra (East), Mumbai-400051.
Date : 17th Jan, 2012.
Pay Mr. R. Bohare a sum of Z One Thousand only.
Bank of India
Shivaji Park branch
Mumbai – 96. For Disha Industries Ltd.,
1. _______________ Managing Director
2. _______________ Secretary
Treasury bills, also known as Zero Coupon Bonds are the instrument of short term borrowing with maturity period of less than one year.
This instrument is issued by Reserve Bank of India on behalf of the Central Government for fulfilling short term requirements of funds. They are issued at discount and are paid at par.
This difference between the issue and the redemption price is the interest payable. They are highly liquid and no risk of default of payment is there. They are issued of Rs.25, 000 or in multiples thereof.
For example, suppose an investor purchases a 108 days Treasury bill for Rs. 138,000 having face value of Rs. 1, 50, 000. On maturity, he receives Rs. 1, 50,000. The difference of Rs. 12, 000 in the issue and redemption price is the interest received by him.
Commercial Paper (CP) is a short term unsecured promissory note with maturity period of 15 days to one year. Since it is unsecured, it is issued by the large and creditworthy companies to meet their short term fund requirements.
Commercial Paper is issued at discount and redeemed at par. It is negotiable and transferable by endorsement. The funds raised through Commercial Paper can be used for fulfilling seasonal and working capital need. For example, for meeting the floatation cost at the time of issue of shares and debentures i.e. Bridge Financing.
Call Money is short term finance used for interbank transactions. It has a maturity period of one day to fifteen days. All the commercial banks are required to maintain cash balance which is known as Cash Reserve Ratio (CRR).
The Reserve Bank of India keeps on changing this ratio from time to time thus affecting the availability of funds, for providing loans, with the banks. Call money is a facility under which banks borrow money from each other to maintain CRR at rate of interest known as Call Rate.
This rate keeps on changing from day to day and sometimes from hour to hour. The relationship between call rates and other short term instruments such as commercial papers, certificates of deposit etc. is an inverse relationship. An increase in call money rates increases the demand for other short term instruments.
Certificates of deposit are short term instruments issued by commercial banks and financial institutions to the individuals, corporations and companies. They are unsecured and negotiable. Such instruments are usually issued by banks when they have a tight liquidity position because of slow growth of bank deposits but the demand for credit is high.
Commercial bill is a bill of exchange used to finance the credit sales of firms. It is a short term, negotiable and self liquidity instrument. In case of goods sold on credit, the buyer is liable to make the payment on a specific date in future.
The seller could either wait till the maturity date or can draw a bill of exchange. When this bill is accepted by the buyer it becomes a marketable instrument and is called a trade bill. If the seller wants the funds before the maturity date, he can get the bill discounted from the bank. When a commercial bank accepts a trade bill it becomes a commercial bill.
(3) Draft a letter of thanks to the depositor of a company.
Deposits are accepted from the depositor according to the acceptance of company deposit rules and provisions of the Companies Act 1956. This letter is sent by a company immediately after the deposit is received. This letter gives information regarding the amount of deposit, date of deposit, period of deposit etc. A deposit receipt is sent to the depositor along with this letter.
Sunrise Industries Limited
601A, V S. Khandekar Road,
Vile Parle (W),
Mumbai – 400056.
web: http://www.Sunind.co.in ,
Tele No.: 022-61246871 Fax: 61246872Ref.: Sunind/48/2012-13 15th May, 2012.
Mr. Mahendra NaikS-
4, Sahavas Society,
V Balwant Phadke Chowk,
Sub : Thanking depositor for fixed deposit
Dear Sir,We take this opportunity to thank you for showing faith and confidence in the company, for submitting form for fixed deposit of Rs. 25,000 for a period of 12 months.
Fixed deposit receipt No. 317 dated 10th May, 2012 for a sum of Rs. 25,000 is enclosed along with this letter In case you need any further information or explanation please do not hesitate to contact us. We ensure that our service is benchmarked to international standards.
For Sunrise industries Ltd,
Encl : Fixed deposit receipt No. 317
Sunrise Industries Limited.
60/A, V S. Khandekar Road,
Vile Parle (W), Mumbai – 400056.
Tel. No. : 022-61246871 Fax: 022-61246872Ref. : D4/2012 – 21st April, 2012.
