Description
covers securities in detail.
Topics : Financial ratios, payment through draft, disbursements,zero balance account(ZBA),EFT,treasury bills,commercial paper,certificate of deposit,
Financial Ratio
LIQUIDITY RATIOS
Dabur India Ltd
Emami Ltd
Current ratio Quick ratio Debt to equity Debt to total assets Debt to total capitalization
COVERAGE RATIO
1.11 1.78 0.18 0.06 0.15
1.35 0.94 1.48 0.59 0.68
EBIT to Interest ratio
ACTIVITY RATIO
32.86
6.18
Receivable turnover ratio Receivable turnover in days Payable turnover ratio Payable turnover in days Inventory Turnover ratio Inventory turnover in days Operating cycle Cash cycle Total assets turnover
PROFITABILITY RATIOS
21.32 17 days 10.96 33 days 5.58 65 days 82 days 49 days 1.08
14.62 25 days 8.13 45 days 4.21 86 days 111 days 66 days 0.99
Gross profit margin Net profit margin Return on Assets
39% 15.58% .16%
64% 12.28% 12.21%
Current Ratio: Higher ratio is an indication that Emami is liquid and has the ability to pay its current obligations in time and when they become due. Lower ratio indicates that the liquidity position of Dabur is not good and the firm shall not be able to pay its current liabilities in time with no difficulties.
Quick Ratio: Higher ratio of Dabur gives an indication that the firm is liquid and has the ability to meet its current / liquid liabilities in time and on the other hand a low ratio represents that Emami’s liquidity position is not good. This discrepancy between the current and quick ratio is explained by the fact that Emami carries more inventories thus having low quick ratio.
Debt to Equity Ratio: Higher ratio shows that Emami has a higher proportion of debt financing in comparison to share holder’s equity which increases the level of risk in comparison with Dabur Ltd. As Dabur has a lower debt component and higher proportion of equity in its financing.
Debt to Total Asset Ratio: Ratio is fairly low for Dabur which can be explained the fact that Dabur is a larger company as compared to Emami and thus Dabur has a larger operations Base and higher amount of assets; also the debt component is small.
Debt to Total Capitalization Ratio: The higher the debt to capital ratio, the more debt the Company has compared to its equity. Emami has high ratio which shows weak financial strength because the cost of debts may weigh on the company and increase its default risk.
EBIT to Interest Ratio: In case of Dabur, a high ratio assures the lenders a regular and periodical interest income. It shows that Dabur has more ability than Emami to meet its interest payments. In case of Emami, low ratio may create some problems to the financial manager in raising funds from debt sources. Accounts Receivable Turnover Ratio: indicates the number of times the receivables are turned over a year. The higher value suggests that Dabur is more efficient in the management of receivables. Receivable Turnover in Days: As per report, Dabur is collecting more quickly on its accounts in 17 days As compared to 25 days taken by Emami. It clearly means that Dabur is managing its receivables more efficiently than Emami.
Payable Turnover ratio: Higher ratio of Dabur signifies that creditors are being paid promptly. However a very favorable ratio to this effect also shows that the business is not taking the full advantage of credit facilities allowed by the creditors. Payable Turnover in Days: It signifies the credit period enjoyed by the firm in paying creditors. The higher the payable turnover in days, the lesser number of times the payables are turned over in a year. Total Asset Turnover ratio: It measures the activity of assets and the ability of the business to generate sales and income through the use of the assets. Higher ratio is showing effective utilization of its assets by Dabur. Lower ratio means underutilization of assets by Emami. It is also indicating about pricing strategy of the two companies. Dabur with low profit margins tend to have high asset turnover, while Emami with high profit margins have low asset turnover. Gross Profit Margin: The margin is higher for Emami which means that cost of production is lower for Emami as compared to Dabur.
All these 8 ratios will be discussed later in detail during the presentation.
Net Profit Margin: It measures profitability of sales after adjusting all income expenses and taxes. Although net profit margin of Emami is higher Dabur has a higher net profit margin which indicates how well Dabur has managed its operating expenses. Return on Assets: It evaluates how effectively the company employs its assets to generate a return, indicating efficiency of the firm. Here Emami has higher ROA ratio thus suggesting about more earnings for the amount of assets and their well efficient use of business assets. It means that Dabur is earning more money with less investment as compared to Emami.
