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FINANCE FUNCTION Definition:The finance function is the process of acquiring and utilising funds of a business. – by R.C.Osborn Financing consists of the raising, providing, managing of all the money, capital or funds of any kind to be used in connection with the business. -- by Bonneville & Dewey SCOPE OF FINANCE FUNCTION According to modern approach, the scope of finance function is concerned with the following three types of decisions. Financing Decisions :Decisions basically concerned with the process of acquiring funds. May be from own sources (Equity Capital) or loan sources ( Debt Capital). These decisions are concerned with answers to the following questions. • What should be the amount of funds to be raised? • What should be the mix of equity and debt capital?
Investment Decisions:Concerned with utilisation of funds. These decisions relate to the selection of the assets in which funds should be invested. From the asset perspective these decisions are— • Capital Budgetting decisions • Working Capital Management Dividend Policy Decisions:Related to the decisions regarding proportion of dividends & profits retained in the business for future expansion. SIGNIFICANCE OF FINANCE FUNCTION Other than finance, every business generally operates in the other main functional areas – Production, Marketing and Personnel. These functions are closely related to finance function because funds are required to execute these functions. E.g. to produce good quality of finished goods, business needs good infrastructural facilities like building, plant& machinery etc. To regulate the flow of production inputs like quality raw material, WIP, consumable stores, quality control equipments, maintenance facilities are required. All these need investments in of fixed capital & working capital which is the area of finance function.
To market the finished goods to guarantee regular flow of goods in the market, it may be required to have good distribution systems which may call for investment in of fixed assets or labour force. All these activities need the investments to be made either in of fixed capital and/or working capital which is the area of finance function. The personnel function deals with the availability of human resource at proper time, training them properly and fixing their job responsibilities. All these activities need funds to pay salaries, wages and other facilities. Thus, all the functions or activities of the business are ultimately related to finance. The success of the business depends on how best all these functions can be co-ordinated with finance function.
CONCEPT OF FINANCE •
•
•
•
The concept of ‘Finance’ is not a static one but it is more dynamic in nature. It has changed with times and according to circumstances. The important approaches could be explained as below. According to first approach, the term finance was interpreted to mean procurement of funds by corporate enterprises to meet their financing needs. According to second approach finance is concerned with cash. As all the business transactions are expressed in of cash, it is concerned with every activity of the business. This approach is concerned with all the functional areas of the business i.e. Production, Marketing, Purchasing, HR istration, R&D. The third approach interprets the term finance as being concerned with procurement of funds and proper application of the funds. This approach is more balanced and acceptable universally as it gives equal weightage to procurement and utilisation of funds as well. This approach is called Managerial Approach to the term finance.
CORPORATE FINANCE •
Corporation :- Corporations are t stock companies which are public limited. Corporations are owned by it’s stockholders who elect a board of directors. The separation of ownership and management gives corporations perpetual character. • Finance function of corporations can broadly be divided into two categories. Finance Control Function Treasury Function • ing & Costing 1. Receivables Management • Annual Reporting 2. Taxes & Insurance • Internal Auditing 3. Cost Management • Budgeting 4. Securities • Statistics & Finance 5. Banking Relations • Record Keeping 6. Real Estate 7. Dividend Distributions
OBJECTIVES OF CORPORATE FINANCE •
The two most important objectives of Corporate Finance are – 1. Maximisation of EBIT & EPS 2. Maximisation of the spread between ROA and WACC i.e.EVA Apart from the above major objectives following objectives which are consequential to the above are – • Maximisation of the market capitalisation • Maximisation of the % ROI. • Desired growth rate in EPS • To attract the institutional investors.
ROLE OF A FINANCE EXECUTIVE :Finance function may not be a specialized function in small business organisations. But in large corporate houses it is a specialized task and is centralised. Usually the Board Of Directors have the authority to take the financial policy decisions. Within this policy framework, the delegation of powers is made to the executive committee comprising of CFO, Managing Director and one or two directors. Only routine financial matters are delegated to lower level officers. Reasons for finance function being highly centralised are – • Financial decisions are the most crucial ones on which survival or failure of the organisation depends. • Financial decisions affects the solvency position of the organisation and a wrong decision in this area may lead to crisis. • The organisation may gain economies of centralisation in the form of reduced cost of raising funds, acquisition of fixed assets at the competitive prices.
DUTIES AND RESPONSIBILITIES OF FINANCE EXECUTIVE • 1. 2. 3.