Mr. Babu MahaleC/12,
Raja Bade Chowk,
Mahim, Mumbai – 400016
Sub : Repayment of Deposit
Dear Sir,We have received from you the original deposit receipt no. 83556 duly discharged alongwith your instruction for repayment.Details of repayment of deposit are as under :
|Type of deposit||Receipt No.||Deposit Amount||Maturity Amount||T.D.S.||Due date/ maturity date|
|Deposit for 12 months||83556||Rs. 20000/-||Rs. 22000/-||Nil||20th April 2012|
Please find enclosed herewith a cheque of Rs. 22000 bearing No. 443211 dated 20th April, 2012, drawn on Bank of India, Shivaji Park branch, Dadar, Mumbai – 28.
Assuring you the best of our services at all time.
Encl: – Cheque No – 443211
Meaning: -According to the companies Act, 1956. “All shares which are not preference shares are equity shares”. The capital collected by a company by issuing equity shares is called Equity Shares Capital. Equity shares do not have claim prior to preference shares for payment of dividend and repayment of capital. If a company does not earn profit in a particular year then equity shareholders will not get any dividend. Thus, the equity share capital is also called as Risk Capital.
Features of Equity shares capital: –
1. No preferential (special) rights: -Equity share holders get dividend only after the dividend is paid to preference shareholders. Similarly, at the time of winding up of the company, the claim of equity shares is considered at the end.
2. No fixed rate of dividend: -Company does not commit any fixed rate of dividend on equity shares. The rate of dividend keeps changing from year to year as per company’s financial position. The rate of dividend is recommended by Board of Directors every year and declared by share holders.
3. Voting Rights: -Every equity shareholder has voting right in the proportion with the shares held by him. They can vote on all the matters placed before the meeting. As per the rights conferred upon the equity shareholders by the companies Act, the voting rights can be exercised either personally or through proxy (only after observing certain rules)
4. No claim on unpaid dividend: -If a company incurs loss or earns less profit in a particular year then it does not pay any dividend to equity share holders. The equity shareholders cannot claim this dividend in future.
5. Irredeemable nature: -Company does not repay the money raised through equity shares during its lifetime. This money is repaid only at the time of winding up of the company.
6. Chances of prosperity (richness): -Equity shareholders are paid dividend at fluctuating rate as per the profits of the company. They claim the entire amount of residual (remaining) of distributable profits. So, if company earns well, the equity shareholders also prosper along with the company.
7. Privileges (rights): – It is the privilege and right of equity shareholders to have priority in purchasing shares in case of further public issue of shares. It is called as Right Issue. Equity shareholders are also entitled to receive bonus shares which are issued by companies as a gift.
8. Less face Value : – As compared to preference shares, the equity shares are of less face value like Rs 10/- or even Rs 1/-
Balbharati solutions for Secretarial Practice 12th Standard HSC Maharashtra State Board
Finance is related to money and money management.
Finance is the management of monetary affairs of the company
Corporation finance deals with the acquisition and use of capital by business corporation.
Company has to pay taxes to government.
Fixed capital refers to any kind of fixed assets.
Working capital refers to the excess of current assets over current liabilities.
Manufacturing industries have to invest huge amount of funds to acquire fixed assets.
When the population is increasing at high rate, certain manufacturers find this as an opportunity to expand business.
The sum of all current assets is gross working capital.
Capital structure means mix up of various sources of funds in desired proportion.
|Group ‘A’||Group ‘B’|
|a) Capital budgeting||1) Sum of current assets|
|b) Fixed capital||2) Deals with acquisition and use of capital|
|c) Working capital||3) Fixed liabilities|
|d) Capital structure||4) Sum of current liabilities|
|e) Corporate finance||5) Fixed assets|
|6) Investment decision|
|7) Financing decision|
|8) Deals with acquisition and use of assets|
|9) Mix up of various sources of funds|
|10) Product mix|
|Group ‘A’||Group ‘B’|
|a) Capital budgeting||1) Investment decision|
|b) Fixed capital||2) Fixed assets|
|c) Working capital||3) Sum of current assets|
|d) Capital structure||4) Mix up of various sources use of assets|
|e) Corporate finance||5) Deals with acquisition and use of capital|
A key determinant of success of any business function. – Finance
The decision of finance manager which ensures that firm is well capitalised. – Financing Decision
The decision of finance manager to deploy the funds in systematic manner – Investment decision
Capital needed to acquire fixed assets which are used for longer period of time. – Fixed Capital
The sum of current assets. – Working Capital
The excess of current assets over current liabilities. – Gross working capital
The process of converting raw material into finished goods. – Product Cycle
The boom and recession cycle in the economy. – Business cycle
The ratio of different sources of funds in the total capital. – Capital structure
The internal source of financing. – Retained earnings
The business will require huge funds, if assets are acquired on lease basis.