Return on Equity: This ratio is more meaningful to the equity shareholders who are interested to know profits earned by the company and those profits which can be made available to pay dividends to them. Higher ratio indicates that investment in Emami is more attractive than Dabur. It indicates that Dabur is getting more return on the invested capital against other investment opportunities like stocks, real estates, savings etc, as compared to Emami.
Inventory Turnover Ratio: For Dabur, higher ratio indicates the efficient management of inventory as more frequently the stocks are sold; the lesser amount of money is required to finance the inventory.
Inventory Turnover in Days: In case of Dabur, 65 days mean that inventory is being converted into sales more quickly as compared to 86 days in Emami. Operating Cycle: It shows that Dabur is able to generate money by operations, faster than Emami therefore, showing more efficient operating procedures of Emami as compared to Dabur. Cash Cycle: Shorter cash cycle is leading Dabur to a comfortable cash position, efficient management of working capital as compared to Emami.
?
?
“Playing the Float”
Control of Disbursements
?
?
?
Payable through Draft (PTD) Payroll and Dividend Disbursements Zero Balance Account (ZBA)
?
Remote and Controlled Disbursing
?
Net Float :
The dollar difference between the balance shown in a firm’s (or individual’s) checkbook balance and the balance on the bank’s books. You write a check today, which is subtracted from your calculation of the account balance.
The check has not cleared, which creates float.
You can potentially earn interest on money that you have “spent.”
Firms should be able to: 1. shift funds quickly to banks from which disbursements are made. 2. generate daily detailed information on balances, receipts, and disbursements. Solution: Centralize payables into a single (smaller number of) account(s). This provides better control of the disbursement process.
PAYROLL & DIVIDEND DISBURSEME NT
PAYABLE THROUGH DRAFT ZERO BALANCE ACCOUNT
DISBURSEMENT
?
A check-like instrument that is drawn against the payor and not against a bank as is a check. After a PTD is presented to a bank, the payor gets to decide whether to honor or refuse payment. Delays the time to have funds on deposit to cover the draft.
Some suppliers prefer checks.
?
? ?
Banks will impose a higher service charge due to the additional handling involved
?
The firm attempts to determine when payroll and dividend checks will be presented for collection. Many times a separate account is set up to handle each of these types of disbursements. A distribution scheduled is projected based on past experiences. [See slide 9-28] Funds are deposited based on expected needs. Minimizes excessive cash balances.
?
?
? ?
100%
75% The firm may plan on payroll checks being presented in a similar pattern every pay period.
Percent of Payroll Collected
50%
25% 0% F (Payday) M T W H F M and after
A corporate checking account in which a zero balance is maintained. The account requires a master (parent) account from which funds are drawn to cover negative balances or to which excess balances are sent.
Eliminates the need to accurately estimate each disbursement account. Only need to forecast overall cash needs.
Remote disbursement ? Controlled disbursement
?
A system in which the firm directs checks to be drawn on a bank that is geographically remote from its customer so as to maximize check-clearing time. This maximizes disbursement float. This may stress supplier relations, and raises ethical issues.
A system in which the firm directs checks to be drawn on a bank (or branch bank) that is able to give early or mid-morning notification of the total dollar amount of checks that will be presented against its account that day.
Late check presentments are minimal, which allows more accurate predicting of disbursements on a day-to-day basis.
? The
exchange of business information in an electronic (non-paper) format, including over the Internet.
Messaging systems can be:
?
1. Unstructured -- utilize technologies such as faxes and e-mails 2. Structured -- utilize technologies such as electronic data interchange (EDI).
? Electronic
Data Interchange -- The movement of business data electronically in a structured, computer-readable format.
? EDI
Electronic Funds Transfer (EFT) Financial EDI (FEDI)
Electronic Funds Transfer (EFT) -- the electronic movements of information between two depository institutions resulting in a value (money) transfer. EDI Subset Society of Worldwide Interbank Financial Telecommunications (SWIFT) Clearinghouse Interbank Payments System (CHIPS)
Financial EDI -- The movement of financially related electronic information between a company and its bank or between banks.
Examples include:
Lockbox remittance information Bank balance information
Costs
? Computer
hardware and software expenditures ? Increased training costs to implement and utilize an EDI system ? Additional expenses to convince suppliers and customers to use the electronic system ? Loss of float
Benefits
Information and payments move faster and with greater reliability ? Improved cash forecasting and cash management ? Customers receive faster and more reliable service ? Reduction in mail, paper, and document storage costs
?
