worthiness of the customer and changes in the performance of customer’s industry. MONITORING RECEIVABLES Managing receivables does not end with granting of credit as dictated by the credit policy. It is necessary to ensure that customers make payment as per the credit term and in the event of any deviation, corrective actions are required. Thus, monitoring the payment behavior of the customers assumes importance. There are several possible reasons for customers to deviate from the payment terms. Three ofthese possible reasons and their implications in credit management are discussed below: Changing Customer Business Characteristics: The customers, who have earlier agreed to make payment within a certain period of time, may deviate from their acceptance and delay the payment. For example, economic slowdown or slowdown in the industry of the customers’ business may force the customers to delay the payment. In fact, the bills payable become discretionary cash outflow item in economic recession. Thus, a close watch on the performance of customer’s industry is required. Inaccurate Policy Forecasts: A wide deviation from the credit terms and actual flow of cash flows show inaccurate forecast and defective credit policy. It is quite possible that a firm uses defective credit rating model or wrongly assesses the credit variable. For example, it is quite possible to overestimate the collateral value and then lend more credit. If this is the reason for wide deviation, it requires updating the model or training the employees. Improper Policy Implementation: Often wide deviation is noticed in practice while implementing credit policy. This may not be intentional but frequently in the form of accommodating special requests of the customers. For example, a customer may not be eligible for credit or higher credit as per the model in force. The customer may personally see the concerned manager and request her/him to relax the credit restriction. If there is no policy in place to deal with these types of request and ad hoc decisions are made, then wide deviation is possible. Often these deviations become costly for the firm. Intervention of top officials and ad hoc decisions are cited as major reasons for widespread defaults in many public financial institutions. Thus, it is necessary to ensure that policies are implemented in letter and spirit. Monitoring provides signals of deviation from expectations. There are several monitoring 150 CU IDOL SELF LEARNING MATERIAL (SLM)
techniques available to the credit managers. The monitoring system begins with aggregate analysis and then move down to account-specific analysis. Investments in Receivables: The decision to supply on credit basis leads to investments in receivables. Credit policy is designed in such a way that investment needs of receivables are optimized i.e. return is greater than cost associated with investments. Credit monitoring starts with an assessment of investment in receivables as a percentage of total assets. The investments in receivables are then compared with the budget. Any deviation from budgeted value shows delay in collection or managers deviating from the credit policy. For example, if a firm based on credit policy worked out that investments in receivables is 12%, the actual value for the last three months is around 18%, there are two possible reasons. Firstly, some of the customers are not paying and thus, the receivables value has gone up. Secondly, the managers would be giving more credit than the prescribed limit or extend the credit period. In either case, it requires an investigation and explanation from managers for the increased investment in receivables. Collection Period: Receivables can be related to sales in different ways. The simplest form of analysis is comparing sales and receivables for different periods to know the trend. While this analysis gives a reasonable understanding on how the receivables have moved over the period, it fails to give an implication of the changes in the trend. For example, if sales and receivables of two periods are Rs. 90 lakhs, 120 lakhs and Rs.120 lakhs, Rs.140 lakhs respectively, the figures show (i) the sales value has gone up during the period, and (ii) receivables have also gone up along with sales. A shaper focus on changes in the trend can be obtained by computing the collection period of the two periods. The collection period is computed as follows: Credit sales per day is computed by dividing the total credit sale of the period by the number of days of the period. If the sales value given above are related to quarterly sales value, then sales per day for the two quarters are Rs. 1 lakh (Rs.90 lakhs/90 days) and Rs. 1.33 lakh (Rs.120 lakhs/90 days) respectively. The collection period for the two quarters are Period 1: 120/1 = 120 days Period 2: 140/1.33 =105 days The collection period shows a decline and thus improved performance, which was not visible earlier in simple comparison. If the sales value for the second period is Rs. 100 lakhs instead of 120 lakhs, then average credit sales per day is Rs.1.11 lakh and collection period is 126 days. The collection performance in this case has marginally come down. The 151 CU IDOL SELF LEARNING MATERIAL (SLM)
collectionperiod of manufacturing companies in BSE-30 index (Sensex) for the last five years is given in Table 5.2. The Table shows the average collection period for companies such as Hindustan Petroleum, Nestle, Hindustan Lever, Bajaj Auto, Gujarat Ambuja Cements, ACC, and Colgate are low whereas BHEL, L&T, Telco, Tesco, Grasim, etc., have experienced longer days for collection. If customers are granted different credit periods, then customers of similar nature are to be grouped separately and then sales, receivables and collection period relating to each group of customers are to be computed separately. Otherwise, it will give a distorted figure. In addition to comparing collection period of one period with other periods, they are also compared with credit terms. Any abnormal deviation warrants customer-wise analysis. That is, all these three values for two periods can be computed for each customer to know the trends in collection period of different customers. Such an analysis will help to narrow down the customers who take longer time for paying the dues. COLLECTING RECEIVABLES The analysis explained earlier are useful to know the trend of collection and identify customers, who are not paying on due dates. This should enable the management to take appropriate action to collect the dues, which is the main objective of receivables management. Collecting receivables begins with timely mailing of invoices. There are