Project Finance management assignment

Prepared by Manohar M. M. Iyer
Ref. No. VAS2010XMBA15P005
Batch XMBA 19/ EFM 13
Faculty Mr. Phadke
Prepared on December 25, 2012

Financial Management Assignments

Contents
1. Disclaimer note: ........................................................................................................................................3
2. List of Assignments.................................................................................................................................... 4
3. Projected P/L, B/S, WC statement, Ratios & Leverages. .............................................................................5
4. Profitability of the project ......................................................................................................................... 9
5. Financial ratios ........................................................................................................................................ 13
6. Working Capital Statement ..................................................................................................................... 14
7. Leverages & EPS ...................................................................................................................................... 15
8. Sources of Funding .................................................................................................................................. 16
9. End note: ................................................................................................................................................ 29

Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 2


1. Disclaimer note:
This document is prepared purely as an educational project assignment to be submitted as a component of
the XMBA curriculum being conducted by ITM (Institute for Technology and Management) at Vashi, Navi-
mumbai.

The information contained within this document is for educational assessment purposes only

None of the Idea & content mentioned in his document or results/inferences that come out after
understanding this document is permissible to be copied or to be used in part or whole without written
permission.

The reader of this document is strongly advised not to indulge in any such activity



2. List of Assignments

This assignment is prepared as a part of Financial Management study.

My attempt is to answer following list of questions given as a part of the assignment.

1. M/s ABC ltd is interested to start a new activity & has approached a bank for loan. Prepare the
projected P/L A/c, B/S, WC stmt, Cash Flow stmt, Current Ratio, quick Ratio, liquidity Ratio, stock
turnover Ratio, interest coverage Ratio, Net profit Ratio & financial leverage.

2. Mr. Deepak MD of M/s JBS ltd is interested in starting a heat treatment plant and decided to
approach Bank of India for a loan. The bank manager asked Mr. Deepak about profitability of the
project. Mr. Deepak wishes to seek your advice on how to go about. Make necessary assumption &
submit your opinion.

3. Based on balance sheet of M/s A Ltd, Find the necessary financial ratios.

4. Prepare working capital statement, based on given financial information

5. Find financial leverage, operating leverage, consolidated leverage & EPS based on the given
information.

6. What are the various Sources of funding and explanation of two such sources? A presentation.



3. Projected P/L, B/S, WC statement, Ratios & Leverages.

M/s ABC ltd is interested to start a new activity & has approached a bank for loan. Prepare the projected
P/L A/c, B/S, WC stmt, Cash Flow stmt, Current Ratio, quick Ratio, liquidity Ratio, stock turnover Ratio,
interest coverage Ratio, Net profit Ratio & financial leverages.

Details of case:
M/s ABC ltd is interested to start a new activity. It approaches Banker demanding loan of 20 L. The
company is of the opinion that M/c will cost 20 L. Furniture, AC & other equip will cost 5L.

The bank refused saying that it will give only 80% of cost of project. It asked how you will manage the
working capital of the project. The c/o replied that the same will be funded thru contribution of 5
directors @ of 20K each which is contribution for equity shares.

The loan officer asked to submit the projected P/L A/c, B/S, WC stmt, Cash Flow stmt, Current Ratio,
quick Ratio, liquidity Ratio, stock turnover Ratio, interest coverage Ratio, Net profit Ratio & financial
leverage.

The company started collecting necessary Info. The cost Accountant worked out & found out that
material cost will be 50% of sales. Establishment Mgr intimated the salaries to be Rs. 2 L PM which will
increase by 10% per year.

It was predicated that other expenses will be
A) Fixed @ Rs.3 L which will increase @ 5 % per year
B) Variable expenses will be 10% of sales

The directors decided to introduce Rs. 5 L by cheque as unsecured loan. Treasury Mgr intimated that
recovery on credit sales will take 3 m whereas payments for material will be disbursed after 2 m.
Inventory mgr has forecasted that one month raw material in stock is must for smooth production

