Upload
mm-fakhrul-islam
View
227
Download
0
Tags:
Embed Size (px)
DESCRIPTION
Finance lectures
Citation preview
10/10/2015
1
Certified Finance SpecialistM M Fakhrul Islam
Email: [email protected]
Sources of Finance
1) Share capital (Equity)
2) Preference share
3) Long-term debt
4) Short term loan
5) Credit purchase
Long-term finance
Short-term finance
Considerable Factors:(a) the level of risk in the investment for the investor, and(b) the level of return the investor will require.
10/10/2015
2
Why do we need to study finance?
Almost half of all newventures fail becauseof poor financialmanagement
-Dun & Brandstreet
What is Finance?
Who needs money?Every one? you?Can you or a business survive
without cash? Why?So what is Finance? First, how to have money…
10/10/2015
3
Personal finance
Where does money for individuals (personal finance) come from:Our own money in pocket Borrows: from friends or credit cards Received from Government if entitled to some benefits Earned by doing something or sales of products and services
Business finance
Business finance: a business has the same source of money for individuals
Its own money
Borrows: from friends, colleagues, banks and lending institutions
Received from Government grants. Eg. new in deprived sectors
Earned by sales of products and services
From venture capitalists (seeking profit for spare funds)
From private individuals (Business Angels – often seen in entertainment sector)
Private companies
Microloans
10/10/2015
4
To obtain funding for a business project
Determine how much money is needed to start your company
Prove to your investor that your company requires the predetermined amount of money
Offer incentives, interest, or collateral for the investor’s contribution
Make arrangements to pay back the loan
Classifying businesses
Each type of business can have different ways to finance itself, so we
need to look at types of business ownerships
Sole trader – owned by one person
Partnership – owned by two or more and based on agreement among them
Limited company: owned by two or more but separate in law from people
who own and control
10/10/2015
5
Sources of Finance
Business Growth
10/10/2015
6
Internal Sources of Finance and Growth
‘Organic growth’ – growth generated through the development and expansion of the business itself. Can be achieved through: Generating increasing sales –
increasing revenue to impact on overall profit levels
Use of retained profit – used to reinvest in the business
Sale of assets – can be a double edged sword –reduces capacity?
Selling more goods and services to consumers is one way to grow the business.Title: Home Depot quarterly profit rises 53%. Copyright: Getty Images, available from Education Image Gallery
Business Growth
External Long TermShort Term 'Inorganic Growth‘
10/10/2015
7
Business Growth
External Long Term
SharesOrdinary Shares
Preference Shares
New share issues
Rights Issue
Bonus or Scrip Issue
LoansDebentures
Bank loans (mortgage)
Merchant or Investment Banks
Government/EUGrants
Business Growth
External
Short TermBank loansOverdraft facilitiesTrade creditFactoringInvoice discountingLeasing
10/10/2015
8
Business GrowthExternalShort Term
Factoring is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount in exchange for immediate money
Factoring allows company to raise finance based on the value of your outstanding invoices.
Factoring also gives company the opportunity to outsource your sales ledger operations and to use more sophisticated credit rating systems.
Offers 80 – 85% of the total invoice value Company pays factoring fees
Business GrowthExternalShort Term
LEASING is a contract between the leasing company, the lessor, and the customer (the lessee). The leasing company buys and owns the asset that the lessee requires. The customer hires the asset from the leasing company and pays rental over a pre-determined period for the use of the asset. There are two types of leases:
1. Finance LeasesAn agreement where the lessor receives lease payments to cover its ownership costs. The lessee is responsible for maintenance, insurance, and taxes. Some finance leases are conditional sales or hire purchase agreements.
2. Operating LeasesThe lease will not run for the full life of the asset and the lessee will not be liable for its full value. The lessor or the original manufacturer or supplier will assume the residual risk. This type of lease is normally only used when the asset has a probable resale value, for instance, aircraft or vehicles.
10/10/2015
9
Business GrowthExternal
'Inorganic Growth'AcquisitionsMergerTakeover
External Sources of Finance
Long Term – may be paid back after many years or not at all!
Short Term – used to cover fluctuations in cash flow
‘Inorganic Growth’ –growth generated by acquisitionThe existence of capital markets enable firms to raise
long term loans and share capital.Title: Dow up on Wall Street. Copyright: Getty Images, available from Education Image Gallery
10/10/2015
10
Long term (Means?)
