Investment centers are decentralized divisions or sub-units for which the manager has maximum discretion in determining not only short-term operating decision on product mix, pricing and production methods, but also level and type of investment. An investment center extends the profit center concept in that the measured profit is related to the center investment. It may be described as a special form of profit center since a profitability measure is being developed for the center. The concept relating profits to assets employed has an intuitive appeal for it for indicates whether the return for the capital invested in the division and it is important that an evaluation be made the overall company are earning on in elaborate systems for authorizing capital investment center performance can be the aggregation of past and present capital projects each project individually. Such a measurement also provides an incentive for division managers to monitor Continue reading
Financial Concepts
Evaluating a Company’s Capital Structure using Ratios
A business organization may be financially sound today but it may loose strength tomorrow because of losses. Therefore it is necessary to maintain a judicious balance between the owned capital and borrowed capital. The following ratios have been calculated to analyze the capital structure of a company. 1. Capital Gearing Ratio Capital Gearing Ratio of an organization measures the relationship between equity share capital to preference capital and loan capital. ‘Capital gearing’ refers to the ratio between the variable cost bearing capital and fixed cost bearing capital of the organization and helps to frame the capital structure of the organization. Capital gearing may be of three types: High Gearing Capital, which indicates the excess of interest bearing long-term finance over the equity funds; Low Gearing Capital, which indicates the excess of equity funds over the interest bearing long-term finance; and Evenly Geared, which indicates the equality between the interest bearing Continue reading
The Concept of Debt Recovery Management
Banks were never so serious in their efforts to ensure timely recovery and consequent reduction of Non-Performing Assets (NPAs) as they are today. It is important to remember that recovery management, be of fresh loans or old loans, is central to NPA management. This management process needs to start at the loan initiating stage itself. Effective management of recovery and Non-Performing Assets comprise two pronged strategy. First relates to arresting of the defaults and creation of NPA thereof and the second is to handling of loan delinquencies. The tenets of financial sector reforms were revolutionary which created a sense of urgency in the minds of staff of bank and gave them a message that either they perform or perish. The prudential norm has forced the bank to look into the asset quality. A debt from a loan, credit line or accounts receivable that is recovered either in whole or Continue reading
Merchant Banking Services: Corporate Counseling
Corporate counseling denotes the advice provided by the Merchant Banking to the corporate unit to ensure better corporate performance in terms of image building among investors, steady growth through good working and appreciation in market value of its equity shares. The scope of corporate counseling, capital restructuring and, portfolio management and the full range of financial engineering includes venture capital, public issue management, and loan syndication, working capital, fixed deposit, lease financing, acceptance credit, etc. However counseling is limited to only opinions and suggestions and any detailed analysis would form part of a specific service. The scope of corporate counseling is restricted to the explanations of concepts, procedures and laws to be observed by the client company. Requirement of any action to be taken or compliance of statutory formalities to be made for implementation of those suggestions would mean the demand for a specific type of service other than corporate Continue reading
What is Over Capitalization?
Concept of Over Capitalization The phrase ‘Over Capitalization’ should not be confused with excess of capital. Truly speaking, over capitalization is a relative term used to denote that the firm in question is not earning reasonable income on its funds. According to Bonneville, Dewey and Kelly, when a business is unable to earn a fair rate of return on its outstanding securities, it is over capitalized. Thus over capitalization refers to that state of affairs where earning of the corporation do not justify the amount of capital invested in the business. The main symptom of over capitalization in a company is the amount of earning which it is making on its total capital. Thus, a company is said to be over capitalized when it earns less than what it should have earned as fair rate of return on its total capital. To ascertain whether the company is earning reasonable rate Continue reading
Different Types of Securitized Instruments
Pass Through Certificates and Pay Through Certificates There is no uniform name for the securities issued by the special purpose vehicle (SPV) as such securities take different forms. These securities could either represent a direct claim of the investors on all that the SPV collects from the receivables transferred to it: in this case, the securities are called pass through certificates as they imply certificates of proportional beneficial interest in the assets held by the SPV. Alternatively, the SPV might be re-configuring the cash flows by reinvesting it, so as to pay to the investors on fixed dates, not matching with the dates on which the transferred receivables are collected by the SPV. In this case, the securities held by the investors are called pay through certificates. 1. Pass Through Certificates In case of pass through certificates payments to investors depend upon the cash flow from the assets backing such Continue reading