Land and Building
Plant and Machinery
Equity Share Capital
Preference Share Capital
Initial planning of capital requirement is made by finance Manager.
When there is boom in economy, sales will Increase
The process of converting raw material into finished goods is called Production cycle.
During recession period sales will Decrease.
|Group ‘A’||Group ‘B’|
|a) Financing decision||1) __________________|
|b) __________________||2) Longer period of time.|
|c) Investment decision||3) __________________|
|d) __________________||4) Circulating capital|
|e) Combination of various sources of funds||5) __________________|
(To have right amount of capital, Deploy funds in systematic manner, Fixed capital, Working capital, Capital structure)
|Group ‘A’||Group ‘B’|
|a) Financing decision||1) To have a right amount of capital|
|b) Fixed capital||2) Longer period of time.|
|c) Investment decision||3) Deploy funds in systematic manner.|
|d) Working Capital||4) Circulating capital|
|e) Combination of various sources of funds||5) Capital structure|
According to Henry Hoagland, “Corporate finance deals primarily with the acquisition and use of capital by a business corporation.”
Fixed capital is that portion of capital which is invested in fixed assets such as land, building, furniture, etc.
Gartenberg defines it as “The excess of current assets over current liabilities.”
The process of converting raw material into finished goods is called production cycle.
According to R. H. Wessel, “The long term sources of funds employed in a business enterprise.”
Finance is needed to pay interest to debenture holders.
When there is boom in economy sales will increase
Debenture is an acknowledgment of loan raised by company.
Preference shares carry dividend at fixed rate.
(a) The business firm has access to the capital market to fulfill its financial needs. The firm has multiple choices of sources of financing.
(b) Different types of securities like shares, debentures, etc. can be issued to raise funds. Funds may also be borrowed from financial institutions and lenders. The finance manager must ensure that the firm is well capitalised.
(a) Investment decisions refer to the decisions regarding utilization of funds raised by the firm. It relates to the selection of assets in which funds are to be invested.
(b) The funds can be invested in two types of assets, namely:
• Long term assets or fixed assets
• Short term assets or current assets
(a) Fixed capital refers to capital invested in fixed assets. Fixed Capital is invested in long term assets such as land, building, equipment, etc.
(b) Investor invests money in fixed capital to make a future profit. Fixed capital is usually required at the time of the establishment of the company.
(a) Working capital is the capital that is used to carry out the day to day business activities. The business firm has to arrange capital for making an investment in short term assets such as cash, account receivable, inventory, etc.
(b) The capital invested in these assets is referred to as Working Capital. Investor invests money in working capital for getting an immediate return.
The management of ‘Maharashtra State Road Transport Corporation’, wants to determine the size of working capital.
Being a public utility service provider, will it need less working capital or more?
Being a public utility service provider, will it need more Fixed Capital?
Give one example of public utility service that you come across on day-to-day basis.
Being a public utility service provider, it will need less working capital.
Yes. Being a public utility service provider, it will need more fixed capital.
BEST Brihanmumbai Electric Supply and Transport undertaking is an example of public utility service.
A company is planning to enhance its production capacity and is evaluating the possibility of purchasing new machinery whose cost is 2 crore or has alternative of machinery available on lease basis.
What type of asset is machinery?
Capital used for purchase of machinery is fixed capital or working capital?
Does the size of a business determine the fixed capital requirement?
Machinery is a fixed asset. This is because it stays with a company for a long period of time.
Capital used for the purchase of machinery is fixed capital. It is the capital that stays in the company almost permanently.