? Subcontracting
a certain business operation to an outside firm, instead of doing it “in-house.” ? Why might a firm outsource?*
1. 2. 3.
Improving company focus Reducing and controlling operating costs Freeing resources for other purposes
The optimal level of cash should be the larger of:
(1) (2) the transaction balances required when cash management is efficient. the compensating balance requirements of commercial banks.
? Assets
?
? ?
can be classified as:-
Monetary assets
Money or claims to receive fixed sum of money Idea of unexpired cost not appropriate Items which will be used in future in production and sale of goods and services Amount recorded on balance sheet when acquired at cost Amount shown on balance sheet thereafter is value not yet written off as expense
?
Non monetary assets
?
?
?
Ready cash segment
Marketable Securities Portfolio
Controllable cash segment Free cash segment
Safety
•Refers to the likelihood of getting back the same amount of rupees originally invested. •Judged on the basis of the treasury issue by the central government in any country, which is held certain if held until maturity
Marketability
•Related to the owner`s ability to convert it into cash in a short notice. •Active secondary market- that is, a second hand market where a security can be traded after issuance- is necessary for a security to have a high marketability.
Yield
•Refers to the interest and/or appreciation of principal provided by security.
Maturity
•To the life of security. •Longer the maturity, greater the yield, but at the same time more exposure to yield risk.
Treasury bills
Repurchase Agreements Commercial Papers Certificate of Deposit Banker’s Acceptance
Safety
Issued by central Government of any country One of the safest
Marketability
Available both in primary and secondary market
Yield
Zero risk instruments
Maturity
GOI through RBI issues three types of T-Bills
Low Yield
Highly marketable 91 days, 182 days, 364 days
Payment details
•Central Government issues T- Bills at a price less than their face value (par value) •Promise to pay full face value on maturity •The government pays the holder its face value at maturity •Difference between the purchase price and the maturity value is the interest income earned by the purchaser of the instrument.
Issuance details
•T-Bills are issued through a bidding process at auctions. •Bid can be prepared either competitively or non-competitively. •In case of competitive bidding, the return required on maturity is specified in the bid. •In non competitive bidding, return required is not specified and the one determined at the auction is received on maturity
Auctioning of T-Bills
•T-bills auctions are held on the Negotiated Dealing System (NDS) and the members electronically submit their bids on the system •The Reserve Bank of India issues a quarterly calendar of T-bill auctions •91-day T-bills are auctioned every week on Wednesdays, 182-day and 364- day T-bills are auctioned every alternate week on Wednesdays.
Purpose of RBI in issuing T-bills
•To absorb liquidity from the market by contracting the money supply - Reverse Repurchase (Reverse Repo) •RBI purchases back these instruments at a specified date mentioned at the time of transaction, liquidity is infused in the market - Repo (Repurchase)
Safety
Marketability
Actively traded in secondary market
Issued in form of Promissory note, freely transferrable in Demat Form
Yield
Yield higher as compared to T-Bills
Maturity
Comes with a fixed maturity Ranges from 1 to 270 days
Not backed by any collateral
Less secured, not a zero risk instrument
Commercial Paper contd.
Low-cost alternative to bank loans Strong credit rating of the issuing company a must
As no collaterals, only firms with high credit rating will find buyers easily Issued by corporate to impart flexibility in raising working capital resources at market determined rates.
A promissory note issued by a bank in form of a certificate entitling the bearer to receive interest. The certificate bears
? ? ?
the maturity date, the fixed rate of interest and the value.
It can be issued in any denomination. Its term generally ranges from three months to five years and restricts the holders to withdraw funds on demand. However, on payment of certain penalty the money can be withdrawn on demand also. The returns on certificate of deposits are higher than T-Bills because it assumes higher level of risk.
While buying Certificate of Deposit, return method should be seen. Returns can be based on Annual Percentage Yield (APY) or Annual Percentage Rate (APR).
? ? ? ? ? ? ? ? ? ? ?
Banker’s Acceptance: It is a short term credit investment created by a non financial firm and guaranteed by a bank to make payment. It is simply a bill of exchange drawn by a person and accepted by a bank. It is a buyer’s promise to pay to the seller a certain specified amount at certain date. The same is guaranteed by the banker of the buyer in exchange for a claim on the goods as collateral. The person drawing the bill must have a good credit rating otherwise the Banker’s Acceptance will not be tradable. The most common term for these instruments is 90 days. However, they can very from 30 days to180 days. For corporations, it acts as a negotiable time draft for financing imports, exports and other transactions in goods and is highly useful when the credit worthiness of the foreign trade party is unknown. The seller need not hold it until maturity and can sell off the same in secondary market at discount from the face value to liquidate its receivables.