The bank approved loan of Rs. 15L repayable in 3 yrs @ 15% pa. It asked to submit necessary proposal
along-with all other docs needed such as
1. Quotations for assets
2. MOM/AOA/ Inc Certificate
3. VAT, Service tax, Prof. Tax, Excise, PF & ESIC registration Xerox
4. Brief about the company,
5. Short Intro of directors
6. Plant layout
7. Legal dept approval
8. Pollution control board approval
9. Company sec. certificate about charges (loans) registered against the company (ROC) site
10. CIBIL certificate
11. Pan number of the company
12. Orders in Hand
13. Bank application form
14. Collateral securities of director’s residences
15. Principal securities of assets



Answer:
As requested by the loan officer, The necessary statements are displayed below, based on following
assumptions:
• Sales is 100 lakhs
• Depreciation is 10% on fixed cost
• Increase in sales is 20% PA

Projected P & L
in lakhs
Year 1 Year 2 Year 3 Year 4 Year 5
A Sales 100.00 120.00 144.00 172.80 207.36

Material 50.00 60.00 72.00 86.40 103.68
Wages 24.00 26.40 29.04 31.94 35.14
Variable exp 10.00 12.00 14.40 17.28 20.74
Fixed exp 3.00 3.15 3.31 3.47 3.65
Depreciation 0.30 0.32 0.33 0.35 0.36
Interest 2.25 1.50 0.75 0.00 0.00
B Total exp 89.55 103.37 119.83 139.44 163.57
A-B NPBT 10.45 16.64 24.17 33.36 43.79
Less tax @ 30% 3.14 4.99 7.25 10.01 13.14
NPAT 7.32 11.64 16.92 23.35 30.66

Projected Balance Sheet
in lakhs
Equity share capital 1.00 1.00 1.00 1.00 1.00
Reserves 7.32 18.96 35.88 59.23 89.88
Non-current liability
Secured loan 10.00 5.00 0.00 0.00 0.00
Un secured loan 5.00 5.00 5.00 5.00 5.00
Current liability
Creditors 8.33 10.00 12.00 10.00 17.28
Bank OD 17.22 14.43 7.17
Total liability 48.87 54.39 61.05 75.23 113.16

Non-current Fixed assets 19.70 19.39 19.05 18.71 18.34
Current assets
Stock 4.17 5.00 6.00 5.00 8.64
Debtors 25.00 30.00 36.00 43.20 51.84
Cash 8.32 34.34
Total assets 48.87 54.39 61.05 75.23 113.16



Debtors Sales/12 m * 3m
Creditors Purchase/ 12 m X 2 months
Stock Material/ 12 m * 1 m

Working Capital Statement
in lakhs
Stock 4.17 5.00 6.00 5.00 8.64
Debtors 25.00 30.00 36.00 43.20 51.84
Cash 0.00 0.00 0.00 8.32 34.34
Total Current Assets 29.17 35.00 42.00 56.52 94.82

Less current liability
Creditors 8.33 10.00 12.00 10.00 17.28
Bank OD 17.22 14.43 7.17 0.00 0.00
Total Current Liability 25.55 24.43 19.17 10.00 17.28
Working capital 3.62 10.57 22.83 46.52 77.54

Cash flow stmt
Year 2 Year 3 Year 4 Year 5
Funds from ops
Profit 11.64 16.92 23.35 30.66
Depreciation 0.32 0.33 0.35 0.36
increase in creditors 1.67 2.00 -2.00 7.28
increase in stock -0.83 -1.00 1.00 -3.64
increase in debtors -5.00 -6.00 -7.20 -8.64
Funds for investing activity
fixed assets
Investments
Funds from financing activity
Repayment of loan -5.00 -5.00 0.00 0.00

Total Funds 2.79 7.25 15.50 26.02
Ops balance 17.22 14.43 7.17 8.32
Closing balance -14.43 -7.17 8.32 17.70



Ratio Formula Year 1 Year 2 Year 3 Year 4 Year 5
Current CA/CL 1.14 1.43 2.19 5.65 5.49

Quick CA-Stock /CL –BOD 3.00 3.00 3.00 5.15 4.99

Proprietary Pro Fund/ FA + CA 0.27 0.46 0.69 0.87 0.85
Stock Turnover Cos /creditors 10.75 10.34 9.99 13.94 9.47
Interest
coverage NPAT + Int/Int 4.25 8.76 23.56 NA NA
Net-profit NPAT/Sales * 100 7.32 9.70 11.75 13.51 14.78

