As there is no separate statue for equipment leasing in India, the provisions relating to bailment in the Indian Contract Act govern equipment leasing agreements as well section 148 of the Indian Contract Act defines bailment as: “The delivery of goods by one person to another, for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed off according to the directions of the person delivering them. The person delivering the goods is called the ‘bailor’ and the person to whom they are delivered is called the ‘bailee’. Since an equipment lease transaction is regarded as a contract of bailment, the obligations of the lessor and the lessee are similar to those of the bailor and the bailee (other than those expressly specified in the least contract) as defined by the provisions of sections 150 and 168 of the Indian Contract Act. Continue reading
Business Finance
Business Finance is that business activity which is concerned with the acquisition and conservation of capital funds in meeting financial needs and overall objectives of business enterprises.
Factoring of Receivables – Meaning and Mechanism
Raising short term and medium term debt by inviting and accepting deposits from the investing public has become an established practice with a large number of companies both in the private and public sectors. This is the outcome of the process of dis-intermediation that is taking place in Indian economy. Similarly, issuance of Commercial Paper by high net-worth Corporates enables them to raise short-term funds directly from investors at cheaper rates as compared to bank credit. In practice, however, commercial banks have been the major investors in Commercial Paper in India, implying thereby that bank credit flows to the corporate sector through the route of CPs. Inter-Corporate loans and investments enable the cash rich corporations to lend their surplus resources to those who need them for their working capital purpose. Factoring of receivables is a relatively recent innovation which enables corporates to convert their receivables into liquidity within a short Continue reading
Capital Asset Pricing Model (CAPM) – Definition, Formula and Calculation
The risk or variation in return of a security is caused by two types of factors. The first type of factors will affect the return of almost all securities in the market. Examples of such sources of risks are changes in the interest rates and inflation of the economy, movement of stock market index and exchange rate movement. The risk caused by such factors is known as systematic risk. Apart from systematic risk, the variation in return of a security is also caused by some other factors which are specific to a security, like a strike in a company or the caliber of the management of a company. The risk caused by such factors is known as unsystematic or specific risk. The unsystematic risk of a security can be diversified away by combining different securities into a portfolio. But systematic risk cannot be diversified away by the construction of a Continue reading
Opportunity Cost of Capital
The opportunity cost of capital is defined as the return on capital which might be obtained by its employment when the central objective of planning policy is to use capital so its return to employment in any one investment is at least as high as its return from employment in any alternative investment. Similar to the cost of capital to equity shareholders, we have to allow for any risk differential. In other words, the opportunity cost of capital is the marginal productivity of additional investment in the best alternative uses. It is, therefore, not surprising that the marginal productivity of capital in the private sector is frequently suggested as an appropriate value for the opportunity cost of capital to be used in public investment projects. It seems reasonable to say that if the marginal investment can earn x percent in the private sector, no public investment project should be allowed Continue reading
Cash Budget – Definition, Objectives, Features, and Advantages
Meaning and Definition of Cash Budget A cash budget is a budget or plan of expected cash receipts and disbursements during the period. These cash inflows and outflows include revenues collected, expenses paid, and loans receipts and payments. In other words, a cash budget is an estimated projection of the company’s cash position in the future. Management usually develops the cash budget after the sales, purchases, and capital expenditures budgets are already made. These budgets need to be made before the cash budget in order to accurately estimate how cash will be affected during the period. For example, management needs to know a sales estimate before it can predict how much cash will be collected during the period. Management uses the cash budget to manage the cash flows of a company. In other words, management must make sure the company has enough cash to pay its bills when they come Continue reading
Liquidity – Meaning, Fundamentals, and Effects
Working capital is a term of liquidation as per the accountants. For them it is more important to ascertain if the company would be in a position to pay off its liabilities using its cash flows than to what level of current and non-current resources it holds. The disparity between current assets and current liabilities is therefore considered to be more important than the volume of the investment either in current assets or current liabilities. The success of the management of working capital ultimately depends on the optimal level of liquidity held by the organization. Higher level of liquidity has a bearing on the profitability of the firm whereas lower liquidity level can affect the operations of the firm. There are many factors that contribute to the changes in the level of liquidity but the changes in the composition of the working capital elements is probably the most significant among Continue reading