Description
It describes financial management.It can be very useful for a person looking for a complete overview on finance and financial management.It touches everything e.g. income statement,Balance sheet,budgeting,restructuring,audit etc.
1
Financial Management – an Overview
Business environment Planning Policies&Decisions
(Management Accounting)
Restructuring
Financial Markets
Resource Mobilisation
Treasury
Investor Wish List
Control&Information
( Audit & Taxation)
Valuation Technique
2
Environmental scan
Economy: Convertibility of Local Currency GDP / Industrial growth rate
Scalability of Operations
FDI – Incoming / outgoing Inflation rate / Fiscal deficit Trade surplus/deficits Balance of payment status
WTO Implications
Emerging markets scenario Gross national income distribution
3
Government Policy: Industrial policy Government programmes and projects
Tax regime
Subsidies, incentives and concessions Exim policies / VAT Government Expenditure Lending considerations of financial institutions and commercial banks Infrastructure Development Rating of Govt paper Agricultural policies
4
Technology:
Emergence of new technologies. Access to technical Up gradation
Level of obsolescence.
Socio Demographic: Population trends
Age shifts in population Educational profile.
Attitudes toward consumption and investment
5
Competition:
Number of players in the industry and their market share. Duty barrier and status of international cost and volume positioning. Degree of homogeneity and differentiation among products. Entry barriers for new capacities. Comparison with substitute products. Unorganised sector operations. Marketing polices and practices.
6
ORGANISATIONAL INTERFACE OF FINANCE
Areas Corp planning: Interface Long term financial goals in terms of assets, sales,profits,dividends etc. Expansion, new projects diversifications takeovers , mergers,disinvestments.
Internal generation, tax planning.
Operations:
Integrating functional plans. Working capital management
7
Areas
Control:
Interface
Budgetary control of all divisions Variance analysis
Marketing:
Credit norms
Cost analysis of decisions like discounts , premium pricing,product promotion etc.
Manufacturing:
Budgeting for manufacturing operations. Product mix decisions.
Personnel:
Budgeting for personnel & administrative function.
8
FINANCIAL FUNCTION
Money Mgmt
Accounting
Control
Advisory Role
Resource Mobilisation
Financial Accounting
Budgets
Project Financing
Working Capital Cost Mgmt Accounting Investment Mgmt Mgmt Accounting
Variance Analysis Profit Center
Pricing
Div. Policy Valuation of 9 Assets
Cost Center
Financial Decision Areas
• • • • • • • • • Investment analysis Working capital management Sources and cost of funds Determination of capital structure Dividend policy Analysis of risks & returns Treasury - interest / exchange rate swaps Restructuring of operations / term debt profile Equity buyback / Bonus / Capitalisation
• To result in shareholder wealth maximisation
10
PROFIT AND LOSS ACCOUNT
For the Period 1st April to March 31st
Income:
Gross sales from Goods & Services Less: Excise Duty Net Sales Other Income Non operating Income
Total Income
11
Expenditure:
Raw materials consumed
Manufacturing expenses Administrative expenses Selling expenses WIP +FG adjustment PBIDT (Gross Profit) Less: Interest Less Depreciation PBT (Operating Profit) Less: Tax PAT (net profit) Gross cash accruals : PAT + Depn Net cash accruals : GCA - Dividend
12
THE BALANCE SHEET
For the year ended March 31st 200...
Liabilities:
Equity share capital
Reserves & Surplus
Term loan Debentures Fixed deposits Other unsecured loans Commercial bank borrowings Creditors Other current liabilities
13
Assets:
Gross fixed assets
Less: Acc. Depn Net Block Investments Currents Assets: RM Stock WIP
F.G.Stock
Debtors Cash in bank
Loans & Advances
Misc.. expenditure Deferred expenditure
14
RATIO ANALYSIS
Principal tool for analysis Inter firm comparison Intra firm comparison Industry analysis
Responsibility accounting
15
TYPES OF FINANCIAL RATIOS
Liquidity
Leverage
Turnover
Profitability / Valuation
16
LIQUIDITY RATIOS
Current Ratio: Current assets Current liabilities Acid test ratio: C.A- Inventories Current liabilities Cash position ratio: Cash in bank + hand Current liabilities Inventory to G.W.C: Inventory Current assets
17
LEVERAGE RATIOS
Debt / Equity ratio: Long term debt Net worth
Borrowing / Assets:
1-
Net worth Total Assets
Fixed asset / Networth:
Fixed Assets
Net worth
18
Capital gearing ratio:
Capital entitled to fixed return
Capital not entitled to fixed return
Debt. Service coverage ratio:
PBDIT - Tax
Interest + Annual installment
Interest coverage ratio:
PBDIT - Tax Interest
F. Asset coverage ratio:
Gross fixed asset - Acc. Depn LT Secured liabilities
19
ACTIVITY RATIOS
Total asset turnover:
Net sales Total assets
Fixed asset turnover:
Net sales Fixed assets
Inventory turnover:
Net sales
Inventory
20
Debtors turnover:
Credit sales
Avg. debtor
Collection period:
Avg. debtor * 365
CR. Sales
Creditors Turnover:
Credit purchase Avg.. Creditors
Payment period:
Avg. Creditor * 365 Net Purchases
21
PROFITABILITY / VALUATION RATIOS
Gross profit ratio:
PBDIT / Sales EBITDA / Sales
RONW :
PAT / Networth
ROSE:
PAT - Pref. Div Net worth
Return on CAP. Employed:
PBIT
Total Lia - Creditors – Provisions
Return on Investment
:
PBIT / Investments
22
Book value per share:
Net Worth
NO of Equity Shares
EV / EBITDA:
Enterprise value / Gross profit
Earning per share:
PAT - Pref Div No. of Equity shares
Price Earning ratio:
Market price Earnings per share
Pay out ratio:
Dividend paid
23
Profit after Tax
USERS OF FINANCIAL RATIOS
Lenders of funds for appraising credit worthiness for long term / short term lending decisions.
Valuations in investment / disinvestment decisions.
Financial analyst / Mutual Funds / Investment Bankers. Management for operational short / long term planning.
Credit Rating Agencies
Tax authorities
24
LIMITATIONS OF RATIO ANALYSIS
A ratio in absolute terms has no meaning. It has to be compared.
•Inter firm comparison. •Companies resort to window dressing of Balance sheets.
•Operating and accounting practices differ from company to company.
•Consolidation of group / subsidiary companies figures.