Ratio Commentary for First year
Current Should be more than 2 Bad Ratio seems to be cut to cut
Will receive more given short
Quick should be more than 1:1 Good run
Trouble in long run as it
seems not supported by own
Proprietary should be more than 06:1 Bad funds
Stock Turnover Good
Interest coverage Should be more than 2 Good
Net-profit Bad
Note:
• Proprietary fund is sum of EQ share, Reserve, Quasi capital (un secured loans)
• In P&L interest for unsecured loan, Bank over draft & amount for contingency is not calculated

Leverages
in lakhs Year 1 Year 2 Year 3 Year 4 Year 5
A Sales 100.00 120.00 144.00 172.80 207.36
B Material 50.00 60.00 72.00 86.40 103.68
Variable 10.00 12.00 14.40 17.28 20.74
Wages 24.00 26.40 29.04 31.94 35.14
Total B 84.00 98.40 115.44 135.62 159.55
A-B Contribution 16.00 21.60 28.56 37.18 47.81
Depreciation 0.30 0.32 0.33 0.35 0.36
EBIT 15.70 21.29 28.23 36.83 47.44
Less interest 2.25 1.50 0.75 0.00 0.00
EBT 13.45 19.79 27.48 36.83 47.44
Operating leverage Contribution/EBIT 1.02 1.01 1.01 1.01 1.01
Financial leverage EBIT/EBT 1.17 1.08 1.03 1.00 1.00
Combined leverage ops leverage * Fin leverage 1.19 1.09 1.04 1.01 1.01



4. Profitability of the project
Mr. Deepak MD of M/s JBS ltd is interested in starting a heat treatment plant and decided to approach
Bank of India for a loan. The bank manager asked Mr. Deepak about profitability of the project. Mr. Deepak
wishes to seek your advice on how to go about. Make necessary assumption & submit your opinion.

Details of case:
Mr. Deepak MD of M/s JBS ltd has introduced equity share capital of 30 lakhs along with wife, his brother &
two others. Present Bank balance of the company was 20 lakhs & there are no other assets or liability.

Mr. Deepak was an engineer & was interested in starting a heat treatment plant. Mr. Jayesh was owner of
land in industrial area & he agreed to transfer land to M/s JBS ltd in consideration of equity shares of Rs. 20
Lakhs. Due to this addition the authorized capital was also increased with Rs. 20 lakhs.

Mr. Deepak got FAX for quotation of machinery of Rs. 50 lakhs. The cost accountant Alfred estimated the
AC, Computer, Furniture, filter & electrical fittings would force Mr. Deepak to spend around 10 lakhs.

Mr. Deepak calculated pros & cons & decided to approach bank of India for a loan of Rs. 40 lakhs. Bank
manager asked him to get various documents, income tax returns, qualification certificates, passports,
quotation, plant layout, certificate of valuer, certificate of lawyer & submit proposal in brief for principal
sanction.

Two weeks got lapsed but manager did not reply though Mr. Deepak was getting restless. He asked the
manager about the proposal & was shocked when bank manager calmly replied that RBI inspection was
going on & the proposal is yet in the drawer of the manager.

After a month the bank issued a principal sanction stating 5 years repayment period & rate of interest @
2% above PLR. PLR was 13%.

Mr. Deepak contacted chairman of ES steel Pvt. Ltd. who intimated that fuel required for Furness is 40% of
sales. 20 operate in one shift, work for 8 hours & are paid Rs. 10,000/- per month on an average to satisfy
the order. Mr. Jayesh said that the plant will be operated 24/7.

Mr. Deepak found that the fuel stock should be minimum of 15 days always. The suppliers allowed credit of
2 months & customers are given credit of 3 months.

The bank manager asked Mr. Deepak about profitability of the project & how much will be administrative &
selling department expenses. Mr. Deepak is confused on these issues & he intimated the bank that the
project is financially viable. Other expenses will be 10% of sales & after paying tax at 30%, he is capable of
generating 10 lakhs in the first year.

Bank manager is not convinced with the answer of Mr. Deepak.

Mr. Deepak wishes to seek your advice on how to go about. Make necessary assumption & submit your
opinion.



