Project Finance management assignment

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Project Finance management assignment

  1. 1. Prepared by Manohar M. M. IyerRef. No. VAS2010XMBA15P005Batch XMBA 19/ EFM 13Faculty Mr. PhadkePrepared on December 25, 2012
  2. 2. Financial Management AssignmentsContents1. Disclaimer note: ........................................................................................................................................32. List of Assignments.................................................................................................................................... 43. Projected P/L, B/S, WC statement, Ratios & Leverages. .............................................................................54. Profitability of the project ......................................................................................................................... 95. Financial ratios ........................................................................................................................................ 136. Working Capital Statement ..................................................................................................................... 147. Leverages & EPS ...................................................................................................................................... 158. Sources of Funding .................................................................................................................................. 169. End note: ................................................................................................................................................ 29Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 2
  3. 3. Financial Management Assignments 1. Disclaimer note:This document is prepared purely as an educational project assignment to be submitted as a component ofthe 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 onlyNone of the Idea & content mentioned in his document or results/inferences that come out afterunderstanding this document is permissible to be copied or to be used in part or whole without writtenpermission.The reader of this document is strongly advised not to indulge in any such activityPrepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 3
  4. 4. Financial Management Assignments2. List of AssignmentsThis 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.Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 4
  5. 5. Financial Management Assignments3. 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 projectedP/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 assetsPrepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 5
  6. 6. Financial Management AssignmentsAnswer:As requested by the loan officer, The necessary statements are displayed below, based on followingassumptions: • 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 Year 1 Year 2 Year 3 Year 4 Year 5 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 75.23 113.16Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 6
  7. 7. Financial Management AssignmentsDebtors Sales/12 m * 3mCreditors Purchase/ 12 m X 2 monthsStock Material/ 12 m * 1 m Working Capital Statement in lakhs Year 1 Year 2 Year 3 Year 4 Year 5Stock 4.17 5.00 6.00 5.00 8.64Debtors 25.00 30.00 36.00 43.20 51.84Cash 0.00 0.00 0.00 8.32 34.34Total Current Assets 29.17 35.00 42.00 56.52 94.82Less current liabilityCreditors 8.33 10.00 12.00 10.00 17.28Bank OD 17.22 14.43 7.17 0.00 0.00Total Current Liability 25.55 24.43 19.17 10.00 17.28Working capital 3.62 10.57 22.83 46.52 77.54 Cash flow stmt Year 2 Year 3 Year 4 Year 5Funds from opsProfit 11.64 16.92 23.35 30.66Depreciation 0.32 0.33 0.35 0.36increase in creditors 1.67 2.00 -2.00 7.28increase in stock -0.83 -1.00 1.00 -3.64increase in debtors -5.00 -6.00 -7.20 -8.64Funds for investing activityfixed assetsInvestmentsFunds from financing activityRepayment of loan -5.00 -5.00 0.00 0.00Total Funds 2.79 7.25 15.50 26.02Ops balance 17.22 14.43 7.17 8.32Closing balance -14.43 -7.17 8.32 17.70Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 7
  8. 8. Financial Management Assignments 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 BadNote: • 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 1.01Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 8