E.G.
Changes in Depreciation methods
Inventory Valuation Treatment of contingent liabilities. Valuation of investments. Conversion or transaction of foreign exchange items.
25
FUND FLOW ANALYSIS
It is a statement indicating the methods by which a company has been financed and the uses to which it has applied its funds over a period of time. It provide an insight into the movement of funds and helps in understanding the changes in the structure of asset & liabilities.
Provides information as to how funds are raised and utilised. Determines need for funds and helps in deciding finance mix Determines financial consequences of business decisions. Free cash flow generation ability and Utilisation of the same.
26
FUND MANAGEMENT
Mobilisation
Requirement
Quantum
Source
Cost
Normal Capital expenditure
Incremental Working capital
New Investments
Equity Buy back
27
FUND FLOW OCCASIONS
Sources
Funds from operations
Uses
Loss from operations
Sale of fixed assets
Increase in fixed assets
Increase in liabilities
Redemption of liabilities
Sale of securities
Purchase of securities
Decrease in W.C
Increase In W.C Cash Dividends, Equity buy back 28
FUND FLOW
Assets
Uses of funds
Liabilities
Uses of funds
Assets
Source of funds
Liabilities
Source of funds
Comparison of balance sheets of consecutive years.
29
TYPES OF FUND FLOW STATEMENTS
OVERALL FUND FLOW
OPERATIONAL FUND FLOW
WORKING CAPITAL BASED FUND FLOW (ONLY STS/STU STATEMENT)
30
COST OF CAPITAL
Aggregate of the liabilities raised by a company is the total capital employed in business.
Different sources have different cost and tax implications. Cost of capital It is a single rate (weighted average ) for a finance mix. It is computed on a post - tax basis since cost of different sources have different tax implications E.g.. Interest on debt capital enjoys tax shield while dividend paid on equity has no tax shield. COC is used as a discounting rate in DCF analysis.
31
RELEVANCE OF COC
•Used as a hurdle rate in DCF analysis. •Wt. Average cost of capital •Marginal cost of capital
K0
= Ki + Ke
K0 = WT. Average cost of capital
Ki = Cost of debt capital Ke = Cost of equity capital
32
COST OF CAPITAL
Consists of three components: •Risk less cost of a particular type of finance (rj) •Business risk premium(b) •Finance risk premium(f)
33
K0 = rj + b + f
RELATIONSHIP BETWEEN WEIGHTED AVERAGE COST AND MARGINAL COST OF CAPITAL
•Degree of leverage •Cost of instruments
•Tax Rate / Treatment
WACOC : MCOC : K0 = Ki1 + Ke1 K0 = Ki2 + Ke1
34
METHODS OF COMPUTATION OF COST OF EQUITY
ROI approach Ke = PAT - pref. div + non tax shield portion of depn Equity block (E + R +S + acc depn)
Market capitalisation approach
Ke = D/P + G D = Dividend per share P = Market price per share b= % Retained earnings = PAT - Dividends / PAT r = % Return on “b” = PAT - Pref div / Net worth
35
G = Growth rate = b*r
Capital Asset Pricing model
Ke = Rf +beta ( Rf – Rm) Rf = risk free rate of return Beta = stock relationship with a index Rm = Market expectations of return ( Bloomberg base )
36
•If ROI approach is used to determine Ke then book value to be considered as weights.If market capitalization approach is used then market value to be considered as weights. •All cost to be considered on a post tax basis. •The market capitalization approach is superior to the ROI approach since the parameters are market determined and futuristic as compared to the ROI approach. •The CAPM approach is a further refinement which also includes premium for risk •In loss making companies minimum cash flow approach is used. •Cost of equity could be benchmarked with return on guilts,market risk and portfolio risk ( Asset Beta )
37
WORKING CAPITAL MANAGEMENT
Objective: Optimise current asset deployment.
Advantages:
Lower interest cost. Inventory holding cost reduced.
Disadvantages:
Interruption in production.
Stock out to customers.
38
ASSET STRUCTURE FOR VARIOUS INDUSTRIAL SEGMENTS
FA Power Generation Chemical process plants 80% 50% CA 20% 50%
Engineering
Service
40%
20%
60%
80%
Trading
10%
90%
39
WORKING CAPITAL
Current assets comprise of stocks of raw materials, work in progress, finished goods, and receivables.
Gross working capital = total current assets.
Net working capital
= CA - CL
Objective is to optimse asset requirement and funding the same at minimal cost.
Working capital requirement
Permanent component Variable component)
40
CONSTITUENTS OF CURRENT ASSETS
Raw material stock Work in progress Finished goods stock Cash in hand / bank
Debtors / Receivables
41
OPERATING CYCLE TIME Time required for rolling or rotation of current assets.
Date of receipt of RM
RM issued to production Dept
Throughput time
Collection of Receivables
Despatched to consumers
Converted to FG
42
FACTORS INFLUENCING WORKING CAPITAL REQUIREMENTS
•Nature of business •Manufacturing process •Competitive forces in raw material & finished goods segment. •Infrastructural support. •Through put time •Seasonality in demand •Shelf life of RM / Finished product •Customer relationship management
43
CREDIT MANAGEMENT
•Terms of payment
Cash against delivery Consignee basis Proforma invoice Letter of credit Advances Suppliers / Buyers LOC
•Credit policy variables
Credit standards Credit period Cash Discounts
44
•Credit evaluation
Character
Capacity Capital
Collateral
Macro conditions •Control of accounts receivables
Days sales outstanding Ageing schedule (in days)
Collection matrix
Average collection period
45
RECEIVABLES MANAGEMENT
•Credit standards
Collection cost Average collection period Bad debts Level of incremental sale
•Credit terms
•Collection policies
•Factoring
46
CASH MANAGEMENT
Cash budgets :
Quarterly / monthly / weekly
Operating cash inflow/ outflow items:
Cash inflow Cash sales Collection of receivables
Cash outflow Accounts payable R.M purchase Salary factory expense
Administration/selling exp. Taxes / Duties
47
WORKING CAPITAL FINANCING
•Cash accruals
•Trade credit
•Commercial bank borrowings Cash credit limit WCTL Bill discounting
Letter of credit
Bank guarantee •Public deposits
48
•Short term / medium term loans from FI’s Banks •Debentures for working capital •Commercial Paper. •Euro Commercial Borrowings •Inter Corporate deposits •Trade credit notes ( commodity exchanges )
•Factors
49
Long Term Financing
Basis of evaluation
Availability
•Flexibility •Cost
Availability : should be available at the point / time when required
Flexibility : certain instruments are user/ application specific
Cost : to be evaluated on a post tax basis
50
SOURCES OF TERM FINANCE
•Term loans from Financial institutions & Banks •State level financial institutions
•Debentures:
NCD
PCD OFCD
•Fixed Deposits •Equity share capital •Equity share capital with differential rights •Non voting shares •Preference share capital
51
•Mutual Funds
•Retained earnings •Exchangeables
•Venture Capital
•Deferred payment gurantees •Leasing
•External commercial borrowings
•Depository receipts •Floating interest rate Debt. •Securitisation of future receivables •Derivative linked bonds
52
FINANCIAL / INVESTMENT INSTITUTIONS
They are major source of long term debt funds for financing:
•Fixed Assets •Margin money for working capital
Indian FI’s
IDBI / ICICI / IFCI / IIBI Foreign Institutions Sectoral Institutions HDFC / IL&FS / HUDCO / IDFC
Universal Banks
ICICI Bank
53
Investment institutions
GIC & Subsidiaries UTI LIC Investment Banks •23 State level financial institutions (IDC’s) •23 State level financial institutions (MSFC)
Scheduled Commercial Banks
54
Features:
Interest rate is based upon the prime lending rate + project risk.