Answer:
With following assumptions & statements we can show that the project is profitable. Assume:
• Sales is 200 lakhs
• Depreciation is 3% on sales
• Increase in sales is 10% PA

Projected P & L
in lakhs
A Sales 200.00 220.00 242.00 266.20 292.82

Material 80.00 88.00 96.80 106.48 117.13
Wages 72.00 72.00 72.00 72.00 72.00
Variable exp 20.00 22.00 24.20 26.62 29.28
Fixed exp 0.00 0.00 0.00 0.00 0.00
Depreciation 6.00 6.60 7.26 7.99 8.78
Interest 6.00 4.80 3.60 2.40 1.20
B Total exp 184.00 193.40 203.86 215.49 228.39
A-B NPBT 16.00 26.60 38.14 50.71 64.43
Less tax @ 30% 4.80 7.98 11.44 15.21 19.33
NPAT 11.20 18.62 26.70 35.50 45.10

Projected Balance Sheet
in lakhs
Equity share capital 50.00 50.00 50.00 50.00 50.00
Reserves (Profit + existing Bank Balance) 31.20 49.82 76.52 112.02 157.12
Secured loan 32.00 24.00 16.00 8.00 0.00
Un secured loan 0.00 0.00 0.00 0.00 0.00
Current liability
Creditors 13.33 14.67 16.13 10.00 19.52
Bank OD 0.00 0.00 0.00 0.00 0.00
Total liability 126.53 138.49 158.65 180.02 226.64

Non-current Fixed assets 54.00 47.40 40.14 32.15 23.37
Current assets
Stock 3.33 3.67 4.03 4.44 4.88
Debtors 50.00 55.00 60.50 66.55 73.21
Cash 19.20 32.42 53.98 76.88 125.18
Total assets 126.53 138.49 158.65 180.02 226.64



in lakhs
Stock 3.33 3.67 4.03 4.44 4.88
Debtors 50.00 55.00 60.50 66.55 73.21
Cash 19.20 32.42 53.98 76.88 125.18
Total Current Assets 72.53 91.09 118.51 147.86 203.27

Creditors 13.33 14.67 16.13 10.00 19.52
Bank OD 0.00 0.00 0.00 0.00 0.00
Total Current Liability 13.33 14.67 16.13 10.00 19.52
Working capital 59.20 76.42 102.38 137.86 183.75

Cash flow stmt
Year 2 Year 3 Year 4 Year 5
Funds from ops
Profit 18.62 26.70 35.50 45.10
Depreciation 6.60 7.26 7.99 8.78
increase in creditors 1.33 1.47 -6.13 9.52
increase in stock -0.33 -0.37 -0.40 -0.44
increase in debtors -5.00 -5.50 -6.05 -6.66
Funds for investing activity
fixed assets
Investments
Funds from financing activity
Repayment of loan -8.00 -8.00 -8.00 -8.00

Total Funds 13.22 21.56 22.90 48.31
Ops balance 19.20 32.42 53.98 76.88
Closing balance 32.42 53.98 76.88 125.18



Year Year Year Year Year
Ratio Formula 1 2 3 4 5
Current CA/CL 5.44 6.21 7.35 14.79 10.41
Quick CA-Stock /CL -BOD 5.19 5.96 7.10 14.34 10.16
Proprietary Pro Fund/ FA + CA 0.64 0.72 0.80 0.90 0.91
Stock Turnover Cos /creditors 13.80 13.19 12.64 21.55 11.70
Interest coverage NPAT + Int/Int 2.87 4.88 8.42 15.79 38.58
Net-profit NPAT/Sales * 100 5.60 8.46 11.03 13.34 15.40

Leverages
in lakhs Year 1 Year 2 Year 3 Year 4 Year 5
A Sales 200.00 220.00 242.00 266.20 292.82
B Material 80.00 88.00 96.80 106.48 117.13
Variable 20.00 22.00 24.20 26.62 29.28
Wages 72.00 72.00 72.00 72.00 72.00
Total B 172.00 182.00 193.00 205.10 218.41
A-B Contribution 28.00 38.00 49.00 61.10 74.41
Depreciation 6.00 6.60 7.26 7.99 8.78
EBIT 22.00 31.40 41.74 53.11 65.63
Less int 6.00 4.80 3.60 2.40 1.20
EBT 16.00 26.60 38.14 50.71 64.43
Operating leverage Contribution/EBIT 1.27 1.21 1.17 1.15 1.13
Financial leverage EBIT/EBT 1.38 1.18 1.09 1.05 1.02
Combined leverage ops leverage * Fin leverage 1.75 1.43 1.28 1.20 1.15