4. 5. 6. 7. 8. •
Recurring Duties Deciding the Financial needs Raising the funds required Allocation of funds -- Fixed Asset Management -- Working Capital Management Allocation of income Control of Funds Evaluation of Performance Corporate Taxation Other Duties like internal audit, statutory & tax audit, safeguarding securities & assets by properly insuring them. Non-recurring Duties These duties include preparation of financial plan at the time of company promotion, financial readjustments in times of liquidity crisis, valuation of the enterprise at the time of merger & acquisition.
Non-recurring Duties in the Field of Finance 1. Business Finance 2. International Finance 3. Public Finance 4. Private Finance Non-recurring Duties in other fields :1. Production 2. Marketing 3. Personnel Implications of Forms of Business Organisations:• Sole Proprietorship • Partnership • HUF Businesses • Co-operatives • t Stock Companies • Public Sector Enterprises
FINANCIAL SYSTEM A financial system consists of different financial assets, financial intermediaries, financial market, borrowers & investors. An efficient financial system is of critical importance for the economic development of any country. Financial Market :- A financial market may be defined as the market of financial assets i.e. the market in which financial assets are transacted. Issue of shares & debentures by a company, issue of mutual fund units, working capital loans by commercial banks, long term financial assistance by financial institutions which are undertaken in financial markets. The financial market in India is divided into three parts• Money Market :- It is a market for short term debt transactions. The formal money market is basically characterized by presence of RBI, DFHI, Mutual funds, NBFCs, commercial banks, financial institutions etc. These participants transact in treasury bills, inter-bank call money, commercial bills of exchange, inter-corporate deposits etc. • Capital Market :- It is a market for long term financial assets such as shares, bonds, debentures, mutual fund units.
The subsequent sale or purchase of these securities is undertaken in secondary market. This market is basically provided by the stock exchanges. •
• •
Government Securities Market :- It is a market in which the securities/loans of central government, state government & other government authorities are traded. These securities, primarily in the form of government loans, also known as Gilt-edged securities. The main participants in this market are the commercial banks, provident funds. Financial Assets :-Financial assets represent a financial claim of the holder over the issuer. Financial Intermediaries :- These are financial institutions and are key players in the financial system. Financial intermediaries play a role of establishing a link between the debtors and the creditors in the financial system. They are classified as-All India level financial institutions such as IDBI, SIDBI -State level financial institutions such as MSFC -Commercial Banks -Insurance companies
- The mutual funds - The NBFC including leasing & hire purchase companies - The agricultural finance companies including NABARD - Other institutions such as chit funds Regulatory Framework :Regulatory framework for controlling and supervising the financial system in India is a complex network of legislations, guidelines, notifications. The main elements of regulatory framework are- The Company Act 1956 - The Securities Contracts (Regulation) Act, 1956 - The Income Tax Act, 1961 - The Banking Regulation Act, 1949 - Numerous Guidelines issued by SEBI and the RBI - Credit Policy announced by RBI
SIGNIFICANCE OF FINANCIAL SYSTEM An efficient financial system regulating the various institutions can lead to the economic development of the country. The advantages of good financial system are as follows. • Enables investors to make their investments to their expectations, which are constantly changing. • The process of market evaluation, allocates the available funds for investment to the most efficient firms who can apply them most profitably and productively. • Mobilises the investible surplus and provides expert services in bringing about the flow of funds into securities of business establishments. • Acts as a link between those who save and those who are interested in investing these savings. • Ensures the transparency of transactions of buying and selling the securities. • Guarantees the protection of funds invested by the small investors. • Keeps a watch over the company management. • Encourages acceleration in the rate of capital formation and thus acts as a catalyst in the wealth creation.
•Performs fundamental & technical analysis so as to guide the stakeholders in order to make informed decisions. • Provide for listing of different securities showing their market value. • Provision of ready & continuous market for the purchase and sell of different securities. • Provides an environment for speculation over different securities in a market place.
RATIO ANALYSIS •
Absolute figures in the financial statements, either the profitability statements or the balance sheet, may not give the qualitative indication regarding the financial position or performance of an organisation. A ratio is a relationship expressed in mathematical between two individual or groups of figures connected with each other in some logical manner.
CAPITAL BUDGETTING Capital budgetting includes analysis of various proposals regarding capital expenditure to evaluate their impact on the financial situation of the company and to choose the best out of the various alternatives.
