Financing of Projects: Presented by

Financing of Projects
Presented by
Hariom Singh
Date: 7th Sept 2010 Kushal Sutodiya
Sources of Finance
Equity Debt
 Have residual claim on income  Have a fixed claim in the form of

and wealth of the firm. interest and principal payment.
 Dividend paid is not tax  Interest paid is a tax deductible
deductible payment. payment.
 Has an indefinite life.  Has a fixed maturity
 Investors enjoy prerogative to  Investors play a passive role
control the affairs of the firm.
Key Factors in determining D/E Ratio
Cost Nature of Business

Assets Risk
Norms of Control
Lenders Consideration
Market
Condition
Use more equity when Use more debt when
 Tax rate applicable is negligible  Tax rate applicable is high
 Business risk exposure is high  Business risk exposure is low
 Dilution of control is not an  Dilution of control is an issue
important issue
 The assets are mostly intangible  The assets of the project are
mostly tangible
 The project has many valuable  The project has few growth
growth options options
Menu of Financing
Public and private sources of capital
The typical pattern of financing

Internal Accruals
Depreciation Retained
Earnings
Advantages Disadvantages
 Need not depend on outsiders  Amount available may be limited
 Eliminates issue cost and losses  Opportunity cost quite high
on account of underpricing  Opportunity cost of depreciation
 No dilution of control is equal to WACC
 Stock market views equity issue  Management may invest in sub-
with skepticism. marginal projects
Equity Capital
Authorized, Issued, Subscribed and

Paid up Capital
Par Value, Issue Price, Book Value &

Market Value
Rights of Equity Shareholders
Right to Right to Pre- Right in

Income Control emptive Liquidation
 There is no compulsion to pay  Dilution of control
dividend  Cost of equity capital is highest
 No obligation to redeem  Equity dividends are paid out of
 Enhances the creditworthiness profit after tax
 Equity dividends tax-exempt in  Cost of issuing equity shares are
hands of investors higher
Preference Capital
Its resemblance with equity Its resemblance with Debt
 Preference dividend is payable out  Dividend rate is fixed

of distributable profits  The claim of preference
 Preference dividend is not an shareholders is prior to the claim
obligatory payment of equity shareholders
 Preference dividend is not a tax  Preference shareholders do not
deductible payment normally enjoy right to vote
Types of Preference Capital
Cumulative and Non Cumulative

Preference Shares
Participating and Non Participating

Preference Shares
Redeemable and Non Redeemable

Preference Shares
Convertible and Non Convertible

Preference Shares
 No legal obligation to pay  Expensive source of finance
dividends  Skipping preference dividend can
 No redemption liability affect the image of the firm
 Do not carry voting rights  Prior claims on the assets and
 No security of assets provided earnings of the firm
 Skipping preference dividends for
3 years, firm has to grant voting
rights to preference shareholders
Debentures or Bonds
Deep Convertible Floating Rate
Discount Debentures Bonds
Bonds
Indexed Strips
Bonds
 Interest is tax deductible expense  Fixed interest and principal
 No dilution of control repayment obligation
 Do not partake in the value  Increases financial leverage, raises
created by company the cost of equity to the firm
 Issue cost is lower  Limit the financial and operating
flexibility
Methods of Offering
Public Rights Issue Private

Offering Placement
Term Loans
Features
Interest payment Restrictive

Currency Security and Principal Covenants
Repayment
Working Capital Advances
Forms of Bank Finance
Cash Loans Discount Letter of

Credit of Bills Credit
Application and Processing Sanction and Term Loans
Security
Hypothec Pledge
ation
Margin Amount
Miscellaneous Sources
 Deferred Credit
 Lease and hire purchase finance
 Unsecured loans and deposits
 Special schemes of institutions
 Subsidies and sales deferments and tax exemption
 Short-term loans from financial institutions
 Commercial paper
 Factoring
 Securitization
Leasing
 Cannot claim Hire Purchase
depreciation  Can claim
Depreciation
 Tax deductible
expense  Only interest
component is tax
deductible expense
 Lessee does not
enjoys salvage value
 Hirer enjoys salvage
value
Raising Venture Capital
 Preparing a Business Plan
 Use simple and clear language

 Focus on four basic elements
 Give projections for about two to five years
 Identify risks and develop a strategy
 Convince about management team
Raising Capital in International Markets
 Euromarkets
 Eurocurrency Loan
 Eurocurrency Bonds
 Global Depository Receipts
 Foreign Domestic Markets

 U.S.Capital Market
 Other Markets
 Export Credit Schemes

 Buyer’s Credit
 Supplier’s Credit
Financial Closure
 Key milestone in implementation, means

all the sources of fund have been tied up
 Financial Closure is achieved soon when:
 Suitablecredit enhancement
 Adequate under writing
 Resourcefulness of promoters
 Process started early and concurrent
appraisal initiated
Key Financial Ratios
For working capital loans For term loans

 Current Ratio  Project debt-equity ratio
 TOL / TNW  TOL / TNW
 Profit after tax / Net sales  Gross average debt
 Profit before depreciation service coverage ratio
interest and tax / Interest  Term of payments in
 Return on Capital years
employed  Return on Capital
 Current assets turnover employed
 Fixed asset coverage
ratio
Thank You…

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Financing of Projects

 Have residual claim on income  Have a fixed claim in the form of

Cost Nature of Business

Public and private sources of capital

The typical pattern of financing

Authorized, Issued, Subscribed and

Par Value, Issue Price, Book Value &

Right to Right to Pre- Right in

Its resemblance with equity Its resemblance with Debt

 Preference dividend is payable out  Dividend rate is fixed

Cumulative and Non Cumulative

Participating and Non Participating

Redeemable and Non Redeemable

Convertible and Non Convertible

Public Rights Issue Private

Interest payment Restrictive

Cash Loans Discount Letter of

Application and Processing Sanction and Term Loans

 Preparing a Business Plan

 Use simple and clear language

 Foreign Domestic Markets

 Export Credit Schemes

 Key milestone in implementation, means

For working capital loans For term loans

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