Basic interest rate linked to inflation rate Linked to G-Sec rate or Sub - SBAR ( SBI PLR )
Security
Hypothecation & mortgage
Collateral
Covenants Moratorium period
Amortisation schedule
Door to Door tenure
55
GUIDE LINES FOR KEY RATIOS
DCSR > 1.8 TIMES
D/E
1:5:1
Promoters contribution : 20 - 25% CR: > 1.33 ADDITIONAL FEATURES : -Interest rate re-set clause - Tapering of interest rate post project risk
56
Debentures:
•Approval from SEBI mandatory if public issue is proposed
•Debentures used to finance margin money not to exceed more than 20% of N.W.C
•Convertibility clause terms to be specified at issuance time.
•Credit rating mandatory
57
•Types of Debentures: NCD FCD PCD OCD •Coupon rate depends on terms of issue.
Other features
•No TDS for interest paid upto Rs 2500 per annum •Redemption premium
•Listing on stock exchanges
•Fully secured •Call and put options
58
Advantages from Issuer’s point of view:
•Lower cost due to low risk and tax deductibility of interest payment.
•No / limited dilution of control
•Offer stable return to investors having fixed maturity
and subsequently redemption/ conversion to equity •No increase in equity base during non conversion period
Fixed deposits
•Limit on quantum : 25% of networth •Cost : 8-10 % depending on maturity period & risk •unsecured
59
EQUITY SHARE CAPITAL
•Authorised , issued, subscribed and paid up •Par value, issue price, book value, market value •Residual claims on Income /Assets •No upper limit •Costliest sources of finance •Entails permanent servicing by way of dividends without tax shield
•Voting rights/ Control in management/ Limited liability
•Under preview of SEBI and SEB guidelines •Buy Back allowed
60
Equity investments in foreign cos allowed to resident indian shareholder in the event foregin co has 10% stake in indian co. •For Listing on exchanges atleast 10% to be offered to the public by way of a prospectus Issuance of Non-Voting & differential rights shares allowed •Debentures on conversion becomes equity share capital. •Listed / Unlisted shares •Sweat Equity / Employee Stock Options
61
EVALUATION OF ESC
Company’s point of view Advantages
Represents almost permanent capital
Does not involve any fixed obligation for servicing Enhances credit worthiness of the company to secure additional debt. Disadvantages High cost of capital
Dividends paid on profit after tax further subjected to dividend distribution tax of 15%
High flotation cost Dilution of control (Treasury issue)
62
Investors point of view
Advantages
Enjoy voting right in the company with limited liability. Short term capital gains tax reduced to 10%
Long term Capital gains tax abolished. ( Exchange traded securities )
Indexation benefit available under 54E. Disadvantages Controlling power could be notional Turn over tax at 15 basis points on sale of the security on an exchange
Have residual claim to income / assets
Vide fluctuations in stock price Dividend’s subjected to distribution tax of 15%
63
Retained earnings
Made up of Accumulated depreciation and retained profits.
Represent the internal sources of finance available to the company.
Availability : Level of profitability / payout ratio
Cost
: Identical to ESC.
Flexibility : High
64
Advantages Reinvestment of profit may be convenient to many shareholders. No dilution of control since Co. Relies on retained earnings No flotation cost/ Losses on account of underpricing. Proceeds could be used in a subsequent buyback. Disadvantages High opportunity cost . Limitation on amount Bonus issue may capitalise reserves
65
Preference share capital
Fixed minimum dividend rate No voting rights Prior claim on income / assets
Redeemable at issuer’s & investor’s discretion
Features:
No dilution of control
Provision to skip dividend in absence of profits
66
CAPTAL BUDGETING
67
•Capital investment decision
Capital investments involve increase in the fixed assets of a company.
(Expansion / diversification / Green field / takeover / merger)
•Characteristics of investments Capital outlay needs to be made up front returns come later
Certain amount of risk is involved
Capital investment tend to be indivisible. (difficult to phase out). •Financial techniques The purpose of financial techniques is to enable the making of investment acceptance / rejection decisions.
68
Non financial factors in project appraisal
Market
Technical Infrastructure
Ecological
Economic Influence of non - financial factors Financial projections Gestation period
Profitability
Life of project / Terminal value Sensitivity analysis
69
NON FINANCIAL FACTORS DETERMINING FINANCIAL VIABILITY OF PROJECTS
Market factors Present and future size of the market Present and future demand and supply situation Achievable market share Selling & distribution channels Technical factors Level of Technological obsolence
Plant location Scales of operation Raw material & utilities consumption norms
70
Ecological factors
Pollutant levels Treatment of effluent
Environmental impact of the project
Economic factors Social cost benefit analysis Economic rate of protection
Domestic resource cost
Protection enjoyed by industry.
71
FINANCIAL TECHNIQUES IN CAPITAL BUDGETING
Return on investment AVG ROI = PBIT
(over 10 yrs)
Advantages
Total Inv.
Simple to calculate and easy to understand Maximisation of shareholders wealth and maximising the market value of investments. .Disadvantages Time value of money not considered It is a concept based on profit and not cash No objective criterion for acceptance / Rejection decision.