? Mutual
fund companies usually provide products which can be categorized into following three types
? Debt
fund ? Balanced fund ? Equity fund
? Dabur
follows the mutual fund route for managing its liquid cash. ? Dabur has invested portions of liquid cash in products of 27 Mutual Fund companies like
• •
•
•
Fidelity Cash Fund LIC Mutual Fund DWS Mutual Fun Taurus Mutual Fund
Dabur has liquid cash which needs management to maximise returns
Dabur invests part of its liquid cash in Fidelity Cash fund
72.92% of total investments(Part of Dabur Ltd included) from various companies is invested by Fedility in money market by use of Certificate of Deposits and Commercial Papers Dividend received by all participant companies as per the dividend decided by Fiedility and market norms.
Earnings for Dabur for its idle Cash.
Name of Investment Fidelity Cash Fund
Unit Purchased
Unit Sold
Valuation
Return for Dabur Rs. 17,431
8771890.76 8771890.76 NA 867636 867636
Dividend as on 25th September 2009 - 0.01987142/unit held.
If Dabur was holding the said Units Result in Dabur Earning Rs. 17,431 per month on its idle cash
?
?
Cash management involves the efficient collection, disbursement, and temporary investment of cash. A cash budget is instrumental in the process, it tells us how much cash we are likely to have, when we are likely to have it, and for how long. Thus serves as a foundation for cash forecasting. In addition to the cash budget, the firm needs systematic information on cash as well as a detailed report on changes in this position. Efficient management of information is essential for a firm to manage its cash ultimately. Newer upcoming methods like Electronic Data Interchange, are facilitating information transfer between financial institutions. E-commerce regulations are coming in and might replace manual methods because of their advantages. Apart from the cash level maintained, companies usually invest in marketable securities which act as short term investment which enable them to earn money on their otherwise idle cash.
doc_345753905.pptx
covers securities in detail.
Topics : Financial ratios, payment through draft, disbursements,zero balance account(ZBA),EFT,treasury bills,commercial paper,certificate of deposit,
Financial Ratio
LIQUIDITY RATIOS
Dabur India Ltd
Emami Ltd
Current ratio Quick ratio Debt to equity Debt to total assets Debt to total capitalization
COVERAGE RATIO
1.11 1.78 0.18 0.06 0.15
1.35 0.94 1.48 0.59 0.68
EBIT to Interest ratio
ACTIVITY RATIO
32.86
6.18
Receivable turnover ratio Receivable turnover in days Payable turnover ratio Payable turnover in days Inventory Turnover ratio Inventory turnover in days Operating cycle Cash cycle Total assets turnover
PROFITABILITY RATIOS
21.32 17 days 10.96 33 days 5.58 65 days 82 days 49 days 1.08
14.62 25 days 8.13 45 days 4.21 86 days 111 days 66 days 0.99
Gross profit margin Net profit margin Return on Assets
39% 15.58% .16%
64% 12.28% 12.21%
Current Ratio: Higher ratio is an indication that Emami is liquid and has the ability to pay its current obligations in time and when they become due. Lower ratio indicates that the liquidity position of Dabur is not good and the firm shall not be able to pay its current liabilities in time with no difficulties.
Quick Ratio: Higher ratio of Dabur gives an indication that the firm is liquid and has the ability to meet its current / liquid liabilities in time and on the other hand a low ratio represents that Emami’s liquidity position is not good. This discrepancy between the current and quick ratio is explained by the fact that Emami carries more inventories thus having low quick ratio.
Debt to Equity Ratio: Higher ratio shows that Emami has a higher proportion of debt financing in comparison to share holder’s equity which increases the level of risk in comparison with Dabur Ltd. As Dabur has a lower debt component and higher proportion of equity in its financing.
Debt to Total Asset Ratio: Ratio is fairly low for Dabur which can be explained the fact that Dabur is a larger company as compared to Emami and thus Dabur has a larger operations Base and higher amount of assets; also the debt component is small.