Yes, the size of a business determines the fixed capital requirement. Large size business has high fixed capital requirements and vice versa.
|Fixed Capital:||Working Capital|
|(1) Meaning: Fixed capital refers to any kind of physical capital i.e. fixed assets.||Working capital refers to current assets minus current liabilities.|
|(2) Nature: It stays in business almost permanently i.e. for more than one accounting year.||It stays in business for a short period of time. Thus, working capital is circulating capital.|
|(3) Purpose: Fixed Capital is invested in long term assets such as land, building equipment, etc.||Working capital is invested in short term assets such as cash, account receivable, inventory, etc.|
|(4) Sources: Fixed Capital funding can come from issuing shares, debentures, long term loans, etc.||Working Capital funding can come from short term loans, deposits, trade credit, etc.|
|(5) Objective of investor: Investor invests money in fixed capital to make a future profit.||Investor invests money in working capital for getting an immediate return.|
|(6) Risk Involved: Risk involved in fixed capital is high||The risk involved in working capital is less as compared to fixed capital.|
“A firm’s capital structure is the relation between the debt and equity securities that makes up the firm’s financing of its assets”.
There are four basic components of capital structure. They are as follows :
It is the basic source of financing activities of the business. Equity shares are shares which get dividend and repayment of capital after it is paid to preference shares. They own the company. They bear the ultimate risk associated with ownership. They carry dividends at a fluctuating rate depending upon the profits.
Preference shares carry preferential right as to payment of dividends and have priority over equity shares for return of capital when the company is liquidated. These shares carry dividends at a fixed rate.
It is an internal source of financing. It is nothing but a ploughing back of profit.
It comprises the following:
It is an acknowledgement of loans raised by the company. Company has to pay interest at an agreed rate.
Term loans are provided by the bank and other financial institutions. They carry a fixed rate of interest.
Manufacturing industries and public utilities have to invest a huge amount of funds to acquire fixed assets. While the Trading business may not need huge investments in fixed assets.
Where a business firm is set up to carry on large scale operations, its fixed capital requirements are likely to be high. It is because most of their production processes are based on automatic machines and equipment.
There are business firms which are formed to carry on production or distribution on a large scale. Such businesses would require more amount of fixed capital.
If an entrepreneur decides to acquire assets on a lease or on a rental basis, less amount of funds for fixed assets will be needed for the business.
‘‘corporate finance deals primarily with the acquisition and use of capital by business corporation.’’
The term corporate finance also includes financial planning, study of the capital market, money market and share market. It also covers capital formation and
The business firm has access to the capital market to fulfill its financial needs. The firm has multiple choices of sources of financing. The firm can choose whether it wants to raise equity capital or debt capital. Firms can even opt for a bank loan, public deposits, debentures, etc. to raise funds. The finance manager ensures that the firm is well capitalised i.e. they have the right amount of capital and that the firm has the right combination of debt and equity.
Once the business firm has gained access to capital, the finance manager has to take a decision regarding the use of the funds in a systematic manner so that it will bring a maximum return for its owners. For this, the firm has to take into consideration the cost of capital. Once they know the cost of capital, the firm can deploy or use the funds in such a way that returns are more than the cost of capital.
(a) Finance is the life-blood of the organisation.
The business firm has access to the capital market to fulfill its financial needs.
(b) The firm has multiple choices of sources of financing. Different types of securities like shares, debentures, etc. can be issued to raise funds.
(c) Funds may also be borrowed from financial institutions and lenders. The finance manager must ensure that the firm is well capitalised.
(d) Thus, it is rightly justified that the firm has multiple choice of sources of financing.
There are various factors affecting the requirement of fixed capital. Some of them are as follows:
(a) Nature of Business: The nature of business plays a vital role in determining fixed capital requirements.
For instance, a manufacturing company needs more fixed capital as compared to a trading company. This is because the trading company does not need a plant, machinery, etc.
(b) Size of business: The companies which are operating at large scale require more fixed capital as they need more machinery and other assets.
Whereas, small scale business needless amount of fixed capital. Hence, the size of the firm, either in terms of its assets or sales, affects the need for fixed capital.
(c) Scope of business: The scope of business is the maximum extent up to within which a business can act or perform its business activities.
If the scope of business is vast, it needs higher fixed capital. For instance, a company involved in multiple activities like manufacturing processing, and assembling usually needs a substantial amount of fixed capital. Similarly, if the scope of business is limited, then it requires less fixed capital.