72
Payback period
It is the time required to get back the original investment companies going through liquidity crisis /for small investments will use the pay back period method.
Disadvantages Cash inflows / Outflows after payback Period are ignored.
Time value for money is ignored
73
Discounted cash flow (DCF)
Cash inflow and outflow for the entire life of the project is considered. It considers time value for money as a result earnings in earlier years have higher value than earned in later years. IRR Method IRR is that rate of discount at which the net present value of cash flows equals net present value of cash outflows. If IRR > COC Investment is support worthy. NPV method Using COC discount the netflows If NPV is + VE investment is support worthy..
74
Comparison of elements
Elements Net investment. Subsequent investment Recovery of terminal value Accounting profit Operating cash flow Payback Comparable Possible to use rough approx. Not Possible NPV comparable Exact timing IRR Comparable Exact timing
Specific Specific economic impact economic impact Not relevant Not Relevant
Rough approximation Approximation of pattern
Not relevant
Not relevant
75
Comparison of elements
Year by year operating cash flow pattern Economic Life Cannot accomodate Exact economic impact Exact Economic impact
Not considered
Integral to analysis
Integral to analysis
Result
Years to cover the initial investment
Net Balance of equivalent cash inflows and outflows
Yield rate of discount equating inflows and outflows.
76
CONCEPTS IN CAPITAL BUDGETING
•Life of project
Physical Market
Techno efficient
•Incremental principle Sunk / Allocated costs to be ignored Only incremental cash flows to be considered •Evaluation of post tax basis since COC is on a post tax basis •Principle of separation of “Finance” from “Investment “ decision. Financing cost (interest) to be ignored. •Effect of tax shield on the company as a whole to be considered
77
PROJECT COST COMPONENTS
Land
Civil Construction Plant & Machinery
Misc Fixed Assets
Erection and commissioning Technical Know how fees Preliminary & preoperative expenses Contingencies
Total Capital Cost
Margin money for working capital Total project cost
78
PROJECT CASH FLOWS
Cash outflows Capital expenditure Margin money Normal capital expenditure
Cash inflow
Net cash accruals
Salvage value Recovery of WC
79
NPV vs IRR conflict
• NPV is technically superior to IRR and is also able to handle selection of mutually exclusive projects. • The decision rule for the NPV assumes that cash flows resulting during the life cycle of the project have an opportunity cost equal to the discount rate used. • The decision rule for the IRR assumes that such resulting cash flows have an opportunity cost equal to IRR which generated them. • NPV approach provides an absolute measure that fully represents the value from the project to a company. • IRR by contrast provides a % figure from which the 80 benefits in terms of wealth creation cannot be grasped.
Capital Budgeting Sensitivity Analysis
• Monte Carlo Simulation
• Break even analysis • Decision tree analysis • Expected value Criterion • Alternate buisness plans
81
Share holder value creation
• • • • • • • • • • Cash Dividends Stock Dividends Bonus Shares Bonus Debentures-issued from free reserves Equity Buy back / Secondary Listing Stock Split Synergic Investments Synergic Acquisitions Disinvest out of unrelated businesses Shares of holding co. with fungibility
82
DIVIDEND STRUCTURING
Appropriation of PAT towards Dividend pay out and Reserves
Payout ratio
=
Dividend paid / PAT PAT - Dividend paid / PAT
Retention ratio =
Dividend rate (%) could be high but payout could be low.
Dividend rate will be depended upon the PAT, Payout ratio and Equity base.
83
Dividend Structuring
100% retention scenario For some shareholders dividend acts as a regular income source EX: investor’s for whom it is a regular source of income, mutual funds, investment companies. Declaration of dividend is perceived as an indication that the companies operations are profitable. 100% payout scenario Repeated raising of capital increases floatation cost
Companies requirement for expansion / margin money / new investment.
Tax inefficient due to 15% distribution tax.
84
Factors influencing dividend policy
•If the appetite for funds is high due to increase in level of exsisting operation or due to major capital investment plan then a high retention policy will be adopted. •A closely held company having major capital investment plans will follow a low pay out policy so that internal accruals could act as a major source of finance in the future thereby reducing dependence on infusion of fresh equity.
•Tax implications
Company has to pay 12.5% distribution tax.Recipient of dividend tax exempted in the shareholders hands..
85
Section 80-M exemption at 100%
•Restriction in loan agreement / government regulations / FI’s on on payment of dividend during the currency of the loan. •Legal requirement under Companies act. •Liquidity position : Higher PAT does not necessarily mean healthy liquidity. A strained liquidity position would force a policy of low payout. •Stability in the rate of dividend : companies usually follow a policy of gradually rising or stable dividend policy and not directly link it with PAT.
•Generally the Indian corporate sector follows a payout policy of 30% . The retention ratio keeps increasing so as to counter inflation, floatation cost, help in Equity buyback etc.
86
BONUS SHARES
Bonus share are issued to existing share holders as a result of capitalization of reserves.
In the wake of a bonus issue The shareholders proportional ownership remains unchanged The book value, market price, E.P.S decreases. Fallout of a bonus issue •Normally the Ex-bonus price comes down by the proportion of bonus given with a mark up of approximately 30 - 35% •More active trading in stock exchanges. •The nominal rate of dividend tends to decline this may dispel the impression of profiteering. •Shareholders regard a bonus issue as a firm indication that the prospects for the company are good. •Capital gains tax exemptions with indexation available for bonus 87 issue
GUIDELINES FOR ISSUE OF BONUS SHARES
Issuer : Security exchange board of India
Bonus issue should be made from capitalisation of free reserves built out of genuine profits and share premium.Reserves created by revaluation of assets, statutory reserves etc. are not allowed for capitalisation Bonus issue greater than 1:1 allowed Residual reserve test: residual reserves after the proposed capitalisation should be at least 40% of the increased capital For computation all contingent liabilities, statutory reserves and revaluation reserves to be excluded.
Yield test: 30% of the average P.B.T for the last 3 years should give a return of at least 10% on the enhanced capital.
Bonus in lieu of dividend is not permitted
88
If R S
= Reserves before bonus issue = Share capital before bonus issue
B
PRT RPT YIELD TEST
= Bonus Quantum
= Average PBT for last 3 years = .4 (S + B) > (R - B) = .3 (PBT) > (.1) (S+B)
Bonus issue also to be given to debenture holders if there is an impending conversion.
