corporate finance final
TRANSCRIPT
-
8/3/2019 Corporate Finance Final
1/30
Corporate Finance
SYBFM
-
8/3/2019 Corporate Finance Final
2/30
Corporate
Corporate is a business or entity which has separate legalpersonality, with limited liability or unlimited liability for itsmembers or shareholders, who buy and sell theirshares/stocks depending on the performance of the board
of directors. corporations differ from sole proprietorships
Finance function is the function which determines andbrings the future financial resources need for the companyfrom different sources like banks and financial institutions
finance deals with matters related to money and themarkets.
It is nothing but management of money.
-
8/3/2019 Corporate Finance Final
3/30
Introduction to Corporate FinanceIntroduction to Corporate Finance
Corporate Finance addresses the following three
questions:
1. What long-term investments should thefirm engage in?
2. How can the firm raise money for the
required investments?
3. How much short-term cash flow does a
company need to pay its bills?
-
8/3/2019 Corporate Finance Final
4/30
Shareholders Equity
Current Liabilities
Long-Term Debt
Liabilities to company
Current Assets
Fixed Assets
1 Tangible
2 Intangible
Total Value of Assets:
-
8/3/2019 Corporate Finance Final
5/30
Current Assets
Fixed Assets
1 Tangible
2 Intangible
Shareholders
Equity
Current Liabilities
Long-Term Debt
What long-
terminvestmentsshould thefirm engagein?
The Capital Budgeting Decision(Investment Decision)
-
8/3/2019 Corporate Finance Final
6/30
How can the firm
raise the money
for the required
investments?
The Capital Structure Decision
(Financing Decision)
Current Assets
Fixed Assets
1 Tangible
2 Intangible
Shareholders
Equity
Current Liabilities
Long-Term Debt
-
8/3/2019 Corporate Finance Final
7/30
How much short-
term cash flowdoes a companyneed to pay itsbills?
The Net Working Capital Investment Decision
(Financial Decision)
NetWorking
Capital
Shareholders
Equity
Current Liabilities
Long-Term Debt
Current Assets
Fixed Assets
1 Tangible
2 Intangible
-
8/3/2019 Corporate Finance Final
8/30
Financial Markets
Primary Market
When a corporation issues securities, cash flows
from investors to the firm.
Usually an underwriter is involved
Secondary Markets
Involve the sale of used securities from one
investor to another.
Securities may be exchange traded or trade over-
the-counter in a dealer market.
-
8/3/2019 Corporate Finance Final
9/30
Financial Markets
Company
Investors
Secondary Market
money
securities
SellBuy
Stocks and
Bonds
Money
Primary Market
-
8/3/2019 Corporate Finance Final
10/30
Role of Financial institution in working
capital finance Working capital finance
Bridge finance
Project finance
Project Report
Feasibility study
Priority sector lending
Concessional rate of interest
Credit rating
Supplementary sources Advisory role
Helps in implementing govt. policies.
-
8/3/2019 Corporate Finance Final
11/30
Bridge finance
It is short term source of finance.
Rate of interest is very high.
A method of financing, used by companies before their IPO, toobtain necessary cash for the maintenance of operations.
Financing that an investment bank or venture capital firm extendsuntil long-term financing can be arranged.
A bridge loan is a short-term, high-interest loan that provides aquick source of cash for commercial or individual needs. It is calleda bridge loan because it serves as a bridge between one period offunding and another, more permanent source of funding.
Example: suppose a company has been approved for a 10 crore loanfrom a bank. However, this money will not be available for sixmonths, and they are running short on cash. The company couldapply for a six-month bridge loan of 10 lakhs to cover theirexpenses until the money from the 10 crore comes through.
-
8/3/2019 Corporate Finance Final
12/30
Project finance
Financing of long term infrastructure and/or industrial projects using debtand equity
Debt is typically repaid using cash flow generated from the operations ofthe project.
Limited recourse to project sponsorsDebt is typically secured by projects assets, including revenue producing
contractsFirst priority on project cash flows is given to the Lender
Consent of the Lender is required to disburse any surplus cash flows to projectsponsors
Higher risk projects may require the surety/guarantees of the projectsponsors
project financing is a loan structure that relies primarily on the project'scash flow for repayment, with the project's assets, rights, and interestsheld as secondary security or collateral.
-
8/3/2019 Corporate Finance Final
13/30
Type of finance on the basis of time of
payment.
Short term finance is less than 36 months
Medium term finance is 36-72 months
Long term finance greater than 72 months
-
8/3/2019 Corporate Finance Final
14/30
Credit analysis/Rating
Credit rating evaluate the capacity of borrower torepay the debt(Principal + Interest) in timeaccording to agreement.
Five cs of credit rating Character(Citizen)
Capacity(cash flow)
Capital(wealth) Collateral(security)
Conditions(downside).
-
8/3/2019 Corporate Finance Final
15/30
Term Loan
Basic Features
Maturity
Agreement
Security
Charge
-
8/3/2019 Corporate Finance Final
16/30
security
Primary security:
Term loan are secured by assets acquired
using term loan fund. Secondary security:
Term loan secured by the company current
assets and future assets. It is also known ascollateral security.
Verification of security:
-
8/3/2019 Corporate Finance Final
17/30
Charge
Charge means transfer the right or interest in theassets of person in favour of lender for thepurpose of security the repayment of loan.
First charge and second charge: Fixed and floating charge:
Lien:
Mortgage:
Hypothecation: Pledge:
Pari passu clause:
-
8/3/2019 Corporate Finance Final
18/30
Covenants
Covenants are the basic condition that the lender should follow.