CAPITALISATION •
The financial decision that determines the amount which the firm should have at it’s disposal for financing fixed assets as well as the current assets ( portion of which is financed out of long term sources) is called ‘Capitalisation’. • Thus capitalisation means total amount of long term funds available to the company. It cludes capital stock & debts as well. • Amount of capitalisation of the firm should be equivalent as justified by it’s profits and by the rate of return for the industry concerned. THEORIES OF CAPITALISATION A] Cost Theory :Cost theory considers the amount of capitalisation on the basis of cost of various assets required to set up the organisation. It gives more stress on current outlays than on the periodic requirements. The cost theory considers the actual funds but not the earnings capacity of the assets. The total capitalisation is sum invested in fixed & current assets and also funds required to meet promotional & organisational expenses.
B] EARNINGS THEORY :This theory considers the amount of capitalisation on the basis of expected future earnings. It is worked out in two steps. I] To decide future earnings – Estimation of future earnings should be based on following criteria. • Smaller period of estimation • Weighted average of the past earnings with more weights to recent earnings. • Due adjustments to non-recurring factors. • Adjustment to known factors in future. • For new concerns reasonably correct estimation of future sales & & costs (based on forecast). • Allowances for contingencies. II] To determine Capitalisation Rate – It may be one or combination of the following • The rate of return requireqd to attract the investors. • Cost of Capital • Rate of earnings of similar organisations.
III] To capitalise the future earnings at the decided rate of capitalisation. • Earnings theory is ideal as it considers earnings capacity but also has a limitation as it involves estimation of two variables i.e. future earnings and capitalisation rate which is critical. OVERCAPITALISATION It means an existence of excess capital as compared to the level of business activity and requirements. Causes of Overcapitalisation :• Assets of the firm purchased during inflationary trends. • Inadequate provision for depreciation of the assets. • Heavy expenses during the stage of formation/incorporation. • Acquisition of intangible assets like goodwill, patents. Trademarks, copyrights, Designs etc by paying exorbitant price without proportionate earnings. • In adequate estimation of funds resulting into huge borrowings at high cost. • Liberal dividend policy seriously affecting retained profits & earnings capacity.
High rates of taxation leading to shortage of funds seriously affecting earnings capacity of the assets. • Issue of securities in favourable capital market conditions irrespective of the fact whether they are really required or not. As a result the ability of the company increases but not the earnings capacity. • Lower than prevailing market rate of capitalisation. Effects of Over Capitalisation • On Company :- Real value of the business and it’s earnings capacity reduces with adverse effect on it’s market value. • On Shareholders:- Shares held are not having proper backing of tangible assets. • On Cosumers:- To overcome the situation of overcapitalisation & improve earnings, the selling prices may be increased. • On Society at Large :- Increasing selling prices & falling market prices of shares affects consumers and shareholders as well. This may lead to liquidation of the firm leading unemployment and loss of industrial production.
REMEDIES FOR OVERCAPITALISATION • To reduce the debts by repaying them out of own earnings. • To redeem high cost preference shares. • High cost debenture holders may be persuaded to accept new low cost debentures debentures. • Devaluation of face value of shares with consent from shareholders. UNDERCAPITALISATION It is excess of real worth of the assets over the aggregate of Capital (shares term loans & debentures) outstanding. Causes of Undercapitalisation • Underestimation of the future earnings. • Windfall gains especially during the transition period from depression to boom. • Implementation of modernisation program increasing earnings capacity many times.
EFFECTS OF UNDERCAPITALISATION •
•
•
On Company :Increasing EPS may further increase the competition in the business. Increasing profits will increase the tax liability. High market price of shares restrict the volume of trades. More demand of wages from employees. Customers feeling about the high prices & profitability. On Shareholders :High dividend income High market price maximises wealth. Limited trades of shares on of high price. On Society Encouragement to new entrepreneurs Improve industrial production and reduce unemployment
REMEDIES FOR UNDERCAPITALISATION • •
Issue of bonus shares. Splitting the shares. CAPITAL STRUCTURE Capital Structure refers to the mix of sources from which the long term funds required by a business are raised. Capital structure is based on the following principles. Cost Principle :- Ideal capital structure should minimise the cost of capital and maximise EPS. Risk Principle :- High risk in financing capital should be avoided. Control Principle :- Should ensure controlling stake of the promoter group in the company. Flexibility Principle :- Capital structure should be able to cater to additional requirements of capital in future. Timing Principle :- Capital structure should be able to exploit favourable market conditions & should minimise the cost of raising.
FACTORS AFFECTING CAPITAL STRUCTURE • 1. 2. 3. 4. • 1. 2. 3. 4. 5. • 1. 2. 3. 4.