89
doc_873516517.ppt
It describes financial management.It can be very useful for a person looking for a complete overview on finance and financial management.It touches everything e.g. income statement,Balance sheet,budgeting,restructuring,audit etc.
1
Financial Management – an Overview
Business environment Planning Policies&Decisions
(Management Accounting)
Restructuring
Financial Markets
Resource Mobilisation
Treasury
Investor Wish List
Control&Information
( Audit & Taxation)
Valuation Technique
2
Environmental scan
Economy: Convertibility of Local Currency GDP / Industrial growth rate
Scalability of Operations
FDI – Incoming / outgoing Inflation rate / Fiscal deficit Trade surplus/deficits Balance of payment status
WTO Implications
Emerging markets scenario Gross national income distribution
3
Government Policy: Industrial policy Government programmes and projects
Tax regime
Subsidies, incentives and concessions Exim policies / VAT Government Expenditure Lending considerations of financial institutions and commercial banks Infrastructure Development Rating of Govt paper Agricultural policies
4
Technology:
Emergence of new technologies. Access to technical Up gradation
Level of obsolescence.
Socio Demographic: Population trends
Age shifts in population Educational profile.
Attitudes toward consumption and investment
5
Competition:
Number of players in the industry and their market share. Duty barrier and status of international cost and volume positioning. Degree of homogeneity and differentiation among products. Entry barriers for new capacities. Comparison with substitute products. Unorganised sector operations. Marketing polices and practices.
6
ORGANISATIONAL INTERFACE OF FINANCE
Areas Corp planning: Interface Long term financial goals in terms of assets, sales,profits,dividends etc. Expansion, new projects diversifications takeovers , mergers,disinvestments.
Internal generation, tax planning.
Operations:
Integrating functional plans. Working capital management
7
Areas
Control:
Interface
Budgetary control of all divisions Variance analysis
Marketing:
Credit norms
Cost analysis of decisions like discounts , premium pricing,product promotion etc.
Manufacturing:
Budgeting for manufacturing operations. Product mix decisions.
Personnel:
Budgeting for personnel & administrative function.
8
FINANCIAL FUNCTION
Money Mgmt
Accounting
Control
Advisory Role
Resource Mobilisation
Financial Accounting
Budgets
Project Financing
Working Capital Cost Mgmt Accounting Investment Mgmt Mgmt Accounting
Variance Analysis Profit Center
Pricing
Div. Policy Valuation of 9 Assets
Cost Center
Financial Decision Areas
• • • • • • • • • Investment analysis Working capital management Sources and cost of funds Determination of capital structure Dividend policy Analysis of risks & returns Treasury - interest / exchange rate swaps Restructuring of operations / term debt profile Equity buyback / Bonus / Capitalisation
• To result in shareholder wealth maximisation
10
PROFIT AND LOSS ACCOUNT
For the Period 1st April to March 31st
Income:
Gross sales from Goods & Services Less: Excise Duty Net Sales Other Income Non operating Income
Total Income
11
Expenditure:
Raw materials consumed
Manufacturing expenses Administrative expenses Selling expenses WIP +FG adjustment PBIDT (Gross Profit) Less: Interest Less Depreciation PBT (Operating Profit) Less: Tax PAT (net profit) Gross cash accruals : PAT + Depn Net cash accruals : GCA - Dividend
12
THE BALANCE SHEET
For the year ended March 31st 200...
Liabilities:
Equity share capital
Reserves & Surplus
Term loan Debentures Fixed deposits Other unsecured loans Commercial bank borrowings Creditors Other current liabilities
13
Assets:
Gross fixed assets
Less: Acc. Depn Net Block Investments Currents Assets: RM Stock WIP
F.G.Stock
Debtors Cash in bank
Loans & Advances
Misc.. expenditure Deferred expenditure
14
RATIO ANALYSIS
Principal tool for analysis Inter firm comparison Intra firm comparison Industry analysis
Responsibility accounting
15
TYPES OF FINANCIAL RATIOS
Liquidity
Leverage
Turnover
Profitability / Valuation
16
LIQUIDITY RATIOS
Current Ratio: Current assets Current liabilities Acid test ratio: C.A- Inventories Current liabilities Cash position ratio: Cash in bank + hand Current liabilities Inventory to G.W.C: Inventory Current assets
17
LEVERAGE RATIOS
Debt / Equity ratio: Long term debt Net worth
Borrowing / Assets:
1-
Net worth Total Assets
Fixed asset / Networth:
Fixed Assets
Net worth
18
Capital gearing ratio:
Capital entitled to fixed return
Capital not entitled to fixed return
Debt. Service coverage ratio:
PBDIT - Tax
Interest + Annual installment
Interest coverage ratio:
PBDIT - Tax Interest
F. Asset coverage ratio:
Gross fixed asset - Acc. Depn LT Secured liabilities
19
ACTIVITY RATIOS
Total asset turnover:
Net sales Total assets
Fixed asset turnover:
Net sales Fixed assets
Inventory turnover:
Net sales
Inventory
20
Debtors turnover:
Credit sales
Avg. debtor
Collection period:
Avg. debtor * 365
CR. Sales
Creditors Turnover:
Credit purchase Avg.. Creditors
Payment period:
Avg. Creditor * 365 Net Purchases
21
PROFITABILITY / VALUATION RATIOS
Gross profit ratio:
PBDIT / Sales EBITDA / Sales
RONW :
PAT / Networth
ROSE:
PAT - Pref. Div Net worth
Return on CAP. Employed:
PBIT
Total Lia - Creditors – Provisions
Return on Investment
:
PBIT / Investments
22
Book value per share:
Net Worth
NO of Equity Shares
EV / EBITDA:
Enterprise value / Gross profit
Earning per share:
PAT - Pref Div No. of Equity shares
Price Earning ratio:
Market price Earnings per share
Pay out ratio:
Dividend paid
23
Profit after Tax
USERS OF FINANCIAL RATIOS
Lenders of funds for appraising credit worthiness for long term / short term lending decisions.
Valuations in investment / disinvestment decisions.
Financial analyst / Mutual Funds / Investment Bankers. Management for operational short / long term planning.
Credit Rating Agencies
Tax authorities
24
LIMITATIONS OF RATIO ANALYSIS
A ratio in absolute terms has no meaning. It has to be compared.
•Inter firm comparison. •Companies resort to window dressing of Balance sheets.
•Operating and accounting practices differ from company to company.
