The assets of a company can be financed either by increasing the owners’ claims or the creditors’ claims. The owners claim increase when the firm raises funds by issuing ordinary shares or by retaining earnings; the creditors’ claims increase by borrowing. The various means of financing represent the financial structure or capital structure of a company. The term capital structure is used to represent the proportionate relationship between debt and equity. Equity includes paid-up share capital, share premium and reserve and surplus (retained earnings). The company will have to plan its capital structure initially at the time of its promotion. Subsequently, whenever funds have to be raised finance investment, a capital structure decision is involved. Capital structure of a company refers to the mix of sources from where the long-term funds required in the business may be raised. A demand for raising funds generates a new capital structure a decision Continue reading
Business Finance Terms
Fixed Capital – Meaning, Management and Affecting Factors
Fixed capital means the portion of the capital, which is meant for meeting the permanent or long-term needs of the business. In other words fixed capital is required for the acquisition of those assets that are to be used over a long period. So, Fixed capital is an alternative term for fixed assets. Fixed capital is required for acquisition of the following assets: Tangible assets such as land, buildings, plant and machinery, furniture and fittings, etc. Intangible assets such as goodwill, patents, copyrights, promotion, cost, etc. It should be noted that the fixed assets couldn’t be withdrawn from the business without disturbing the normal working of the undertaking. It is, therefore, necessary that sufficient funds are raised for acquisition of fixed assets. These funds are required not only while establishing a new enterprise but also for expanding, diversifying and maintaining intact the existing enterprise. Assessment of Fixed Capital Requirements The Continue reading
What are Circuit Breakers?
Volatility in stock prices is a cause of concern for both the policy makers and the investors. To curb excessive volatility, SEBI has prescribed a system of circuit breakers. The circuit breakers bring about a nation-wide coordinated halt in trading on all the equity and equity derivatives markets. An index based market-wide circuit breaker system applies at three stages of the index movement either way at 10%, 15% and 20%. The breakers are triggered by movement of either S&P CNX Nifty or Sensex, whichever is breached earlier. Further, the NSE views entries of non-genuine orders with utmost seriousness as this has market-wide repercussion. It may suo-moto cancel the orders in the absence of any immediate confirmation from the members that these orders are genuine or for any other reason as it may deem fit. As an additional measure of safety, individual scrip-wise price bands have been fixed as below: Daily Continue reading
Capital Sources for Business: Debentures
A debenture is a document issued by a company as an evidence of a debt due from the company with or without a charge on the assets of the company. It is an acknowledgement of the company’s indebtedness to its debenture-holders. Debentures are financial instruments for raising long term debt capital. Debenture holders are the creditors of the company. In India, according to the Companies Act, 1956, the term debenture includes “debenture stock, bonds and any other securities of a company whether constituting a charge on the assets of the company or not.” Debenture-holders are entitled to periodical payment of interest at an agreed rate. They are also entitled to redemption of their capital as per the agreed terms. No voting rights are given to debenture-holders. Under section 117 of the Companies Act, 1956, debentures with voting rights cannot be issued. Usually debentures are secured by charge on or mortgage Continue reading
Economic Value Added (EVA) – Definition, Calculation and Implementation
Economic Value Added (EVA) is a value based financial performance measure, an investment decision tool and it is also a performance measure reflecting the absolute amount of shareholder value created. It is computed as the product of the “excess return” made on an investment or investments and the capital invested in that investment or investments. “Economic Value Added (EVA) is the net operating profit minus an appropriate charge for the opportunity cost of all capital invested in an enterprise or project. It is an estimate of true economic profit, or amount by which earnings exceed or fall short of the required minimum rate of return investors could get by investing in other securities of comparable risk.” Economic Value Added (EVA) is a variation of residual income with adjustments to how one calculates income and capital. Stern Stewart & Co., a consulting firm based in New York, introduced the concept on Continue reading
Capital Profit and Revenue Profit
Meaning Of Capital Profits The amount of profit earned by the business from the sale of its assets, shares, and debentures is capital profit. If assets are sold at a price more than their book values then the excess of book value is capital profit. Similarly, if the shares and debentures are issued at a price more than their face value, then the excess of face value or premium is capital profit. Such profit is not earned in the ordinary course of the business. It is not available for the distribution to shareholders as dividend. Such profits are transferred to capital reserve. It is used for meeting capital losses. It is shown on the liabilities side of balance sheet. Meaning Of Revenue Profits Revenue profit is the difference between revenue incomes and revenue expenses. It is earned in the ordinary course of the business. It results from the sale of Continue reading