Internal Factors Cost of Capital Risk Factor Control Factor Objects of Capital Structure Planning External Factors General Economic Conditions Level of Interest Rates Policy of Lending Institutions Taxation Policy Statutory Restrictions General Factors Constitution of Company Characteristics of Company Stability of Earnings Attitude of Management
MANAGEMENT OF PROFITS
Investment Decisions:Concerned with utilisation of funds. These decisions relate to the selection of the assets in which funds should be invested. From the asset perspective these decisions are— • Capital Budgetting decisions • Working Capital Management Dividend Policy Decisions:Related to the decisions regarding proportion of dividends & profits retained in the business for future expansion. SIGNIFICANCE OF FINANCE FUNCTION Other than finance, every business generally operates in the other main functional areas – Production, Marketing and Personnel. These functions are closely related to finance function because funds are required to execute these functions. E.g. to produce good quality of finished goods, business needs good infrastructural facilities like building, plant& machinery etc. To regulate the flow of production inputs like quality raw material, WIP, consumable stores, quality control equipments, maintenance facilities are required. All these need investments in of fixed capital & working capital which is the area of finance function.
To market the finished goods to guarantee regular flow of goods in the market, it may be required to have good distribution systems which may call for investment in of fixed assets or labour force. All these activities need the investments to be made either in of fixed capital and/or working capital which is the area of finance function. The personnel function deals with the availability of human resource at proper time, training them properly and fixing their job responsibilities. All these activities need funds to pay salaries, wages and other facilities. Thus, all the functions or activities of the business are ultimately related to finance. The success of the business depends on how best all these functions can be co-ordinated with finance function.
CONCEPT OF FINANCE •
•
•
•
The concept of ‘Finance’ is not a static one but it is more dynamic in nature. It has changed with times and according to circumstances. The important approaches could be explained as below. According to first approach, the term finance was interpreted to mean procurement of funds by corporate enterprises to meet their financing needs. According to second approach finance is concerned with cash. As all the business transactions are expressed in of cash, it is concerned with every activity of the business. This approach is concerned with all the functional areas of the business i.e. Production, Marketing, Purchasing, HR istration, R&D. The third approach interprets the term finance as being concerned with procurement of funds and proper application of the funds. This approach is more balanced and acceptable universally as it gives equal weightage to procurement and utilisation of funds as well. This approach is called Managerial Approach to the term finance.
CORPORATE FINANCE •
Corporation :- Corporations are t stock companies which are public limited. Corporations are owned by it’s stockholders who elect a board of directors. The separation of ownership and management gives corporations perpetual character. • Finance function of corporations can broadly be divided into two categories. Finance Control Function Treasury Function • ing & Costing 1. Receivables Management • Annual Reporting 2. Taxes & Insurance • Internal Auditing 3. Cost Management • Budgeting 4. Securities • Statistics & Finance 5. Banking Relations • Record Keeping 6. Real Estate 7. Dividend Distributions
OBJECTIVES OF CORPORATE FINANCE •
The two most important objectives of Corporate Finance are – 1. Maximisation of EBIT & EPS 2. Maximisation of the spread between ROA and WACC i.e.EVA Apart from the above major objectives following objectives which are consequential to the above are – • Maximisation of the market capitalisation • Maximisation of the % ROI. • Desired growth rate in EPS • To attract the institutional investors.
ROLE OF A FINANCE EXECUTIVE :Finance function may not be a specialized function in small business organisations. But in large corporate houses it is a specialized task and is centralised. Usually the Board Of Directors have the authority to take the financial policy decisions. Within this policy framework, the delegation of powers is made to the executive committee comprising of CFO, Managing Director and one or two directors. Only routine financial matters are delegated to lower level officers. Reasons for finance function being highly centralised are – • Financial decisions are the most crucial ones on which survival or failure of the organisation depends. • Financial decisions affects the solvency position of the organisation and a wrong decision in this area may lead to crisis. • The organisation may gain economies of centralisation in the form of reduced cost of raising funds, acquisition of fixed assets at the competitive prices.
DUTIES AND RESPONSIBILITIES OF FINANCE EXECUTIVE • 1. 2. 3.
4. 5. 6. 7. 8. •
Recurring Duties Deciding the Financial needs Raising the funds required Allocation of funds -- Fixed Asset Management -- Working Capital Management Allocation of income Control of Funds Evaluation of Performance Corporate Taxation Other Duties like internal audit, statutory & tax audit, safeguarding securities & assets by properly insuring them. Non-recurring Duties These duties include preparation of financial plan at the time of company promotion, financial readjustments in times of liquidity crisis, valuation of the enterprise at the time of merger & acquisition.