  9. 9. Financial Management Assignments4. Profitability of the projectMr. Deepak MD of M/s JBS ltd is interested in starting a heat treatment plant and decided to approachBank of India for a loan. The bank manager asked Mr. Deepak about profitability of the project. Mr. Deepakwishes 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 ofland in industrial area & he agreed to transfer land to M/s JBS ltd in consideration of equity shares of Rs. 20Lakhs. 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 theAC, 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. Bankmanager 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 principalsanction.Two weeks got lapsed but manager did not reply though Mr. Deepak was getting restless. He asked themanager about the proposal & was shocked when bank manager calmly replied that RBI inspection wasgoing 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% ofsales. 20 operate in one shift, work for 8 hours & are paid Rs. 10,000/- per month on an average to satisfythe 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 of2 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 theproject is financially viable. Other expenses will be 10% of sales & after paying tax at 30%, he is capable ofgenerating 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 youropinion.Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 9
  10. 10. Financial Management AssignmentsAnswer: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 Year 1 Year 2 Year 3 Year 4 Year 5 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 Year 1 Year 2 Year 3 Year 4 Year 5Equity share capital 50.00 50.00 50.00 50.00 50.00Reserves (Profit + existing Bank Balance) 31.20 49.82 76.52 112.02 157.12Non-current liability Secured loan 32.00 24.00 16.00 8.00 0.00 Un secured loan 0.00 0.00 0.00 0.00 0.00Current liability Creditors 13.33 14.67 16.13 10.00 19.52 Bank OD 0.00 0.00 0.00 0.00 0.00Total liability 126.53 138.49 158.65 180.02 226.64Non-current Fixed assets 54.00 47.40 40.14 32.15 23.37Current 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 76.88 125.18Total assets 126.53 138.49 158.65 180.02 226.64Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 10
  11. 11. Financial Management Assignments Working Capital Statement in lakhs Year 1 Year 2 Year 3 Year 4 Year 5Stock 3.33 3.67 4.03 4.44 4.88Debtors 50.00 55.00 60.50 66.55 73.21Cash 19.20 32.42 53.98 76.88 125.18Total Current Assets 72.53 91.09 118.51 147.86 203.27Less current liabilityCreditors 13.33 14.67 16.13 10.00 19.52Bank OD 0.00 0.00 0.00 0.00 0.00Total Current Liability 13.33 14.67 16.13 10.00 19.52Working capital 59.20 76.42 102.38 137.86 183.75 Cash flow stmt Year 2 Year 3 Year 4 Year 5Funds from opsProfit 18.62 26.70 35.50 45.10Depreciation 6.60 7.26 7.99 8.78increase in creditors 1.33 1.47 -6.13 9.52increase in stock -0.33 -0.37 -0.40 -0.44increase in debtors -5.00 -5.50 -6.05 -6.66Funds for investing activityfixed assetsInvestmentsFunds from financing activityRepayment of loan -8.00 -8.00 -8.00 -8.00Total Funds 13.22 21.56 22.90 48.31Ops balance 19.20 32.42 53.98 76.88Closing balance 32.42 53.98 76.88 125.18Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 11
  12. 12. Financial Management Assignments Year Year Year Year Year Ratio Formula 1 2 3 4 5Current CA/CL 5.44 6.21 7.35 14.79 10.41Quick CA-Stock /CL -BOD 5.19 5.96 7.10 14.34 10.16Proprietary Pro Fund/ FA + CA 0.64 0.72 0.80 0.90 0.91Stock Turnover Cos /creditors 13.80 13.19 12.64 21.55 11.70Interest coverage NPAT + Int/Int 2.87 4.88 8.42 15.79 38.58Net-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 1.15Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 12
  13. 13. Financial Management Assignments5. Financial ratiosBased 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 Non-current liability 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 0.57Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 13
  14. 14. Financial Management Assignments6. Working Capital StatementPrepare working capital statement, based on given financial informationDetails of the case:Sales are of Rs. 360 lakhs.Material is 40% of salesWages is 30% of salesExpenses 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: Working Capital Statement in lakhs Stock 36.00 Debtors 90.00 Cash 0.00 Total Current Assets 126.00 Less current liability Creditors 36.00 Bank OD 89.00 Total Current Liability 125.00 Working capital 1.00Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 14
  15. 15. Financial Management Assignments7. Leverages & EPSFind financial leverage, operating leverage, consolidated leverage & EPS based on the given information.Details of the case: 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 & EPSAnswer: 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 84.00Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 15
  16. 16. Financial Management Assignments8. Sources of FundingWhat are the various Sources of funding and explanation of two such sources? A presentation.Answer: Financial Management Assignment Sources of Funding An assignment on Financial Management Prepared By: Manohar M. M. Iyer VAS2010XMBA15P005 , ITM Vashi, 2012. Purpose Financial Management 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) Prepared By: Manohar M. M. Iyer VAS2010XMBA15P005 , ITM Vashi, 2012.Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 16