Assets related
Minimum assets base
Current ratioNot to sell assets without lenders approval
Refrain from creating additional charge on assets
Liability related
Restrained from incurring additional debt.Repay existing loan
Reduce debt equity by incurring additional equity shares
Limits the freedom of promoters to dispose of their shareholding.
-
8/3/2019 Corporate Finance Final
19/30
Covenants
Cash flow related covenants
Restricting cash dividend
Restricting cash expenditure
Restricting salaries and perks of managerial staff. Etc
Control related
Appointment of nominee directors by financials institutions to
safeguard the interest of financials institution.
-
8/3/2019 Corporate Finance Final
20/30
Repayment schedule
Repayment of term loan has two components
Interest
Repayment of principal
Two types of amortisation
1. Equal principal payment also know as baloon payment: Repayment of principal in equal installment and pay interest
on outstanding loan. Such payment is called baloon payment.
2. Equal installment payment: An alternate way for amortising loan is to require to pay equalloan installment including both interest and principal.
-
8/3/2019 Corporate Finance Final
21/30
Interest
1. It is tax deductible for borrowing firm.
2. Concessional rate of interest for projects in backward areas.
3. In case of default in repayment additional interest of 2% p.a. for theperiod of default on the amount of principal and interest is to be paid.
4. Interest= MLR+ Risk involved
5. Interest rate is not related to the period or amount of the loan given butto the credit rating of the borrower as decided by bank.
6. Penal interest and additional interest:
7. Penal interest is charged over and above regular interest rate when theborrower fails to comply with one or more stipulated terms andconditions without any approval of appropriate authority.
Eg. Fails to submit stock statement to bank Sell of assets without approval
Fails to maintain the covenants.
-
8/3/2019 Corporate Finance Final
22/30
Term loan:
Advantages:
Cost is low than cost of equity or preference capital
It do not result in dilution of control
They are backed by security which the lender always prefer.
DisadvantagesIt do not carry voting rights
It do not represent negotiable instrument
Payment of interest and repayment of principal is obligation.
Failure to meet result into penalty or additional interest.
-
8/3/2019 Corporate Finance Final
23/30
Illustration 1
Prepare an amortisation schedule form the
following information, assuming that theprincipal amount is repayable equally along
with interest payable on outstanding loan:
Amount borrowed Rs 6,00,000
Annual interest 11%
Repayment period 6 years.
-
8/3/2019 Corporate Finance Final
24/30
Illustration 2
Prepare an amortisation schedule form the
following information, assuming that theamount is an equated annual installment:
Amount borrowed Rs 12,00,000
Annual interest 10% Repayment period 10 years.
-
8/3/2019 Corporate Finance Final
25/30
Moratorium and flash report
Moratorium:The period between the release of loan and the first principal
installment payment is known as moratorium.
This is necessary because new machinery after installationalways take time to recover the overheads and expensesbefore generating the profits to pay installments.
Flash report:It is prepared by the bank
It show whether it is feasible to provide the loan to the applicantsIT determine the amount of money that bank will earn by providing
the loan:
After how many years it will paid it back to the bank.
-
8/3/2019 Corporate Finance Final
26/30
Project Appraisal
The purpose of Project Appraisal is to ascertain whether theproject will be sound technically, economically, financiallyand managerially and ultimately viable as a commercialproposition.
The appraisal of a project will involve the examination of:
a) Technical Feasibility : To determine the suitability of thetechnology selected and the adequacy of the technicalinvestigation, and design.
Focus on following aspects
Process of manufacturing
Raw materials and consumables.
Plant & equipment's
Building.
Manpower requirement
-
8/3/2019 Corporate Finance Final
27/30
Project Appraisal
b) Economic Feasibility : To determine the conduciveness of economicparameters to setting up the project and their impact on the scale of operations.
Eg. Socio economic benefit
Availability of labour in specific area
c) Financial Feasibility : To determine the accuracy of cost estimates,
suitability of the envisaged pattern of financing and general soundness of thecapital structure.
Estimate of working capital requirement
Study of estimated cash flow pattern of project.
Maintaining various ratios eg debt equity, IRR etc
Appropriateness of financial pattern ie IPO, promoters contribution, stockexchange listing
-
8/3/2019 Corporate Finance Final
28/30
Project Appraisal
d) Market appraisal: Examine the reasonableness of demand projection bydoing market survey. Other factor that need to consider are:
distribution network,
transportation facilities.
e) Managerial Competency : To ascertain that competent men are behindthe project to ensure its successful implementation and efficientmanagement after commencement of commercial production. Eg:
person handling project should be well experienced.
F)Ecological analysis:
It is done for big project such as power plant, chemical factory
Questions raised are what are the likely damage caused to environmentdue to project
What is cost of restoration measures so that damages can be withinacceptable limit.
-
8/3/2019 Corporate Finance Final
29/30
Sensitivity analysis
Analyst know that future is uncertain and
there can be estimation error. Sensitivity
analysis take care of estimation error by using
number of possible outcomes in evaluating a
projects. Eg
If sales decreased by specific percentage
Interest rate increase by certain percentage
Additional borrowing required if any, etc.
-
8/3/2019 Corporate Finance Final
30/30
Ratios
Interest coverage ratio: =EBIT/ Interest
expenses
Interest and loan repayment coverage ration:= EBIT/Interest and installment.
Debt service coverage ratio:(Net profit + Depreciation + interest on loan)
Term loan Interest + term loan installment