Page 59 - DMGT405_FINANCIAL%20MANAGEMENT

Unit 3: Sources of Finance

Alternative I: Lease the Equipment Notes

Year Lease Tax Net Cash PV Factor PV of Net
Rent Savings @ Outflow @ 15% Cash
35% Outflows
0 4.00 4.0 1.000 4.000
1 4.00 1.40 2.60 0.870 2.262
2 4.00 1.40 2.60 0.756 1.966
3 1.40 (1.40) 0.658 (0.921)
Total P.V of net cash outflows = 7,307

Suggestion: The present value of net cash outflows is lowest, if the equipment is purchased
by taking a loan from the bank. Hence it is suggested to consider Alternative I.

3.8 Summary

 Financial needs of a business: The financial needs of a business may be grouped into three
categories which are Long-term, Medium-term and Short-term financial needs.
 Long-term Sources of finance of a business include Share capital, Debentures/Bonds of
different types, Loans from financial institutions and Venture capital funding
 Short-term Sources of finance includes Trade credit, Commercial banks, Fixed deposits for
a period of 1 year or less, Advances received from customers and Various short-term
provisions.
 In recent times in India, many companies have raised long-term finance by offering various
instruments to public like deep discount bonds, fully convertible debentures, etc.

 In India, specialized institutions provide long-term financial assistance to industry.
 Bridge finance refers to loans taken by a company normally from commercial banks for a
short period, pending disbursement of loans sanctioned by financial institutions.

 CP is a source of short-term finance to large firms with sound financial position.
 The venture capital financing refers to financing of new high risky venture promoted by
qualified entrepreneurs who lack experience and funds to give shape to their ideas.

 A lease is a contractual arrangement under which the owner of an asset agrees to allow the
case of its asset by another party in exchange of periodic payments (lease-rental) for a
specified period.
 The seed capital assistance is interest free but carries a service charge of 1% for the first five
year and 10% p.a. thereafter.
3.9 Keywords

Commercial Paper: It represents a short-term unsecured promissory note issued by firms that
have a fairly high credit (standing) rating.

Income Note: It is a hybrid security, which combines the features of both conventional loan and
conditional loan.
Inter-corporate Deposits (ICDs): A deposit made by one firm with another firm is known as
Inter-corporate Deposits.

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