A

Case Study On
Sources OF Financing
IISWBM, Batch 4th Semester
 A case Study on Source of Financing
Presented By: PGDBM , Batch 2012-2015

Abir Roy Chowdhury Roll:24/2015

Amitava Sengupta Roll:22/2015
Ayan Bhattacharaya Roll:31/2015
Debasis Kundu Roll:17/2015
Dibyendu Ghoshal Roll:10/2015
Mustafa Alam Roll:19/2015
CASE STUDIES:
Given below is the summarised Balance Sheet of an Industrial Gases Company as on 31 December 2007.

Sources of Funds Rs in Crs

Share Capital 49
Reserve & Surplus 325
Loan Funds 267
------------
641
Application of Funds
Net Fixed Asset 624
Investment 15
Net Working Capital 2
-------------
641
The company has a turn over of Rs.550 Crores and a profit before tax of approximately Rs 80 crores. Net Working
Capital includes
Sundry Debtors of Rs. 57 Crs.
Loan funds
Outstanding Commercial paper Rs 15 Crs
The company is a subsidiary of a multi national company, which holds 54% shares of the company and would not like to
dilute its share-holding in the company
The market price of a Rs.10 Shares of the company is approximately company is rated AA by CRISIL.
The company has bagged a very large contract to supply piped oxygen to a very Rs 150. The large steel plant ( Rated AAA)
The Assured cash flow from the contract is minimum of Rs.10 Crs per month (Take or Pay clause).
To Cater to the steel plant as well as to supply to other companies, the Company needs to install a large oxygen plant, which
will cost around Rs 500 Crs.

You are a Finance Manager of a Gases company and you have to give a report to the Board of Directors suggesting various
options for funding the project and your recommendations.
 Case Study
• We may Consider Following source of financing in for the solution of our case
study in our successive slides
• An important task of the Central Management is to see the capital necessary to
execute the corporate strategy is provided at a reasonable cost and with minimum
risk. In financing strategy, a finance manager has to decide about optimal financing
mix or make up of the capitalisation in order to maximise earnings per share and so
also market value per share.
• Now, while going in for Financing, a Finance Manager should keep in mind the
following :
• Cheap sources available for financing
• Low risk involvement
• Control of Management should not be diluted
• Flexibility of capital structure & repayment
• In our case, we have to keep all these in mind as these are the things which are
required by the management of the company.
• The company can opt for 3 kinds of Funding as per their requirements.
Let us have a brief discussion over the source of funding
for over all analysis foe decision making.
• Finance is the life blood of a
business

Sources of finance:-

• Short term sources

 
• Long term sources
Purpose of long term finance:-

• To finance fixed assets

• To finance the permanent part of working

capital

• To finance the growth and expansion of a

business
 Factors determining long term
sources of finance:-

• Nature of business

• Nature of goods produced

• Technology used
Here we considered retained earning for funding of project
EQUITY CAPITAL

TERMS:

 Authorized, Issued, Subscribed & Paid- up

Capital.

 Par/ face Value, Issue Price, Book Value,

Market Value.
Rights Of Equity Share Holders:

 Right to Income

Right to Control

 Pre – emptive Right

Right in Liquidation
EQUITY CAPITAL
 PREFERENCE CAPITAL

PREFERENCE CAPITAL

• Hybrid form of Financing

• Equity Features:
-out of distributable profits
-dividends not tax deductible
-Priority over Equity shares in case of
bankruptcy

• Debenture features:
-dividend rate is fixed
-capital is redeemable
-normally no right to vote
PREFERENCE CAPITAL
 INTERNAL ACCRUALS

Retained Earnings Depreciation

ITERNAL ACCRUALS
 Term Loans

• TERM LOANS

• Maturities
• Security
• Provided by Foreign Institutes/
Bank
• Repayment schedule
• Restrictive Covenants
• Convertibility
Term Loan Contd…
 DEBENTURES

DEBENTURES

• Interest
• Security
• Maturity & Redemption
• Options
• Convertibility
Few types of Debenture

• Non – convertible debentures

• Fully convertible debentures

• Partly – convertible debentures

Debentures Contd…
 Other Important Sources of
financing

• Leasing
• Hire Purchase
• Asset Securitization
• Government Subsidies
• Lottery funding
• Selling asset
• Convertible bonds eg:British Airways has
announced that it is to raise £300m of new funding via a convertible bond issue
, as part of a £600m refinancing.
 Foreign Sources

• Foreign Collaborators

• International Financial Institutions:

• Non-Resident Indians
Raising Long Term Finance

• Initial Public offering

• Right Issue
• Private Placement
• Preferential Allotment
• Obtaining a Term Loan
• Venture Capital
Initial Public Offering

• Decision to go Public
• Benefits
• Cost
• Eligibility
• Book Building process
Right Issue

• Issue of capital to existing shareholders

• Offer made on pro rata basis
• Right shares are tradable, may be sold in
open market.
• Comparison with Public issue: familiar
investors, hence likely to be more
successful
• Less floatation costs
• Lower pricing to benefit shareholders
Private Placement