For instance, if a company does only assembling activities, it needs a fewer amount of fixed capital.
(d) The extent of lease or rent: If companies can arrange financial and leasing facilities easily then they require less fixed capital as they can acquire assets on easy instalments instead of paying a huge amount at one time.
On the other hand, if the easy loans and leasing facilities are not available then more fixed capital is needed as companies will have to buy plants and machinery by paying huge amounts together.
(e) Choice of Technique: Those manufacturing enterprises which make use of modern and automatic machines need a large amount of fixed capital.
On the other hand, those enterprises in which production is carried out mainly through labour, need less fixed capital.
Fixed capital refers to capital invested in fixed assets. Fixed Capital is invested in long term assets such as land, building, equipment, etc.
Investor invests money in fixed capital to make a future profit. It is permanent capital.
Fixed capital is usually required at the time of the establishment of the company.
However, existing companies may also need such capital for their:
Expansion and development, Replacement of equipment, etc.
Thus, it is rightly justified that, fixed capital stays in the business almost permanently as it is invested in fixed assets.
Capital structure constitutes two words i.e.
capital and structure. ‘Capital’ refers to the investment of funds in the business while ‘structure’ means the arrangement of different components in proper proportion.
Thus, capital structure means ‘mix-up of various sources of funds in desired proportion’. A company can raise its capital from different sources i.e. owned capital or borrowed capital or both.
The owned capital consists of equity share capital, preference share capital, reserves, and surplus. On the other hand, borrowed capital are debentures, loans, etc. The proportion of different sources are used in the capital structure.
Thus, it is rightly justified that, capital structure is composed of owned funds and borrowed funds.
There are various factors affecting the requirement of working capital. Some of them are as follows:
(a) Nature of business: The requirement of working capital depends on the nature of business. The nature of business is usually of two types:
• Manufacturing Business and
• Trading Business.
– In the case of a manufacturing business, it takes a lot of time in converting raw material into finished goods. Therefore, more working capital is required.
– On the contrary, in the case of trading business, the goods are sold immediately after purchasing, or sometimes the sale is affected even before the purchase itself. Therefore, less working capital is required.
(b) Size of Business: There is a direct link between working capital and the size of the business.
In other words, more working capital is required in the case of a big organisation. Whereas, less working capital is required in the case of a small organisation.
(c) Business cycle: The need for working capital is affected by various stages of the business.
During the boom period, the demand for a product increases, and sales also increase. Thus, more working capital is required.
During the depression period, the demand declines and it affects both the production and sales of goods.
Thus, less working capital is required.
(d) Production cycle: Production cycle means the time involved in converting raw material into a finished product. When the period of the production cycle is more, more working capital will be needed.
On the contrary, when the period of the production cycle is less, less working capital will be needed.
(e) Volume of Cycle: This is the most important factor affecting the size of working capital. The volume of sale and the size of working capital are directly related to each other. For instance, if the volume of sales is more, there is an increase in the amount of working capital. But if the volume of sales is less, there is a decrease in the amount of working capital.
In the functional management of a business enterprise, importance is given to production, finance, marketing, and personnel activities. Among all these activities, the utmost importance is given to financial activities. The importance of corporate finance may be discussed as follows
1. Helps in decision making: Most of the important decisions of business enterprises are determined on the basis of the availability of funds. It is difficult to perform any function of a business enterprise independently without finance. Every decision in the business is needed to be taken keeping in view of its impact on profitability. There may be a number of alternatives but the management is required to select the best one which will enhance profitability. A business organisation can give a green signal to the project only when it is financially viable. Thus corporate finance plays a significant role in the decision making process.
2. Helps in Raising Capital for a project: Whenever a business firm wants to start a new venture, it needs to raise capital. A business firm can raise funds by issuing shares, debentures, bonds, or even by taking loans from the banks.
3. Helps in Research and Development: Research and Development must be undertaken for the growth and expansion of the business. Detailed technical work is essential for the execution of projects. Research and Development is a lengthy process and therefore funds have to be made available throughout the research work. This would require continuous financial support.
4. Helps in smooth running of business firms: A smooth flow of corporate finance is needed so that salaries of employees are paid on time, loans are cleared on time, the raw material is purchased whenever required, sales promotion of existing products is carried out smoothly and new products can be launched effectively.
