Long term financial requirement is also called as fixed capital requirement. It is the capital required to purchase fixed assets like building, furniture, land, plant and machinery etc. These are also called as long term financial requirements of a firm. Repayable period in long term is more than five years. Long term financial sources include the following −Equity sharesEquity share represents ownership interest in a company. In this, no compulsion to pay dividend and it does not have any maturity. Capital provided by these funds is more or less on permanent basis. It also creates base for debt and loan ... Read More

The two main regulatory authorities are Securities Exchange Board of India (SEBI) and Reserve Bank of India (RBI).Given below are the regulatory compliance −Raising finance through IPO or SPO.Capital structure changes.Credit rating.Foreign exchange transactions.Derivative transactions.Project financing.Raising finance through IPO or SPOIPO − Initial public offering (first time company comes to public to rise money)SPO − Seasonal public offering (subsequent time a company raises money from the public directly)SEBI prescribed regulatory guidelines regarding the entire process of going public which includes, disclosure to public regarding the potential use of cash, financial projections, etc. Every time company wants a company to access ... Read More

Finance plays an important role in economic and business of a country. System and effective flow is needed for effective management used for business concern. Indian financial system has developed constantly to infuse the new blood to the economic development of the country.If a country has to be economically strong and developed, it depends on how well its financial system is regulated. Financial systems are concerned about money, loan and finance and they are interrelated with each other.Important components of Indian financial system in India are as follows −Financial institutionsThese provides various services to the economic development with the help ... Read More

Payback period allude to the amount of time it takes to reach the cost of an investment. In simple terms, it is time taken for a firm to reach breakeven point.AdvantagesA short payback period can improve the liquidity of the business quickly.Shorter paybacks mean more attractive investments.Payback is easy to compute.DisadvantageIt does consider time value of money.FormulaPay back (even cash flows) =$\frac{investment\:required}{Net\:(annual\:cash\:inflows}$Pay back (uneven cash flows) =$cummulative\:cash\:flow(near\:to\:investment)\:+\:\frac{remaining\:amount\:at\:the\:start\:of\:year}{cash \:flow\:during\:the\:year}$ExamplesCompany A is considering to purchase a new equipment to increase its production and revenue. Useful life of the equipment is 10 years and the company’s maximum desired payback is 4 years.Initial cost ... Read More

Profitability index (PI) measures the ratio between the present value of future cash flow and the initial investment. This is used for ranking investment projects and value created per unit of investment. PI is also known as profit investment ratio (PIR) or the value investment ratio (VIR).PI >1 (project generates value and the company may go with the project).PI=1 (project breaks even and the company is indifferent between proceeding or not proceeding with the project).PI1)Therefore, project generates value and the company may go with the project.

ARR stands for Accounting Rate of Return. It is one of the Non- Discounted cash flow techniques used for calculating capital budgeting.ARR is the average net income of an asset (anticipated) divided by its average capital cost. It is generally expressed as an annual percentage. ARR does not take in account the time value of money or cash flows, which are integral part of maintaining a business.ARR is useful for a quick calculation of an investments probability.ARR is mainly used for comparison between multiple projects to determine the ARR for each.ARR is mainly used for comparison between multiple projects to ... Read More

Net present value (NPV) is the value of all future cash flows over the entire life of an investment discounted to the present. It is one of the most reliable techniques used in capital budgeting, because it is based on discounted cash flow approach. It may be positive, zero or negative.Present value of cash inflow > present value of cash outflow (NPV is positive and project is acceptable).Present value of cash inflow = present value of cash outflow (NPV is zero and project is acceptable).Present value of cash inflow < present value of cash outflow (NPV is negative and project ... Read More

Capital budgeting is a process a business undertakes to evaluate potential major projects or investments. It is a planning process used to decide the company’s long term investments like new machinery, new plants, new products, research development projects etc. are worth the funding through firm capitalisation. Primary objective of investments is to increase the value of the firm to the shareholders.Capital budgeting usually involves the following −Computation of each projects future accounting profit by period.The cash flow by period.The present value of cash flow after considering time value of money.The number of years it takes for a project cash flow ... Read More

LiabilitiesRs.AssetsRs.Equity share capital15000Fixed assets (less depreciation Rs.12000)360007% preference share capital3500Reserves and surplus110006% mortgage debentures16500Current liabilitiesCurrent assetsCreditors1300Cash1790Bills payable2200Investments (12%)4055Outstanding expenses500Sundry debtors4740Stock6415Tax provision30005300053000Additional information − Net sales: Rs.55000, Cost of goods sold: Rs. 48600, Net income before Tax: Rs. 3500, Net income after Tax: Rs. 1400SOLUTIONThe solution is as follows −Short term solvency ratioscurrent ratio = current assets/current liability = 17000/7000 => 2.43:1liquid ratio = liquid ratio/ current liability = (1790+4055)/7000 => 5845/7000=> 0.84:1Long term solvency ratiosproprietary ratio = proprietors fund/total assets = (1500+3500+11000)/53000=> 16000/53000 => 0.32:1(Proprietors fund or shareholders fund = equity share capital + preference share + capital + Reserve ... Read More

Liabilities20042005Assets20042005Share capital100000110000Land and building6000060000Profit and loss a/c Loans2000023000Plant and machinery3500045000Loans-1000stock2000025000Creditors1500018000Debtors1800028000Bills payable50004000Bills receivable20001000Cash500060001400001650005000165000SOLUTIONThe solution is as follows −InflowRs.OutflowRs.Balance b/d5000Purchase of plant10000Issued share capital10000Increase current AssetsLoan10000StockCash opening profit3000Decrease in bills payable5000Decrease in bills1000Balance c/d10000Receivable30001000Increase in creditors60003200032000