• Sale of securities directly to wholesale investors like FIs,

banks, MFs, FIIs, PE funds etc.(QIP’s)
• Called private placement in equity/equity related
instruments, in unlisted companies and in all cases of debt
• Called preferential allotment in case of unlisted companies
for equity/equity related instruments
• Different from reservations made for such QIBs out of a
public issue
• Subject to SEBI regulations on pricing, lock in period,
open offer to be made to public
• QIB placement guidelines recently issued by SEBI for
compliance and disclosures
Obtaining a term loan

• Submission of loan application

• Initial processing of loan application
• Project Appraisal
• Issue of Letter of Sanction
• Acceptance of terms and conditions by the
borrowing unit
• Execution of loan agreement
• Disbursement of loan
• Creation of security
• Monitoring
Venture Capital

• Equity Participation

• Long term investment

• Participation in management
 Equity with DVR

AS the company would not like to dilute its share-holding in

the company we opt for Equity with DVR (Differential
Voting Right).
As per company Act 2013 issuance of Equity with DVR should not exceed 25%
of the total issued shares

75% of issued share = 49 Crs (given)

1% of issued share = 49/75
100% of issued Shares = (49/75)*100 = 65.3Crs.

Hence 25% of total issued shares would be, [(25/100)*65.3] =16.32 Crs. can be
issued for fund collection.
 Mid term Loan

• Next We opt for Mid term Loan

Loan Fund available is 267 Crs (given)

As per the statement available there is commercial paper of Rs. 15 Crs
Hence Loan against asset is (267-15=252) Crs. available.
Assuming 75% of the principal asset value is paid by Financial bank or institution.

Therefore 75% of principal asset = 252 Crs

1% of principal asset = 252/75
100% of principal asset = (252/75)*100= 336 Crs.

Hence Net Fixed Asset is 624 Cr, Asset available without loan is
625-336= 288 Crs.

Applicable Source of loan will be 75%x288 Crs= 216 Crs.

 Retained Earning

• Next We opt for Retained Earning

Profit before tax of approximately Rs 80 Crs given.
Tax payable is assumed 30%

Net tax payable is (80x30%) = 24 Crs.

Hence Profit after tax is (80-24)= 56 Crs.

Assuming 28% is retained profit and 22% is fixed liabilities ( rent, taxes and
interest etc.)

Hence 50% has of the profit has been consumed, rest 50% will be available for
Funding

Hence 50% of 56 Crs = 28 Crs available for funding.

 Factoring
• Next we Opt for Factoring

Total Sundry Debtors is 57 Crs available.

Usually 80%of Sundry Debtors are utilised for collecting funds.

Hence (57x80/100)= 45.6 ~ 46 Crs fund can be collected through factoring.

Normally commercial banks facilitates factoring services are

(1) SBI Factors Ltd
(2) CAN Bank Factors Ltd.
 Securitization
• Next we opt for Securitization
The assured cash flow from the contract with AAA rated Company is 10 Crs per
month.
Annual Cash flow will be 12x10 = 120 Crs.
Profit after tax = 80 Crs. And net cash flow 550Cr
Percentage Profit will be (80/550)x100= 14.4
Projected Profit will be 120x14.5/100= 17.4 Crs.
Tax deduction is equal to 17.4x30/100= 5.22 Crs.
Profit after tax = 17.4-5.22= 12.18 Crs.

Assuming 70% of PAT can be available for securitization.

Hence Fund amount 12.18x70/100 = 8.6 Crs will be available from securitization.
 Preferential Share
• Next we opt for Rights Share
Company has total share capital is 49 Crs.
If we issue rights share in 4:1 ratio then our problem is solved.
The total share which can be issued will amount to 49CrsX4=196 Crores.
By doing so the holding company gets to get in shares and if need be can increase their
holding share ratio, thereby increasing the hold on the company.

Company has total debt amounting Rs. 267 Crs.

Now if that happens then the share capital becomes (49+196)=245 Crs.

The Debt/Equity ratio becomes 267:245 = 1.09:1

 Case study solution

• Net Result:
Equity With DVR = 16.32 Crs
Mid Term Loan = 216 Crs
Retained Earning = 28 Crs
Factoring = 45 Crs
Securitization= 12.18 Crs
Rights Share = 196 Crs
--------------------------------------------------------------
Total = 513.5 Crs.
Target amount is 500 Crs. Hence target fulfilled.
Comparison of Various sources of Long – term Financing

Cost Dilution of Risk Restraint on

Control managerial
freedom

Equity High Yes Nil No

Capital
Retained High No Nil No
Earning
Rights Share High No Negligible No
Capital
Term Loans Low No High Moderate

Debentures Low No High Some

Conclusion
During the research of this assignment we have
concluded that
• many type of finance can be used at one
particular time.
• Depending on the type of company and they
should try to get the best possible finance deal
• to save the borrower on the risk of borrowing
high amount and
• also to pay high amount on the interest rate.
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