Debt to Total Capitalization Ratio: The higher the debt to capital ratio, the more debt the Company has compared to its equity. Emami has high ratio which shows weak financial strength because the cost of debts may weigh on the company and increase its default risk.
EBIT to Interest Ratio: In case of Dabur, a high ratio assures the lenders a regular and periodical interest income. It shows that Dabur has more ability than Emami to meet its interest payments. In case of Emami, low ratio may create some problems to the financial manager in raising funds from debt sources. Accounts Receivable Turnover Ratio: indicates the number of times the receivables are turned over a year. The higher value suggests that Dabur is more efficient in the management of receivables. Receivable Turnover in Days: As per report, Dabur is collecting more quickly on its accounts in 17 days As compared to 25 days taken by Emami. It clearly means that Dabur is managing its receivables more efficiently than Emami.
Payable Turnover ratio: Higher ratio of Dabur signifies that creditors are being paid promptly. However a very favorable ratio to this effect also shows that the business is not taking the full advantage of credit facilities allowed by the creditors. Payable Turnover in Days: It signifies the credit period enjoyed by the firm in paying creditors. The higher the payable turnover in days, the lesser number of times the payables are turned over in a year. Total Asset Turnover ratio: It measures the activity of assets and the ability of the business to generate sales and income through the use of the assets. Higher ratio is showing effective utilization of its assets by Dabur. Lower ratio means underutilization of assets by Emami. It is also indicating about pricing strategy of the two companies. Dabur with low profit margins tend to have high asset turnover, while Emami with high profit margins have low asset turnover. Gross Profit Margin: The margin is higher for Emami which means that cost of production is lower for Emami as compared to Dabur.
All these 8 ratios will be discussed later in detail during the presentation.
Net Profit Margin: It measures profitability of sales after adjusting all income expenses and taxes. Although net profit margin of Emami is higher Dabur has a higher net profit margin which indicates how well Dabur has managed its operating expenses. Return on Assets: It evaluates how effectively the company employs its assets to generate a return, indicating efficiency of the firm. Here Emami has higher ROA ratio thus suggesting about more earnings for the amount of assets and their well efficient use of business assets. It means that Dabur is earning more money with less investment as compared to Emami.
Return on Equity: This ratio is more meaningful to the equity shareholders who are interested to know profits earned by the company and those profits which can be made available to pay dividends to them. Higher ratio indicates that investment in Emami is more attractive than Dabur. It indicates that Dabur is getting more return on the invested capital against other investment opportunities like stocks, real estates, savings etc, as compared to Emami.
Inventory Turnover Ratio: For Dabur, higher ratio indicates the efficient management of inventory as more frequently the stocks are sold; the lesser amount of money is required to finance the inventory.
Inventory Turnover in Days: In case of Dabur, 65 days mean that inventory is being converted into sales more quickly as compared to 86 days in Emami. Operating Cycle: It shows that Dabur is able to generate money by operations, faster than Emami therefore, showing more efficient operating procedures of Emami as compared to Dabur. Cash Cycle: Shorter cash cycle is leading Dabur to a comfortable cash position, efficient management of working capital as compared to Emami.
?
?
“Playing the Float”
Control of Disbursements
?
?
?
Payable through Draft (PTD) Payroll and Dividend Disbursements Zero Balance Account (ZBA)
?
Remote and Controlled Disbursing
?
Net Float :
The dollar difference between the balance shown in a firm’s (or individual’s) checkbook balance and the balance on the bank’s books. You write a check today, which is subtracted from your calculation of the account balance.
The check has not cleared, which creates float.
You can potentially earn interest on money that you have “spent.”
Firms should be able to: 1. shift funds quickly to banks from which disbursements are made. 2. generate daily detailed information on balances, receipts, and disbursements. Solution: Centralize payables into a single (smaller number of) account(s). This provides better control of the disbursement process.
PAYROLL & DIVIDEND DISBURSEME NT
PAYABLE THROUGH DRAFT ZERO BALANCE ACCOUNT
DISBURSEMENT
?
A check-like instrument that is drawn against the payor and not against a bank as is a check. After a PTD is presented to a bank, the payor gets to decide whether to honor or refuse payment. Delays the time to have funds on deposit to cover the draft.
Some suppliers prefer checks.
?
? ?
Banks will impose a higher service charge due to the additional handling involved
?