•Consolidation of group / subsidiary companies figures.
E.G.
Changes in Depreciation methods
Inventory Valuation Treatment of contingent liabilities. Valuation of investments. Conversion or transaction of foreign exchange items.
25
FUND FLOW ANALYSIS
It is a statement indicating the methods by which a company has been financed and the uses to which it has applied its funds over a period of time. It provide an insight into the movement of funds and helps in understanding the changes in the structure of asset & liabilities.
Provides information as to how funds are raised and utilised. Determines need for funds and helps in deciding finance mix Determines financial consequences of business decisions. Free cash flow generation ability and Utilisation of the same.
26
FUND MANAGEMENT
Mobilisation
Requirement
Quantum
Source
Cost
Normal Capital expenditure
Incremental Working capital
New Investments
Equity Buy back
27
FUND FLOW OCCASIONS
Sources
Funds from operations
Uses
Loss from operations
Sale of fixed assets
Increase in fixed assets
Increase in liabilities
Redemption of liabilities
Sale of securities
Purchase of securities
Decrease in W.C
Increase In W.C Cash Dividends, Equity buy back 28
FUND FLOW
Assets
Uses of funds
Liabilities
Uses of funds
Assets
Source of funds
Liabilities
Source of funds
Comparison of balance sheets of consecutive years.
29
TYPES OF FUND FLOW STATEMENTS
OVERALL FUND FLOW
OPERATIONAL FUND FLOW
WORKING CAPITAL BASED FUND FLOW (ONLY STS/STU STATEMENT)
30
COST OF CAPITAL
Aggregate of the liabilities raised by a company is the total capital employed in business.
Different sources have different cost and tax implications. Cost of capital It is a single rate (weighted average ) for a finance mix. It is computed on a post - tax basis since cost of different sources have different tax implications E.g.. Interest on debt capital enjoys tax shield while dividend paid on equity has no tax shield. COC is used as a discounting rate in DCF analysis.
31
RELEVANCE OF COC
•Used as a hurdle rate in DCF analysis. •Wt. Average cost of capital •Marginal cost of capital
K0
= Ki + Ke
K0 = WT. Average cost of capital
Ki = Cost of debt capital Ke = Cost of equity capital
32
COST OF CAPITAL
Consists of three components: •Risk less cost of a particular type of finance (rj) •Business risk premium(b) •Finance risk premium(f)
33
K0 = rj + b + f
RELATIONSHIP BETWEEN WEIGHTED AVERAGE COST AND MARGINAL COST OF CAPITAL
•Degree of leverage •Cost of instruments
•Tax Rate / Treatment
WACOC : MCOC : K0 = Ki1 + Ke1 K0 = Ki2 + Ke1
34
METHODS OF COMPUTATION OF COST OF EQUITY
ROI approach Ke = PAT - pref. div + non tax shield portion of depn Equity block (E + R +S + acc depn)
Market capitalisation approach
Ke = D/P + G D = Dividend per share P = Market price per share b= % Retained earnings = PAT - Dividends / PAT r = % Return on “b” = PAT - Pref div / Net worth
35
G = Growth rate = b*r
Capital Asset Pricing model
Ke = Rf +beta ( Rf – Rm) Rf = risk free rate of return Beta = stock relationship with a index Rm = Market expectations of return ( Bloomberg base )
36
•If ROI approach is used to determine Ke then book value to be considered as weights.If market capitalization approach is used then market value to be considered as weights. •All cost to be considered on a post tax basis. •The market capitalization approach is superior to the ROI approach since the parameters are market determined and futuristic as compared to the ROI approach. •The CAPM approach is a further refinement which also includes premium for risk •In loss making companies minimum cash flow approach is used. •Cost of equity could be benchmarked with return on guilts,market risk and portfolio risk ( Asset Beta )
37
WORKING CAPITAL MANAGEMENT
Objective: Optimise current asset deployment.
Advantages:
Lower interest cost. Inventory holding cost reduced.
Disadvantages:
Interruption in production.
Stock out to customers.
38
ASSET STRUCTURE FOR VARIOUS INDUSTRIAL SEGMENTS
FA Power Generation Chemical process plants 80% 50% CA 20% 50%
Engineering
Service
40%
20%
60%
80%
Trading
10%
90%
39
WORKING CAPITAL
Current assets comprise of stocks of raw materials, work in progress, finished goods, and receivables.
Gross working capital = total current assets.
Net working capital
= CA - CL
Objective is to optimse asset requirement and funding the same at minimal cost.
Working capital requirement
Permanent component Variable component)
40
CONSTITUENTS OF CURRENT ASSETS
Raw material stock Work in progress Finished goods stock Cash in hand / bank
Debtors / Receivables
41
OPERATING CYCLE TIME Time required for rolling or rotation of current assets.
Date of receipt of RM
RM issued to production Dept
Throughput time
Collection of Receivables
Despatched to consumers
Converted to FG
42
FACTORS INFLUENCING WORKING CAPITAL REQUIREMENTS
•Nature of business •Manufacturing process •Competitive forces in raw material & finished goods segment. •Infrastructural support. •Through put time •Seasonality in demand •Shelf life of RM / Finished product •Customer relationship management
43
CREDIT MANAGEMENT
•Terms of payment
Cash against delivery Consignee basis Proforma invoice Letter of credit Advances Suppliers / Buyers LOC
•Credit policy variables
Credit standards Credit period Cash Discounts
44
•Credit evaluation
Character
Capacity Capital
Collateral
Macro conditions •Control of accounts receivables
Days sales outstanding Ageing schedule (in days)
Collection matrix
Average collection period
45
RECEIVABLES MANAGEMENT
•Credit standards
Collection cost Average collection period Bad debts Level of incremental sale
•Credit terms
•Collection policies
•Factoring
46
CASH MANAGEMENT
Cash budgets :
Quarterly / monthly / weekly
Operating cash inflow/ outflow items:
Cash inflow Cash sales Collection of receivables
Cash outflow Accounts payable R.M purchase Salary factory expense
Administration/selling exp. Taxes / Duties
47
WORKING CAPITAL FINANCING
•Cash accruals
•Trade credit
•Commercial bank borrowings Cash credit limit WCTL Bill discounting
Letter of credit
Bank guarantee •Public deposits
48
•Short term / medium term loans from FI’s Banks •Debentures for working capital •Commercial Paper. •Euro Commercial Borrowings •Inter Corporate deposits •Trade credit notes ( commodity exchanges )
•Factors
49
Long Term Financing
Basis of evaluation
Availability
•Flexibility •Cost
Availability : should be available at the point / time when required
Flexibility : certain instruments are user/ application specific
Cost : to be evaluated on a post tax basis
50
SOURCES OF TERM FINANCE
•Term loans from Financial institutions & Banks •State level financial institutions
•Debentures:
NCD
PCD OFCD
•Fixed Deposits •Equity share capital •Equity share capital with differential rights •Non voting shares •Preference share capital
51
•Mutual Funds
•Retained earnings •Exchangeables
•Venture Capital
•Deferred payment gurantees •Leasing
•External commercial borrowings
•Depository receipts •Floating interest rate Debt. •Securitisation of future receivables •Derivative linked bonds
52
FINANCIAL / INVESTMENT INSTITUTIONS
They are major source of long term debt funds for financing:
•Fixed Assets •Margin money for working capital
Indian FI’s
IDBI / ICICI / IFCI / IIBI Foreign Institutions Sectoral Institutions HDFC / IL&FS / HUDCO / IDFC
Universal Banks
ICICI Bank
53
Investment institutions
GIC & Subsidiaries UTI LIC Investment Banks •23 State level financial institutions (IDC’s) •23 State level financial institutions (MSFC)
Scheduled Commercial Banks
54
Features:
Interest rate is based upon the prime lending rate + project risk.