5. Financial ratios
Based on balance sheet of M/s A Ltd, Find the necessary financial ratios.

Details of the case:

Following is the balance sheet of M/s A Ltd.

Equity Share capital 30 lakhs
Reserves 20 lakhs

Debentures 40 lakhs

Current liability
Creditors 10 lakhs
Bank Overdraft 20 lakhs
Total 120 lakhs

Non-current Assets
Fixed Assets 80 lakhs

Current Assets
Stock 30 lakhs
Debtors 8 lakhs
Cash & Bank 2 lakhs
Total 120 lakhs

Sales Rs. 160 lakhs
Gross profit Rs. 40 lakhs
NPAT Rs. 20 lakhs
Face Value of Share Rs. 10
Market value per share Rs. 25

Find the necessary ratios.
Answer:
Ratio Formula Result
Current CA/CL 1.33
Quick CA-Stock /CL -BOD 1.00
Proprietary Pro Fund/ FA + CA 0.42
Debtors Turnover Sales/Debtors 20.00
Net-profit NPAT/Sales * 100 12.50
Gross Profit Gross Profit/Sales * 100 25.00
EPS NPAT/Number of equity of shares 6.67
Debt Equity Ratio Debentures + Loans/Equity + Reserves + P&L 0.57



6. Working Capital Statement
Prepare working capital statement, based on given financial information


Sales are of Rs. 360 lakhs.
Material is 40% of sales
Wages is 30% of sales
Expenses are 20% of sales.
Time lag of Creditors & Debtors is 3 months & wages is 1 month.
Raw Material in stock, finished goods in stock, work in progress is of 1 month each.
Cash in hand Rs. 1 Lakh.
Prepare working capital statement.

Answer:

in lakhs

Stock 36.00
Debtors 90.00
Cash 0.00
Total Current Assets 126.00

Creditors 36.00
Bank OD 89.00
Total Current Liability 125.00
Working capital 1.00



7. Leverages & EPS
Find financial leverage, operating leverage, consolidated leverage & EPS based on the given information.


Sales in lakhs 800
Variable expenses 400
Fixed assets 100
Interest 150
TAX 30%
Number of shares 2
Find financial leverage, operating leverage, consolidated leverage & EPS

Answer: Assume Depreciation is 10% on fixed assets

Leverages
in lakhs
A Sales 800.00
B Material 0.00
Variable 400.00
Wages 0.00
Total B 400.00
A-B Contribution 400.00
Depreciation 10.00
EBIT 390.00
Less interest 150.00
EBT 240.00
Operating leverage Contribution/EBIT 1.03
Financial leverage EBIT/EBT 1.63
Combined leverage ops leverage * Fin leverage 1.67

EPS
EBT 240.00
Tax 30% 72
NPAT 168.00
Shares 2
EPS NPAT/Number of equity of shares 84.00



8. Sources of Funding

What are the various Sources of funding and explanation of two such sources? A presentation.

Answer:

Financial Management
Assignment

Sources of Funding
An assignment on

Prepared By: Manohar M. M. Iyer
VAS2010XMBA15P005 , ITM Vashi, 2012.

Purpose
Assignment

• To list down & learn various major sources of funding.

• To get an overview on following specific instruments &
see how they can be sources of funding
– Call money
– Reserves (ploughed Back profit)




Assignment

Major known Sources of Funding


Long Term Finance
Assignment

• Corporate Bonds • Venture Capital
• Debentures • Angel Investors
• Share capital • Private equity
• Equity • Bail out
• Preferential shares • M&A
• Bank Loans (Term) • Insurance/ Pension
• Depository receipts • Investment Banking
• Sell of Assets • Violability Gap funding
• External Commercial borrowings • Hedge funds
• FDI • Mutual Funds
• Reserves (ploughed back profits) VAS2010XMBA15P005 , ITM Vashi, 2012.