The firm attempts to determine when payroll and dividend checks will be presented for collection. Many times a separate account is set up to handle each of these types of disbursements. A distribution scheduled is projected based on past experiences. [See slide 9-28] Funds are deposited based on expected needs. Minimizes excessive cash balances.
?
?
? ?
100%
75% The firm may plan on payroll checks being presented in a similar pattern every pay period.
Percent of Payroll Collected
50%
25% 0% F (Payday) M T W H F M and after
A corporate checking account in which a zero balance is maintained. The account requires a master (parent) account from which funds are drawn to cover negative balances or to which excess balances are sent.
Eliminates the need to accurately estimate each disbursement account. Only need to forecast overall cash needs.
Remote disbursement ? Controlled disbursement
?
A system in which the firm directs checks to be drawn on a bank that is geographically remote from its customer so as to maximize check-clearing time. This maximizes disbursement float. This may stress supplier relations, and raises ethical issues.
A system in which the firm directs checks to be drawn on a bank (or branch bank) that is able to give early or mid-morning notification of the total dollar amount of checks that will be presented against its account that day.
Late check presentments are minimal, which allows more accurate predicting of disbursements on a day-to-day basis.
? The
exchange of business information in an electronic (non-paper) format, including over the Internet.
Messaging systems can be:
?
1. Unstructured -- utilize technologies such as faxes and e-mails 2. Structured -- utilize technologies such as electronic data interchange (EDI).
? Electronic
Data Interchange -- The movement of business data electronically in a structured, computer-readable format.
? EDI
Electronic Funds Transfer (EFT) Financial EDI (FEDI)
Electronic Funds Transfer (EFT) -- the electronic movements of information between two depository institutions resulting in a value (money) transfer. EDI Subset Society of Worldwide Interbank Financial Telecommunications (SWIFT) Clearinghouse Interbank Payments System (CHIPS)
Financial EDI -- The movement of financially related electronic information between a company and its bank or between banks.
Examples include:
Lockbox remittance information Bank balance information
Costs
? Computer
hardware and software expenditures ? Increased training costs to implement and utilize an EDI system ? Additional expenses to convince suppliers and customers to use the electronic system ? Loss of float
Benefits
Information and payments move faster and with greater reliability ? Improved cash forecasting and cash management ? Customers receive faster and more reliable service ? Reduction in mail, paper, and document storage costs
?
? Subcontracting
a certain business operation to an outside firm, instead of doing it “in-house.” ? Why might a firm outsource?*
1. 2. 3.
Improving company focus Reducing and controlling operating costs Freeing resources for other purposes
The optimal level of cash should be the larger of:
(1) (2) the transaction balances required when cash management is efficient. the compensating balance requirements of commercial banks.
? Assets
?
? ?
can be classified as:-
Monetary assets
Money or claims to receive fixed sum of money Idea of unexpired cost not appropriate Items which will be used in future in production and sale of goods and services Amount recorded on balance sheet when acquired at cost Amount shown on balance sheet thereafter is value not yet written off as expense
?
Non monetary assets
?
?
?
Ready cash segment
Marketable Securities Portfolio
Controllable cash segment Free cash segment
Safety
•Refers to the likelihood of getting back the same amount of rupees originally invested. •Judged on the basis of the treasury issue by the central government in any country, which is held certain if held until maturity
Marketability
•Related to the owner`s ability to convert it into cash in a short notice. •Active secondary market- that is, a second hand market where a security can be traded after issuance- is necessary for a security to have a high marketability.
Yield
•Refers to the interest and/or appreciation of principal provided by security.
Maturity
•To the life of security. •Longer the maturity, greater the yield, but at the same time more exposure to yield risk.
Treasury bills
Repurchase Agreements Commercial Papers Certificate of Deposit Banker’s Acceptance
Safety
Issued by central Government of any country One of the safest
Marketability
Available both in primary and secondary market
Yield
Zero risk instruments
Maturity
GOI through RBI issues three types of T-Bills
Low Yield
Highly marketable 91 days, 182 days, 364 days
Payment details
•Central Government issues T- Bills at a price less than their face value (par value) •Promise to pay full face value on maturity •The government pays the holder its face value at maturity •Difference between the purchase price and the maturity value is the interest income earned by the purchaser of the instrument.