5. Brings coordination between various activities: Corporate finance plays a significant role in the control and coordination of all activities in an organisation. For e.g. Production will suffer if the finance department does not provide adequate finance for the purchase of raw materials and meeting other day-to-day financial requirements for a smooth running of production unit. Due to this, sales will also suffer and consequently, the income of concern, as well as rate of profit, will be affected. Thus the efficiency of every department depends upon effective financial management.
6. Promotes expansion and diversification: Modern machines and modern techniques are required for expansion and diversification. Corporate finance provides money to purchase modern machines and technologies. Therefore finance becomes mandatory for the expansion and diversification of a company.
7. Managing Risk: Company has to manage several risks, such as sudden fall in sales, loss due to natural calamity, loss due to strikes, etc. The company needs financial aid to manage such risks
8. Replace old assets: Assets such as plant and machinery become old and outdated over the years. They have to be replaced by new assets. Finance is required to purchase new assets.
9. Payment of dividend and interest: Finance is needed to pay a dividend to shareholders, interest to creditors, banks, etc.
10. Payment of taxes/fees: Companies have to pay taxes to the Government such as Income Tax, Goods and Service Tax (GST), and fees to the Registrar of Companies on various occasions. Finance is needed for paying taxes and fees.
Working capital is the capital that is used to carry out the day to day business activities. The business firm has to arrange capital for making an investment in short term assets such as cash, account receivable, inventory, etc.
The capital invested in these assets is referred to as ‘Working Capital. An investor invests money in working capital for getting an immediate return.
According to Gerstenbergh, “Working capital is the excess of current assets over liability”. This approach is called Net Working Capital.
There are no precise standards to measure working capital adequacy. Management has to determine the size of working capital in the light of certain aspects of the business firm and the economic environment within which the firm operates.
1. Nature of business: Firms engaged in manufacturing essential products of daily consumption would need relatively less working capital as there would be constant and sufficient cash inflow in the firm to take care of liabilities. Likewise, public utility concerns have to maintain small working capital because of continuous flow of cash from their customers.
2. Public utility concern: These concerns provide services such as transport, gas, electricity, etc.
On the contrary, if the business is dealing with luxurious products, it requires a huge amount of working capital, as sale of luxurious items are not frequent.
Trading/merchandising firms that are concerned with the distribution of goods have to carry big inventories of goods to meet customer’s demand and have to extend credit facilities to attract customers. Hence they need a large amount of working capital.
Merchandising firms are those which are concerned with buying and selling of goods, either as wholesaler or retailer, without altering the physical form of goods.
3. Size of business: The size of the business also affects the requirement of working capital. A firm with large scale operations will require more working capital.
4. The volume of sales: This is the most important factor affecting the size of working capital. The volume of sales and the size of working capital are directly related to each other. If the volume of sales increases, there is an increase in the amount of working capital and vice versa.
5. Production cycle: The process of converting raw material into finished goods is called production cycle.
If the period of the production cycle is longer, then the firm needs more amount of working capital. If the manufacturing cycle is short, it requires less working capital.
6. Business cycle: When there is a boom in the economy, sales will increase. This will lead to an increase in investment in stocks. This requires additional working capital. During a recession, sales will decline and hence the need for working capital will also decline.
7. Terms of purchases and sales: If the firm does not get credit facility for purchases but adopts a liberal credit policy for its sales, then it requires more working capital. On the other hand, if credit terms of purchases are favourable and terms of credits sales are less liberal, then the requirement of cash will be less. Thus working capital requirements will be reduced.
8. Credit control: Credit control includes factors such as the volume of credit sales, the terms of credit sales, the collection policy, etc. If a credit control policy is sound, it is possible for the company to improve its cash flow. If credit policy is liberal, it creates a problem of the collection of funds. It can increase the possibility of bad debts. Therefore a firm requires more working capital. The firm making cash sales requires less working capital.
9. Growth and Expansion :
The working capital requirement of a firm will increase with the growth of a firm. A growing company needs funds continuously to support large scale operations.
10. Management ability :
The requirement of working capital is reduced if there is proper co-ordination between the production and distribution of goods. A firm stocking on heavy inventory calls for a higher-level for working capital.
11. External factors :
If financial institutions and banks provide funds to the firm as and when required, the need for working capital is reduced.