Loans (Represent creditors to the company – not owners) Bank loans and mortgages – suitable for small to medium sized firms where
property or some other asset acts as security for the loan
A mortgage loan is a loan secured by real property Merchant or Investment Banks – act on behalf of clients to organise and
underwrite raising finance Government/EU – may offer loans in certain circumstances
Grants
Shares (Shareholders are part owners of a company only in PLC’s)New Share Issues – arranged by investment banks.
Short Term
Bank loans – necessity of paying interest on the payment, repayment periods from 1 year upwards but generally no longer than 5 or 10 years at most
Overdraft facilities – the right to be able to withdraw funds you do not currently have
Provides flexibility for a firm
Interest only paid on the amount overdrawn
Overdraft limit – the maximum amount allowed to be drawn - the firm does not have to use all of this limit
Trade credit – Careful management of trade credit can help ease cash flow –usually between 28 and 90 days to pay
Factoring – the sale of debt to a specialist firm who secures payment and charges a commission for the service.
Leasing – provides the opportunity to secure the use of capital without ownership –effectively a hire agreement
10/10/2015
11
'Inorganic Growth'
Acquisitions The necessity of financing
external inorganic growth Merger:
firms agree to join together – both may retain some form of identity
Takeover:One firm secures
control of the other, the firm taken over may lose its identity
The merged entity, which will operate under the brand name of Robi, will be 70 percent-owned by Axiata Group. Bharti Airtel will have 25 percent stakes in the new company. Japan's NTT DOCOMO in Robi will be diluted to 5 percent from 8.41 percent now
Business Angels
10/10/2015
12
Business Angels
Individuals looking for investment opportunitiesGenerally small sums up to £100,000Could be an individual or a small groupGenerally have some say in the running of the
company
Venture Capital
10/10/2015
13
Venture Capital
Pooling of capital in the form of limited companies –Venture Capital Companies
Looking for investment opportunities in fast growing businesses or businesses with highly rated prospects
May also buy out firms in administration who are going concerns
May also provide advice, contacts and experience In the UK, venture capitalists have invested £50 billion
since 1983
Reasons for share listing
i. Access to a wider pool of finance.ii. Improved marketability of sharesiii. Transfer of capital to other usesiv.Enhancement of the company image.v. Facilitation of growth by acquisition.
10/10/2015
14
Rights issue Offer to existing shareholders at existing proportion, at a lower price than
market Pre-emption rights This is a choice of shareholders
Take up
Renounce
Take partial
Do nothing at all
‘Cum rights’ Theoretical ex rights price
Rights Issue and EPS
Seagull can achieve a profit after tax of 20% on the capital employed. At present its capital structure is as follows.
$ 2,000,000 ordinary shares of $1 each 2,000,000 Retained earnings 1,000,000
3,000,000 The directors propose to raise an additional $1,260,000 from a rights issue. The current market price is $1.80.
(a) Calculate the number of shares that must be issued if the rights price is: $1.60; $1.50; $1.40; $1.20. (b) Calculate the dilution in earnings per share (EPS) in each case.
10/10/2015
15
Preference shares
not equity
P. shareholders are not owners of the company
Shareholders are entitled to a dividend before any dividend to equity holders
Types of preference shares(a) cumulative
(b) participating
(c) redeemable, or
(d) convertible
Cost of Capital
Two aspects Cost of funds Expected return by investors
Three elements Risk free rate of return Premium for business risk Premium for financial risk
Cost of Equity Cost of Debt Weighted Average Cost of Capital (WACC)
10/10/2015
16
Cost of Equity Dividend valuation model
r = D1/ P 0
Where, r = the shareholders' cost of capital D1= the annual dividend per share, starting at Year 1 to be received
perpetuallyP0 = Current Share Price
Dividend growth model (also known as Gordon's growth model )
D1 = D0 (1 + g) g = the annual growth rate in dividends, expressed as a proportion (e.g. 4% = 0.04)
Cost of Debt
Interest on debt capital is an allowable deduction
After-tax cost of irredeemable debt capital
where: Kd = cost of debt capital
I = annual interest payment
P0 = current market price of the debt capital ex interest (that is, after payment of the current interest)
t = Rate of tax
10/10/2015
17
Weighted Average Cost of Capital (WACC)
where: Keg is the cost of equity
Kd = Cost of debt
E = Market value of equity in the firm is the market value of debt in the firm