Issuance details
•T-Bills are issued through a bidding process at auctions. •Bid can be prepared either competitively or non-competitively. •In case of competitive bidding, the return required on maturity is specified in the bid. •In non competitive bidding, return required is not specified and the one determined at the auction is received on maturity
Auctioning of T-Bills
•T-bills auctions are held on the Negotiated Dealing System (NDS) and the members electronically submit their bids on the system •The Reserve Bank of India issues a quarterly calendar of T-bill auctions •91-day T-bills are auctioned every week on Wednesdays, 182-day and 364- day T-bills are auctioned every alternate week on Wednesdays.
Purpose of RBI in issuing T-bills
•To absorb liquidity from the market by contracting the money supply - Reverse Repurchase (Reverse Repo) •RBI purchases back these instruments at a specified date mentioned at the time of transaction, liquidity is infused in the market - Repo (Repurchase)
Safety
Marketability
Actively traded in secondary market
Issued in form of Promissory note, freely transferrable in Demat Form
Yield
Yield higher as compared to T-Bills
Maturity
Comes with a fixed maturity Ranges from 1 to 270 days
Not backed by any collateral
Less secured, not a zero risk instrument
Commercial Paper contd.
Low-cost alternative to bank loans Strong credit rating of the issuing company a must
As no collaterals, only firms with high credit rating will find buyers easily Issued by corporate to impart flexibility in raising working capital resources at market determined rates.
A promissory note issued by a bank in form of a certificate entitling the bearer to receive interest. The certificate bears
? ? ?
the maturity date, the fixed rate of interest and the value.
It can be issued in any denomination. Its term generally ranges from three months to five years and restricts the holders to withdraw funds on demand. However, on payment of certain penalty the money can be withdrawn on demand also. The returns on certificate of deposits are higher than T-Bills because it assumes higher level of risk.
While buying Certificate of Deposit, return method should be seen. Returns can be based on Annual Percentage Yield (APY) or Annual Percentage Rate (APR).
? ? ? ? ? ? ? ? ? ? ?
Banker’s Acceptance: It is a short term credit investment created by a non financial firm and guaranteed by a bank to make payment. It is simply a bill of exchange drawn by a person and accepted by a bank. It is a buyer’s promise to pay to the seller a certain specified amount at certain date. The same is guaranteed by the banker of the buyer in exchange for a claim on the goods as collateral. The person drawing the bill must have a good credit rating otherwise the Banker’s Acceptance will not be tradable. The most common term for these instruments is 90 days. However, they can very from 30 days to180 days. For corporations, it acts as a negotiable time draft for financing imports, exports and other transactions in goods and is highly useful when the credit worthiness of the foreign trade party is unknown. The seller need not hold it until maturity and can sell off the same in secondary market at discount from the face value to liquidate its receivables.
? Mutual
fund companies usually provide products which can be categorized into following three types
? Debt
fund ? Balanced fund ? Equity fund
? Dabur
follows the mutual fund route for managing its liquid cash. ? Dabur has invested portions of liquid cash in products of 27 Mutual Fund companies like
• •
•
•
Fidelity Cash Fund LIC Mutual Fund DWS Mutual Fun Taurus Mutual Fund
Dabur has liquid cash which needs management to maximise returns
Dabur invests part of its liquid cash in Fidelity Cash fund
72.92% of total investments(Part of Dabur Ltd included) from various companies is invested by Fedility in money market by use of Certificate of Deposits and Commercial Papers Dividend received by all participant companies as per the dividend decided by Fiedility and market norms.
Earnings for Dabur for its idle Cash.
Name of Investment Fidelity Cash Fund
Unit Purchased
Unit Sold
Valuation
Return for Dabur Rs. 17,431
8771890.76 8771890.76 NA 867636 867636
Dividend as on 25th September 2009 - 0.01987142/unit held.
If Dabur was holding the said Units Result in Dabur Earning Rs. 17,431 per month on its idle cash
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Cash management involves the efficient collection, disbursement, and temporary investment of cash. A cash budget is instrumental in the process, it tells us how much cash we are likely to have, when we are likely to have it, and for how long. Thus serves as a foundation for cash forecasting. In addition to the cash budget, the firm needs systematic information on cash as well as a detailed report on changes in this position. Efficient management of information is essential for a firm to manage its cash ultimately. Newer upcoming methods like Electronic Data Interchange, are facilitating information transfer between financial institutions. E-commerce regulations are coming in and might replace manual methods because of their advantages. Apart from the cash level maintained, companies usually invest in marketable securities which act as short term investment which enable them to earn money on their otherwise idle cash.
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