Basic interest rate linked to inflation rate Linked to G-Sec rate or Sub - SBAR ( SBI PLR )
Security
Hypothecation & mortgage
Collateral
Covenants Moratorium period
Amortisation schedule
Door to Door tenure
55
GUIDE LINES FOR KEY RATIOS
DCSR > 1.8 TIMES
D/E
1:5:1
Promoters contribution : 20 - 25% CR: > 1.33 ADDITIONAL FEATURES : -Interest rate re-set clause - Tapering of interest rate post project risk
56
Debentures:
•Approval from SEBI mandatory if public issue is proposed
•Debentures used to finance margin money not to exceed more than 20% of N.W.C
•Convertibility clause terms to be specified at issuance time.
•Credit rating mandatory
57
•Types of Debentures: NCD FCD PCD OCD •Coupon rate depends on terms of issue.
Other features
•No TDS for interest paid upto Rs 2500 per annum •Redemption premium
•Listing on stock exchanges
•Fully secured •Call and put options
58
Advantages from Issuer’s point of view:
•Lower cost due to low risk and tax deductibility of interest payment.
•No / limited dilution of control
•Offer stable return to investors having fixed maturity
and subsequently redemption/ conversion to equity •No increase in equity base during non conversion period
Fixed deposits
•Limit on quantum : 25% of networth •Cost : 8-10 % depending on maturity period & risk •unsecured
59
EQUITY SHARE CAPITAL
•Authorised , issued, subscribed and paid up •Par value, issue price, book value, market value •Residual claims on Income /Assets •No upper limit •Costliest sources of finance •Entails permanent servicing by way of dividends without tax shield
•Voting rights/ Control in management/ Limited liability
•Under preview of SEBI and SEB guidelines •Buy Back allowed
60
Equity investments in foreign cos allowed to resident indian shareholder in the event foregin co has 10% stake in indian co. •For Listing on exchanges atleast 10% to be offered to the public by way of a prospectus Issuance of Non-Voting & differential rights shares allowed •Debentures on conversion becomes equity share capital. •Listed / Unlisted shares •Sweat Equity / Employee Stock Options
61
EVALUATION OF ESC
Company’s point of view Advantages
Represents almost permanent capital
Does not involve any fixed obligation for servicing Enhances credit worthiness of the company to secure additional debt. Disadvantages High cost of capital
Dividends paid on profit after tax further subjected to dividend distribution tax of 15%
High flotation cost Dilution of control (Treasury issue)
62
Investors point of view
Advantages
Enjoy voting right in the company with limited liability. Short term capital gains tax reduced to 10%
Long term Capital gains tax abolished. ( Exchange traded securities )
Indexation benefit available under 54E. Disadvantages Controlling power could be notional Turn over tax at 15 basis points on sale of the security on an exchange
Have residual claim to income / assets
Vide fluctuations in stock price Dividend’s subjected to distribution tax of 15%
63
Retained earnings
Made up of Accumulated depreciation and retained profits.
Represent the internal sources of finance available to the company.
Availability : Level of profitability / payout ratio
Cost
: Identical to ESC.
Flexibility : High
64
Advantages Reinvestment of profit may be convenient to many shareholders. No dilution of control since Co. Relies on retained earnings No flotation cost/ Losses on account of underpricing. Proceeds could be used in a subsequent buyback. Disadvantages High opportunity cost . Limitation on amount Bonus issue may capitalise reserves
65
Preference share capital
Fixed minimum dividend rate No voting rights Prior claim on income / assets
Redeemable at issuer’s & investor’s discretion
Features:
No dilution of control
Provision to skip dividend in absence of profits
66
CAPTAL BUDGETING
67
•Capital investment decision
Capital investments involve increase in the fixed assets of a company.
(Expansion / diversification / Green field / takeover / merger)
•Characteristics of investments Capital outlay needs to be made up front returns come later
Certain amount of risk is involved
Capital investment tend to be indivisible. (difficult to phase out). •Financial techniques The purpose of financial techniques is to enable the making of investment acceptance / rejection decisions.
68
Non financial factors in project appraisal
Market
Technical Infrastructure
Ecological
Economic Influence of non - financial factors Financial projections Gestation period
Profitability
Life of project / Terminal value Sensitivity analysis
69
NON FINANCIAL FACTORS DETERMINING FINANCIAL VIABILITY OF PROJECTS
Market factors Present and future size of the market Present and future demand and supply situation Achievable market share Selling & distribution channels Technical factors Level of Technological obsolence
Plant location Scales of operation Raw material & utilities consumption norms
70
Ecological factors
Pollutant levels Treatment of effluent
Environmental impact of the project
Economic factors Social cost benefit analysis Economic rate of protection
Domestic resource cost
Protection enjoyed by industry.
71
FINANCIAL TECHNIQUES IN CAPITAL BUDGETING
Return on investment AVG ROI = PBIT
(over 10 yrs)
Advantages
Total Inv.
Simple to calculate and easy to understand Maximisation of shareholders wealth and maximising the market value of investments. .Disadvantages Time value of money not considered It is a concept based on profit and not cash No objective criterion for acceptance / Rejection decision.