Short Term Finance
Assignment

• Call Money (for Banks) • Treasury Bills
• Commercial Paper • Unsecured Loans
• Inter company Deposit • Bank Acceptance
• Repo • Overdraft / CC

VAS2010XMBA15P005

Assignment

Overview of certain Specific instruments




What we will see?
Assignment

• Layman Definition
• Markets in which these are traded
• Who are the players
• What is the time periodicity (Min & Max)
• Cost of raising
• Features
• Suitability
• Advantages & Limitations
• Types
• Min & Max amount
• Terms & conditions VAS2010XMBA15P005 , ITM Vashi, 2012.

Assignment

Call Money
Source of Short Term Finance




Call Money
Assignment
• Overnight money/ money at short notice
• Lent and borrowed without collateral
• Short term finance repayable on demand
• Maturity period varying from 2 days to 15 days.
• Helps Banks with short-term liquidity mismatches
• Major markets are Mumbai, Kolkata, Delhi,
Chennai, Ahmedabad.
• UTI, LIC & NABARD can participate as lenders.

Call Money : RBI
Assignment
As per RBI Master Circular Ref No. RBI/2012-13/98 dated July 2, 2012
• Call Money is liquid & can be turned into money quickly at low cost
• Equilibrates the short-term surplus funds of lenders and the
requirements of borrowers.
• Only Participants are scheduled commercial banks, co-operative
banks (other than Land Development Banks) and Primary Dealers .
• “Scheduled bank” means a bank included in the Second Schedule
of the Reserve Bank of India Act, 1934.
• "Primary Dealer (PD)“: Financial institution authorized by the RBI
under "Guidelines for PDs in Government Securities Market" dated
March 29, 1995



Call Money : RBI
Assignment
As per RBI Master Circular Ref No. RBI/2012-13/98 dated July 2, 2012
• Free to decide on interest rates based on the Handbook of Market
Practices brought out by the Fixed Income Money Market and
Derivatives Association of India (FIMMDA).
• Deals can be done up-to 5.00 pm on weekdays and 2.30 pm on
Saturdays
• All dealings on Negotiated Dealing System-Call, i.e. NDS-Call (a
screen-based, negotiated, quote-driven system), do not require
separate reporting.
• Mandatory for all members of the NDS to report their call/notice
money market deals within 15 minutes irrespective of the size of
the deal or whether the counterparty is a member of the NDS

Table: Prudential Limits for Transactions in Call/Notice Money Market
Sr. No. Participant Borrowing Lending
1 Scheduled On a fortnightly average basis, borrowing On a fortnightly average basis,
Commercial outstanding should not exceed 100 per cent lending outstanding should not
Banks of capital funds (i.e., sum of Tier I and Tier II exceed 25 per cent of their
Assignment
capital) of latest audited balance sheet. capital funds. However, banks
However, banks are allowed to borrow a are allowed to lend a maximum
maximum of 125 per cent of their capital of 50 per cent of their capital
funds on any day, during a fortnight. funds on any day, during a
fortnight.

2 Co-operative Outstanding borrowings of State Co- No Limit.
Banks operative Banks/District Central Co-
operative Banks/ Urban Co-op. Banks in
call/notice money market, on a daily basis
should not exceed 2.0 per cent of their
aggregate deposits as at end March of the
previous financial year.

3 PDs PDs are allowed to borrow, on average in a PDs are allowed to lend in
reporting fortnight, up to 225 per cent of call/notice money market, on
their net owned funds (NOF) as at end- average in a reporting fortnight,
March of the previous financial year. up to 25 per cent of their NOF.
XMBA Batch 19 , ITM Vashi, 2012.



Assignment

Reserves
Source of Long Term Finance


Reserves - Ploughing back of profits
Assignment
• Process of retaining a part of the company's net profits
for the purpose of reinvesting in the business itself.
• the amount held back by the entrepreneur after paying a
reasonable dividend to the shareholders
• reduces their dependence on funds from external
sources in order to finance
• most convenient and economical method of finance and
involves no legal formalities or negotiations.