Non-recurring Duties in the Field of Finance 1. Business Finance 2. International Finance 3. Public Finance 4. Private Finance Non-recurring Duties in other fields :1. Production 2. Marketing 3. Personnel Implications of Forms of Business Organisations:• Sole Proprietorship • Partnership • HUF Businesses • Co-operatives • t Stock Companies • Public Sector Enterprises
FINANCIAL SYSTEM A financial system consists of different financial assets, financial intermediaries, financial market, borrowers & investors. An efficient financial system is of critical importance for the economic development of any country. Financial Market :- A financial market may be defined as the market of financial assets i.e. the market in which financial assets are transacted. Issue of shares & debentures by a company, issue of mutual fund units, working capital loans by commercial banks, long term financial assistance by financial institutions which are undertaken in financial markets. The financial market in India is divided into three parts• Money Market :- It is a market for short term debt transactions. The formal money market is basically characterized by presence of RBI, DFHI, Mutual funds, NBFCs, commercial banks, financial institutions etc. These participants transact in treasury bills, inter-bank call money, commercial bills of exchange, inter-corporate deposits etc. • Capital Market :- It is a market for long term financial assets such as shares, bonds, debentures, mutual fund units.
The subsequent sale or purchase of these securities is undertaken in secondary market. This market is basically provided by the stock exchanges. •
• •
Government Securities Market :- It is a market in which the securities/loans of central government, state government & other government authorities are traded. These securities, primarily in the form of government loans, also known as Gilt-edged securities. The main participants in this market are the commercial banks, provident funds. Financial Assets :-Financial assets represent a financial claim of the holder over the issuer. Financial Intermediaries :- These are financial institutions and are key players in the financial system. Financial intermediaries play a role of establishing a link between the debtors and the creditors in the financial system. They are classified as-All India level financial institutions such as IDBI, SIDBI -State level financial institutions such as MSFC -Commercial Banks -Insurance companies
- The mutual funds - The NBFC including leasing & hire purchase companies - The agricultural finance companies including NABARD - Other institutions such as chit funds Regulatory Framework :Regulatory framework for controlling and supervising the financial system in India is a complex network of legislations, guidelines, notifications. The main elements of regulatory framework are- The Company Act 1956 - The Securities Contracts (Regulation) Act, 1956 - The Income Tax Act, 1961 - The Banking Regulation Act, 1949 - Numerous Guidelines issued by SEBI and the RBI - Credit Policy announced by RBI
SIGNIFICANCE OF FINANCIAL SYSTEM An efficient financial system regulating the various institutions can lead to the economic development of the country. The advantages of good financial system are as follows. • Enables investors to make their investments to their expectations, which are constantly changing. • The process of market evaluation, allocates the available funds for investment to the most efficient firms who can apply them most profitably and productively. • Mobilises the investible surplus and provides expert services in bringing about the flow of funds into securities of business establishments. • Acts as a link between those who save and those who are interested in investing these savings. • Ensures the transparency of transactions of buying and selling the securities. • Guarantees the protection of funds invested by the small investors. • Keeps a watch over the company management. • Encourages acceleration in the rate of capital formation and thus acts as a catalyst in the wealth creation.
•Performs fundamental & technical analysis so as to guide the stakeholders in order to make informed decisions. • Provide for listing of different securities showing their market value. • Provision of ready & continuous market for the purchase and sell of different securities. • Provides an environment for speculation over different securities in a market place.
RATIO ANALYSIS •
Absolute figures in the financial statements, either the profitability statements or the balance sheet, may not give the qualitative indication regarding the financial position or performance of an organisation. A ratio is a relationship expressed in mathematical between two individual or groups of figures connected with each other in some logical manner.
CAPITAL BUDGETTING Capital budgetting includes analysis of various proposals regarding capital expenditure to evaluate their impact on the financial situation of the company and to choose the best out of the various alternatives.
CAPITALISATION •
The financial decision that determines the amount which the firm should have at it’s disposal for financing fixed assets as well as the current assets ( portion of which is financed out of long term sources) is called ‘Capitalisation’. • Thus capitalisation means total amount of long term funds available to the company. It cludes capital stock & debts as well. • Amount of capitalisation of the firm should be equivalent as justified by it’s profits and by the rate of return for the industry concerned. THEORIES OF CAPITALISATION A] Cost Theory :Cost theory considers the amount of capitalisation on the basis of cost of various assets required to set up the organisation. It gives more stress on current outlays than on the periodic requirements. The cost theory considers the actual funds but not the earnings capacity of the assets. The total capitalisation is sum invested in fixed & current assets and also funds required to meet promotional & organisational expenses.