  17. 17. Financial Management Assignments Financial Management Assignment Major known Sources of Funding Prepared By: Manohar M. M. Iyer VAS2010XMBA15P005 , ITM Vashi, 2012. Long Term Finance Financial Management 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 Prepared By: Manohar M. M. Iyer • Reserves (ploughed back profits) VAS2010XMBA15P005 , ITM Vashi, 2012.Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 17
  18. 18. Financial Management Assignments Short Term Finance Financial Management Assignment • Call Money (for Banks) • Treasury Bills • Commercial Paper • Unsecured Loans • Inter company Deposit • Bank Acceptance • Repo • Overdraft / CC Prepared By: Manohar M. M. Iyer VAS2010XMBA15P005 Financial Management Assignment Overview of certain Specific instruments Prepared By: Manohar M. M. Iyer VAS2010XMBA15P005 , ITM Vashi, 2012.Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 18
  19. 19. Financial Management Assignments What we will see? Financial Management 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 Prepared By: Manohar M. M. Iyer • Terms & conditions VAS2010XMBA15P005 , ITM Vashi, 2012. Financial Management Assignment Call Money Source of Short Term Finance Prepared By: Manohar M. M. Iyer VAS2010XMBA15P005 , ITM Vashi, 2012.Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 19
  20. 20. Financial Management Assignments Call Money Financial Management 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. Prepared By: Manohar M. M. Iyer VAS2010XMBA15P005 , ITM Vashi, 2012. Call Money : RBI Financial Management 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 Prepared By: Manohar M. M. Iyer VAS2010XMBA15P005 , ITM Vashi, 2012.Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 20
  21. 21. Financial Management Assignments Call Money : RBI Financial Management 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 Prepared By: Manohar M. M. Iyer VAS2010XMBA15P005 , ITM Vashi, 2012. 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 Financial Management 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. Prepared By: Manohar M. M. Iyer XMBA Batch 19 , ITM Vashi, 2012.Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 21
  22. 22. Financial Management Assignments Financial Management Assignment Reserves Source of Long Term Finance Prepared By: Manohar M. M. Iyer VAS2010XMBA15P005 , ITM Vashi, 2012. Reserves - Ploughing back of profits Financial Management Assignment • Process of retaining a part of the companys 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. Prepared By: Manohar M. M. Iyer VAS2010XMBA15P005 , ITM Vashi, 2012.Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 22
  23. 23. Financial Management Assignments Reserves - Ploughing back of profits Financial Management 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. Prepared By: Manohar M. M. Iyer VAS2010XMBA15P005 , ITM Vashi, 2012.Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 23
  24. 24. Financial Management Assignments Reserves - Ploughing back of profits Financial Management 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. Prepared By: Manohar M. M. Iyer VAS2010XMBA15P005 , ITM Vashi, 2012.Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 24
  25. 25. Financial Management Assignments Reserves - Ploughing back of profits Financial Management 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 VAS2010XMBA15P005 , ITM Vashi, 2012.Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 25
  26. 26. Financial Management Assignments Reserves - Ploughing back of profits Financial Management 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. Prepared By: Manohar M. M. Iyer VAS2010XMBA15P005 , ITM Vashi, 2012.Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 26
  27. 27. Financial Management Assignments Reserves - Ploughing back of profits Financial Management 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. Prepared By: Manohar M. M. Iyer VAS2010XMBA15P005 , ITM Vashi, 2012.Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 27
  28. 28. Financial Management Assignments Summary Financial Management Assignment Thus we can see • A gist various sources funding that are available for a corporate • The issues associated with couple of these sources Prepared By: Manohar M. M. Iyer VAS2010XMBA15P005 , ITM Vashi, 2012. Financial Management 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 Prepared By: Manohar M. M. Iyer VAS2010XMBA15P005 , ITM Vashi, 2012.Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 28
  29. 29. Financial Management Assignments9. End note:I thank one and all who have provided me with the opportunity to handle this responsibility and theknowledge & support to prepare this document.Please feel free to forward your valuable feedback, comments, queries and suggestions related to thisdocument at mumbai_man1977@yahoo.comThank you,Warm regards,Manohar M. M. IyerPrepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 29

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