Assignment
• (A) Advantages to the Company.
• (i) Shock absorber. In a period of depression, the part of profits reinvested in business act as shock
absorber. The company can easily face the shocks of ups and downs of business cycles.

• (ii) Aids in smooth running of business. This self financing method (ploughing back of profits) aids in the
smooth running of the business.

• (iii) Increase in credit worthiness of the company. A company which reinvests a part of profits every year
into the business is considered a stable company. As such it increases the credit worthiness of the
company.

• (iv) Self dependent company. A company which retains a part of profits becomes self dependent to a great
extent. It depends less on outside agencies for financial help.

• (v) Expansion and growth of business. The company with retained earnings can spend funds for expansion
modernization, replacement of machinery etc.

• (vi) Redemption of long term debts. A company which re-employs a part of profits into business is
generally able to pay back its long term loans.



Assignment
• (B) Advantages to the share holders.
• (i) Increase in the value of shares. A company which earns profits and reinvests a
part of it into business year is considered a stable company. It earns a good name.
As such the value of its shares rises in the share market.

• (ii) Increase in earning capacity. The retained earnings in the business helps the
company to grow. It increases the earning capacity of the concern.

• (iii) Retaining the control. A self financing company need not issue new shares for
its future capital requirements. This enables the existing share-holders to retain
the control of the company.




Assignment
• (C) Advantages to the society.
• (i) Increase in the rate of capital formations. The retained earnings in a business
lead to expansion and growth of business. The rate of capital formation increases
in the country.

• (ii) Rapid industrialization. The ploughing back of profits into business stimulates
industrialization in the country. The nation as a whole thus benefits from it.

• (iii) Increase in industrial capacity. The reinvestment of profits in the business
meets a part of the fixed and working needs of the company. The modernization
and rationalization increase industrial production.

• (iv) Better quality of goods at reduced prices. The retained earning in business
increases productivity reduces costs provides more jobs to the workers leads to
increase in their wages etc. The industries are able to produce better quality of
goods at cheaper cost. Prepared By: Manohar M. M. Iyer



Assignment
• Dangers of ploughing back of profits.
• Ploughing back of profits into business has a number of disadvantages. The main dangers or
limitations of refinancing are as under:-

• (i) Overcapitalization. If there is excessive ploughing back of profits, it may lead to
overcapitalization of the company. The company may not be able to pay a fail rate of dividend
to its shareholders.

• (ii) Reduces dividend. The reinvestment of profits reduces the amount of dividend payable to
the shareholders.

• (iii) Evasion of taxes. A company may retain earnings with the sole object of evasion of super
profits tax. Such evasion of taxes reduces the revenue of the government.

• (iv) Frustration among shareholders. If there is too much ploughing back of profits into
business it creates dissatisfaction and frustration among shareholders.



Assignment

• The heavy reinvestment of such profits, year after year, by a company may cause
dissatisfaction among shareholders as they may get lower dividends.
• It may tempt the management to raise bonus shares to the equity shareholders
leading to over capitalisation of reserves.
• The company may not always use the retained earnings to promote the interests
of the shareholders. Instead, it may be invested in unprofitable avenues or
misused by locking them up in those business concerns which are against the
interests of the shareholders.
• It may be used to manipulate the share prices of stock exchange. The company
may keep the dividend rate very low so as to purchase the shares at lower prices
and later by increasing dividends rates, it may reap benefits from higher share
prices.




Summary
Assignment

Thus we can see
• A gist various sources funding that are
available for a corporate
• The issues associated with couple of these
sources


Assignment

I thank one and all who have provided me with the opportunity to handle this
responsibility and the knowledge & support to prepare this Presentation.

Please feel free to forward your valuable feedback, comments, queries and
suggestions related to this presentation at mumbai_man1977@Yahoo.com

Thank you,

Warm regards,

Manohar M. M. Iyer
XMBA Batch 19 , ITM Vashi, 2012




9. End note:

I thank one and all who have provided me with the opportunity to handle this responsibility and the
knowledge & support to prepare this document.

Please feel free to forward your valuable feedback, comments, queries and suggestions related to this
document at mumbai_man1977@yahoo.com

Thank you,

Warm regards,

Manohar M. M. Iyer


Project Finance management assignment

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