Asset securitization can be defined as the partial or complete segregation of a specific set of cash flows from a corporation’s other assets and the issuance of securities based on these cash flows, i.e exchanging one asset for another. The types of financial assets involved in asset securitization transactions are often receivables. The practice of securitization originated with the sale of securities backed by residential mortgages, but the framework of asset securitization has rapidly expanded from its initial root of mortgages and receivables to other more variable cash flows in home equity loan markets, commercial loan markets, credit card receivables, auto loans, small-business loans, corporate loans, state lottery winnings, and litigation settlement payments and other types of loans. Asset securitization is the transformation of a mix of illiquid individual loans that are combined into relatively similar pools and transformed into highly liquid bonds traded in securities markets and usually, when Continue reading
Financial Management Concepts
Advantages and Disadvantages of Different Sources of Finance
Finance is essential for a business’s operation, development and expansion. Finance is the core limiting factor for most businesses and therefore it is crucial for businesses to manage their financial resources properly. Finance is available to a business from a variety of sources both internal and external. It is also crucial for businesses to choose the most appropriate source of finance for its several needs as different sources have its own benefits and costs. 1. Personal Savings This is the amount of personal money an owner, partner or shareholder of a business has at his disposal to do whatever he wants.When a business seeks to borrow the personal money of a shareholder, partner or owner for a business’s financial needs the source of finance is known as personal savings. Advantages; The owner would not want collateral to lend money to the business. There is no paperwork required. The money need Continue reading
The Concept of Financial Innovation
Financial intermediaries have to perform the task of financial innovation to meet the ever-changing requirements of the economy and to help the investors cope with the increasingly volatile market. Because of this reason there is a necessity for the financial intermediaries to innovate unique financial instruments. The following are the major reasons for financial innovation: Low Profitability: Profitability refers to the ability of a financial institution to maximize profits. The profitability of the major financial institutions have been declining in the recent times. So, the institutions are compelled to seek new products, which fetches high returns. Competition: The entry foreign and private players in the financial services sector have led to severe competition in the industry. This has compelled the institutions to innovate the financial instruments. Economic Liberalization: Economic liberalization such as, deregulation of exchange controls and interest rate ceilings etc, have made the industry more innovative. Customer service: To Continue reading
Working Capital – Definition and Factors Affecting Working Capital
Working capital is the amount of money that a company has tied up in funding its day-to-day operations. A company has to tie up money to fund its stocks, credit sales and other current assets, but this is offset by its ability to fund this from current liabilities liabilities such as purchases on credit. In the Annual Survey of Industries (1961), working capital is defined to include “Stocks of materials, fuels, semi-finished goods including work-in-progress and finished goods and by-products; cash in hand and bank and the algebraic sum of sundry creditors as represented by (a) outstanding factory payments e.g. rent, wages, interest and dividend; b) purchase of goods and services; c) short-term loans and advances and sundry debtors comprising amounts due to the factory on account of sale of goods and services and advances towards tax payments”. Modern industrial concerns produce an anticipation of demand. Payment has, therefore, to Continue reading
Separate Trading of Registered Interest and Principal of Securities (STRIPS)
STRIPS is the acronym for Separate Trading of Registered Interest and Principal of Securities. STRIPS let investors hold and trade the individual interest and principal components (also known as stripping) of eligible Treasury notes and bonds as separate securities. The origin of Strip Bonds can be traced to the 1960s, when Investment Dealers in the United States began (physically) clipping coupons from bearer government bonds and selling the individual pieces as separate securities. These clipped bonds gained immense popularity and their sales gained momentum in the early and mid 1980s as the interest rates surged to high levels. This was so because it allowed investors to lock in the very high yields that were available at that time, without worrying about the risk of not being able to re-invest future interest payments at the same high rates. The interest and principal steam of cash flow are deterministic and are known Continue reading
Asset Valuation Methods
There are various methods adopted across the globe, however we discuss some of the common and widely accepted asset valuation methods. 1. Discounted Cash Flow Method This valuation method based on free cash flow is considered a strong tool because it concentrates on cash generation potential of a business. This valuation method uses the future free cash flow of the company (after providing for changes in working capital and capital expenditures) and discounts it by the firm’s weighted average cost of capital (the average cost of all the capital used in the business, including debt and equity) to arrive at the value of the enterprise as a whole. According to the discounted cash flow valuation model, the intrinsic value of a company is the present value of all future free cash flows, plus the cash proceeds from its eventual sale. The presumption is that the cash flows are used to Continue reading