B] EARNINGS THEORY :This theory considers the amount of capitalisation on the basis of expected future earnings. It is worked out in two steps. I] To decide future earnings – Estimation of future earnings should be based on following criteria. • Smaller period of estimation • Weighted average of the past earnings with more weights to recent earnings. • Due adjustments to non-recurring factors. • Adjustment to known factors in future. • For new concerns reasonably correct estimation of future sales & & costs (based on forecast). • Allowances for contingencies. II] To determine Capitalisation Rate – It may be one or combination of the following • The rate of return requireqd to attract the investors. • Cost of Capital • Rate of earnings of similar organisations.
III] To capitalise the future earnings at the decided rate of capitalisation. • Earnings theory is ideal as it considers earnings capacity but also has a limitation as it involves estimation of two variables i.e. future earnings and capitalisation rate which is critical. OVERCAPITALISATION It means an existence of excess capital as compared to the level of business activity and requirements. Causes of Overcapitalisation :• Assets of the firm purchased during inflationary trends. • Inadequate provision for depreciation of the assets. • Heavy expenses during the stage of formation/incorporation. • Acquisition of intangible assets like goodwill, patents. Trademarks, copyrights, Designs etc by paying exorbitant price without proportionate earnings. • In adequate estimation of funds resulting into huge borrowings at high cost. • Liberal dividend policy seriously affecting retained profits & earnings capacity.
High rates of taxation leading to shortage of funds seriously affecting earnings capacity of the assets. • Issue of securities in favourable capital market conditions irrespective of the fact whether they are really required or not. As a result the ability of the company increases but not the earnings capacity. • Lower than prevailing market rate of capitalisation. Effects of Over Capitalisation • On Company :- Real value of the business and it’s earnings capacity reduces with adverse effect on it’s market value. • On Shareholders:- Shares held are not having proper backing of tangible assets. • On Cosumers:- To overcome the situation of overcapitalisation & improve earnings, the selling prices may be increased. • On Society at Large :- Increasing selling prices & falling market prices of shares affects consumers and shareholders as well. This may lead to liquidation of the firm leading unemployment and loss of industrial production.
REMEDIES FOR OVERCAPITALISATION • To reduce the debts by repaying them out of own earnings. • To redeem high cost preference shares. • High cost debenture holders may be persuaded to accept new low cost debentures debentures. • Devaluation of face value of shares with consent from shareholders. UNDERCAPITALISATION It is excess of real worth of the assets over the aggregate of Capital (shares term loans & debentures) outstanding. Causes of Undercapitalisation • Underestimation of the future earnings. • Windfall gains especially during the transition period from depression to boom. • Implementation of modernisation program increasing earnings capacity many times.
EFFECTS OF UNDERCAPITALISATION •
•
•
On Company :Increasing EPS may further increase the competition in the business. Increasing profits will increase the tax liability. High market price of shares restrict the volume of trades. More demand of wages from employees. Customers feeling about the high prices & profitability. On Shareholders :High dividend income High market price maximises wealth. Limited trades of shares on of high price. On Society Encouragement to new entrepreneurs Improve industrial production and reduce unemployment
REMEDIES FOR UNDERCAPITALISATION • •
Issue of bonus shares. Splitting the shares. CAPITAL STRUCTURE Capital Structure refers to the mix of sources from which the long term funds required by a business are raised. Capital structure is based on the following principles. Cost Principle :- Ideal capital structure should minimise the cost of capital and maximise EPS. Risk Principle :- High risk in financing capital should be avoided. Control Principle :- Should ensure controlling stake of the promoter group in the company. Flexibility Principle :- Capital structure should be able to cater to additional requirements of capital in future. Timing Principle :- Capital structure should be able to exploit favourable market conditions & should minimise the cost of raising.
FACTORS AFFECTING CAPITAL STRUCTURE • 1. 2. 3. 4. • 1. 2. 3. 4. 5. • 1. 2. 3. 4.
Internal Factors Cost of Capital Risk Factor Control Factor Objects of Capital Structure Planning External Factors General Economic Conditions Level of Interest Rates Policy of Lending Institutions Taxation Policy Statutory Restrictions General Factors Constitution of Company Characteristics of Company Stability of Earnings Attitude of Management
MANAGEMENT OF PROFITS
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