Investment in capital projects needs funds. These funds are provided by the investors like equity shareholders, preference shareholders, debenture holders, etc in expectation of a minimum return from the firm. The minimum return expected by the investors depends upon the risk perception of the investor as well as on the risk-return characteristics of the firm. This minimum return expected by the investors, which in turn, is the cost of procuring funds for the firm, is termed as the cost of capital of the firm. Thus, the cost of capital of a firm is the minimum rate of return that it must earn on its investments in order to satisfy the expectation of the various categories of investors who have invested in the firm. A firm procures funds from various sources by issuing different securities to finance its projects. Each of these sources of finance entails cost to the firm. Since Continue reading
Business Finance Concepts
Cost Reconciliation Statement
A manufacturing concern may adopt either Integrated Accounting System or Non-Integral Accounting System. Under Integrated Accounting System, only one set of books is maintained to record both costing and financial transaction, therefore, under this system, both financial accounts and cost accounts give similar results. But in Non-Integral Accounting System, separate books are maintained for costing and financial transactions, which may exhibit different results i.e. profits or losses. In other words, when cost accounts and financial accounts are maintained independently by a concern, the profit or loss shown by the cost accounts may not agree with the profit or loss shown by the financial accounts. In this situation, it is needed to reconcile the profits or losses shown differently by cost accounts and financial account by preparing a statement called Cost Reconciliation Statement. A statement which is prepared for reconciling the profit between financial account and cost account is known as Continue reading
Methods of Raising Finance for Business
The methods of financing should be adjusted to the stage or phase of the trade cycle. The total capital shall be raised by different means, or what is sometimes called “geared”, according to the phase of the cycle. Different types of securities may be issued in certain proportions, an what ratio will each type bear to the total capital will depend upon the particular phase. For example, in the beginning of an optimistic expansion, debentures may be offered to good advantage. At a later time, when speculative enthusiasm is strong, shares will yield better returns. During depression short time borrowing can be resorted to, if the credit of the company is good. The financing plan may be adjusted to the conditions of the market an the security market by varying the proportion, rate of yield, term denominations and guaranteed rights of the securities issued. The sources of finance for an Continue reading
Capital Sources for Business: Retained Earnings
Like an individual, companies also set aside a part of their profits to meet future requirements of capital. Companies keep these savings in various accounts such as General Reserve, Debenture Redemption Reserve and Dividend Equalization Reserve etc. These reserves can be used to meet long term financial requirements. The portion of the profits which is not distributed among the shareholders but is retained and is used in business is called retained earnings or ploughing back of profits. As per Indian Companies Act., companies are required to transfer a part of their profits in reserves. The amount so kept in reserve may be used to buy fixed assets. This is called internal financing. Retained Earnings = Beginning Retained Earnings + Net Income – Dividends A company that has experienced more losses than gains to date, or which has distributed more dividends than it had in the retained earnings balance, will have Continue reading
Major Participants in Securitization Process
Securitization is the process whereby relatively illiquid financial assets such as mortgages are packaged together and sold off to individual investors. Securitization turns relatively illiquid instruments into quite liquid investments called asset-backed securities. A market maker agrees to create a secondary market by buying and selling the securities. Securitization originated in the mortgage market in the early 1980s, when mortgage loans began to be packaged together and sold off as securities in the secondary market often with government insurance guaranteeing that the principal and interest would be repaid. Securitization became popular because it provides a way of protecting against interest rate risk in an environment of increased interest rate volatility. Securitization offers reduced credit risk because of the pooling of assets. Read More: The Concept of Securitization Process of Securitization Benefits of Securitization The securitization process involves a number of participants. The role of major participants in securitization process are Continue reading
Concept of Secret Reserve
A reserve which maintained to strengthen the financial position of the business without disclosing it in the book is known as secret reserve. Secret reserve is hidden reserve which is not disclosed by the balance sheet. Secret reserve is also known as internal reserve. It is created by showing the figure of net profit less than actual. Its existence makes the financial position of the business better than what the balance sheet is disclosing. Generally, it is maintained by bank, Insurance and other financial institutions. A secret reserve is created in any of the following ways: High Value Of Goodwill: In the balance sheet if value of good will is shown nominal or how but infact its value is high reserve may be created. Shown More Bad Debts: If management has made excessive provisions for bad debts. Infact these are less than the reserves allocated. So keeping in view the Continue reading