72
Payback period
It is the time required to get back the original investment companies going through liquidity crisis /for small investments will use the pay back period method.
Disadvantages Cash inflows / Outflows after payback Period are ignored.
Time value for money is ignored
73
Discounted cash flow (DCF)
Cash inflow and outflow for the entire life of the project is considered. It considers time value for money as a result earnings in earlier years have higher value than earned in later years. IRR Method IRR is that rate of discount at which the net present value of cash flows equals net present value of cash outflows. If IRR > COC Investment is support worthy. NPV method Using COC discount the netflows If NPV is + VE investment is support worthy..
74
Comparison of elements
Elements Net investment. Subsequent investment Recovery of terminal value Accounting profit Operating cash flow Payback Comparable Possible to use rough approx. Not Possible NPV comparable Exact timing IRR Comparable Exact timing
Specific Specific economic impact economic impact Not relevant Not Relevant
Rough approximation Approximation of pattern
Not relevant
Not relevant
75
Comparison of elements
Year by year operating cash flow pattern Economic Life Cannot accomodate Exact economic impact Exact Economic impact
Not considered
Integral to analysis
Integral to analysis
Result
Years to cover the initial investment
Net Balance of equivalent cash inflows and outflows
Yield rate of discount equating inflows and outflows.
76
CONCEPTS IN CAPITAL BUDGETING
•Life of project
Physical Market
Techno efficient
•Incremental principle Sunk / Allocated costs to be ignored Only incremental cash flows to be considered •Evaluation of post tax basis since COC is on a post tax basis •Principle of separation of “Finance” from “Investment “ decision. Financing cost (interest) to be ignored. •Effect of tax shield on the company as a whole to be considered
77
PROJECT COST COMPONENTS
Land
Civil Construction Plant & Machinery
Misc Fixed Assets
Erection and commissioning Technical Know how fees Preliminary & preoperative expenses Contingencies
Total Capital Cost
Margin money for working capital Total project cost
78
PROJECT CASH FLOWS
Cash outflows Capital expenditure Margin money Normal capital expenditure
Cash inflow
Net cash accruals
Salvage value Recovery of WC
79
NPV vs IRR conflict
• NPV is technically superior to IRR and is also able to handle selection of mutually exclusive projects. • The decision rule for the NPV assumes that cash flows resulting during the life cycle of the project have an opportunity cost equal to the discount rate used. • The decision rule for the IRR assumes that such resulting cash flows have an opportunity cost equal to IRR which generated them. • NPV approach provides an absolute measure that fully represents the value from the project to a company. • IRR by contrast provides a % figure from which the 80 benefits in terms of wealth creation cannot be grasped.
Capital Budgeting Sensitivity Analysis
• Monte Carlo Simulation
• Break even analysis • Decision tree analysis • Expected value Criterion • Alternate buisness plans
81
Share holder value creation
• • • • • • • • • • Cash Dividends Stock Dividends Bonus Shares Bonus Debentures-issued from free reserves Equity Buy back / Secondary Listing Stock Split Synergic Investments Synergic Acquisitions Disinvest out of unrelated businesses Shares of holding co. with fungibility
82
DIVIDEND STRUCTURING
Appropriation of PAT towards Dividend pay out and Reserves
Payout ratio
=
Dividend paid / PAT PAT - Dividend paid / PAT
Retention ratio =
Dividend rate (%) could be high but payout could be low.
Dividend rate will be depended upon the PAT, Payout ratio and Equity base.
83
Dividend Structuring
100% retention scenario For some shareholders dividend acts as a regular income source EX: investor’s for whom it is a regular source of income, mutual funds, investment companies. Declaration of dividend is perceived as an indication that the companies operations are profitable. 100% payout scenario Repeated raising of capital increases floatation cost
Companies requirement for expansion / margin money / new investment.
Tax inefficient due to 15% distribution tax.
84
Factors influencing dividend policy
•If the appetite for funds is high due to increase in level of exsisting operation or due to major capital investment plan then a high retention policy will be adopted. •A closely held company having major capital investment plans will follow a low pay out policy so that internal accruals could act as a major source of finance in the future thereby reducing dependence on infusion of fresh equity.
•Tax implications
Company has to pay 12.5% distribution tax.Recipient of dividend tax exempted in the shareholders hands..
85
Section 80-M exemption at 100%
•Restriction in loan agreement / government regulations / FI’s on on payment of dividend during the currency of the loan. •Legal requirement under Companies act. •Liquidity position : Higher PAT does not necessarily mean healthy liquidity. A strained liquidity position would force a policy of low payout. •Stability in the rate of dividend : companies usually follow a policy of gradually rising or stable dividend policy and not directly link it with PAT.
•Generally the Indian corporate sector follows a payout policy of 30% . The retention ratio keeps increasing so as to counter inflation, floatation cost, help in Equity buyback etc.
86
BONUS SHARES
Bonus share are issued to existing share holders as a result of capitalization of reserves.
In the wake of a bonus issue The shareholders proportional ownership remains unchanged The book value, market price, E.P.S decreases. Fallout of a bonus issue •Normally the Ex-bonus price comes down by the proportion of bonus given with a mark up of approximately 30 - 35% •More active trading in stock exchanges. •The nominal rate of dividend tends to decline this may dispel the impression of profiteering. •Shareholders regard a bonus issue as a firm indication that the prospects for the company are good. •Capital gains tax exemptions with indexation available for bonus 87 issue
GUIDELINES FOR ISSUE OF BONUS SHARES
Issuer : Security exchange board of India
Bonus issue should be made from capitalisation of free reserves built out of genuine profits and share premium.Reserves created by revaluation of assets, statutory reserves etc. are not allowed for capitalisation Bonus issue greater than 1:1 allowed Residual reserve test: residual reserves after the proposed capitalisation should be at least 40% of the increased capital For computation all contingent liabilities, statutory reserves and revaluation reserves to be excluded.
Yield test: 30% of the average P.B.T for the last 3 years should give a return of at least 10% on the enhanced capital.
Bonus in lieu of dividend is not permitted
88
If R S
= Reserves before bonus issue = Share capital before bonus issue
B
PRT RPT YIELD TEST
= Bonus Quantum
= Average PBT for last 3 years = .4 (S + B) > (R - B) = .3 (PBT) > (.1) (S+B)
Bonus issue also to be given to debenture holders if there is an impending conversion.
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