several procedures available to credit managers, who must judiciously decide when, where and to what extent pressure should be applied to delinquent customers. Management of collection activity should be based on careful comparison of likely benefits and costs. Inexpensive procedures include periodical mailing of duplicate bills reminding the customers that the account is not settled or sending a formal letter informing non- payment of bill and requesting the customer to pay immediately. Written follow-up on an overdue account is referred to as dunning. If a customer fails to respond to these reminders, then expensive procedures are initiated. Personal telephone calls and reminder through registered post are initially tried. Even if these steps fail to deliver the desired results, a personal visit by the credit manager or representative to sort out the issue would be useful. If the credit manager realizes that the customer is willfully defaulting or is in deep trouble and hence unlikely to pay the dues, a formal legal action is initiated either to recover the dues or file a liquidation petition before the court to recover the dues. It is difficult to prescribe exactly as to which and when these collection procedures should be adopted. If collection policy is strict, then it would reduce the outstanding receivables but at the same time frightened many potential customers from doing business. On the other hand, a liberal collection policywould invite many willful defaulters to do business with the company. 152 CU IDOL SELF LEARNING MATERIAL (SLM)
The above discussion assumes that the firm takes the responsibility of collection. Two alternatives are available to firms in collecting the receivables. The first one called factoring enables the firm to transfer the receivables to factoring agent, who takes the responsibility of collection. Some factoring agents takes the credit risk (i.e. the factoring agents bear the loss on account of bad debts) and others accept factoring without credit risk. In India, we have factoring subsidiaries of Canara Bank, SBI, etc. and Exim Bank does the factoring service relating to export bills. The second one is called receivables securitization. Securitization is somewhat similar to factoring but here the securitizing agent sells the units of receivables to investors in the market. Though the concept of securitization is popular in finance related receivables like housing loans, credit cards receivables, lease rentals, etc., the concept is slowly spreading to other types of receivables. A few securitization deals have already been completed in India and the market will witness more such transactions in the near future. WORKING CAPITAL FINANCING Working capital financing is done by various modes such as trade credit, cash credit/bank overdraft, working capital loan, purchase of bills/discount of bills, bank guarantee, letter of credit, factoring, commercial paper, inter-corporate deposits etc. The arrangement of working capital financing forms a major part of the day to day activities of a finance manager. It is a very crucial activity and requires continuous attention because working capital is the money which keeps the day to day business operations smooth. Without appropriate and sufficient working capital financing, a firm may get into troubles. Insufficient working capital may result in nonpayment of certain dues on time. Inappropriate mode of financing would result in loss of interest which directly hits the profits of the firm. Types of Working Capital Financing / Loans Trade Credit This is simply the credit period which is extended by the creditor of the business. Trade credit is extended based on the creditworthiness of the firm which is reflected by its earning records, liquidity position, and records of payment. Working Capital Financing Just like other sources of working capital financing, trade credit also comes with a cost after the free credit period. Normally, it is a costly source as a means of financing business working capital. Cash Credit / Bank Overdraft Cash credit or bank overdraft is the most useful and appropriate type of working capital financing extensively used by all small and big businesses. It is a facility offered by commercial banks whereby the borrower is sanctioned a particular amount which can be utilized for making his business payments. The borrower has to make sure that he does not cross the sanctioned limit. The best part is that the interest is charged to the extent the money is used and not on the sanctioned amount which motivates him to keep depositing the amount 153 CU IDOL SELF LEARNING MATERIAL (SLM)
as soon as possible to save on interest cost. Without a doubt, this is a cost-effective working capital financing. Working Capital Loans Working capital loans are as good as term loan for a short period. These loans may be repaid in installments or a lump sum at the end. The borrower should take such loans for financing permanent working capital needs. The cost of interest would not allow using such loans for temporary working capital. SUMMARY An enterprise needs funds to operate profitably. The working capital of a business reflects the short-term uses of funds. Apart from the investment in the long-term assets such as buildings, plant and equipment, funds are also needed for meeting day to day operating expensesand for amounts held in current assets. Within the time span of one year there is a continuing cycle or turnover of these assets. Cash is used, to acquire stock, which on being sold results in an inflow of cash, either immediately or after a time lag in case the sales are on credit. The rate of turnover of current assets in relation to total sales of a given time period is of critical importance to the total funds employed in those assets. The amount needed to be invested in current assets is affected by many factors and may fluctuate over a period of time. Manufacturing cycle, production policies, credit terms, growth and expansion needs, and inventory turnover are some of the important factors influencing the determination of working capital. Inflation magnifies the need for working capital. The constant rise in the cost of inputs, if not accompanied with corresponding increase in output prices puts an additional strain on the management. However, by taking several measures on production front and by keeping a strict watch on managed costs and expediting collection of credit sales, etc. the management can contain or at least minimize the upward thrusts for additional working capital. The management should ensure the adequacy and efficiency in the utilization of working capital. For this purpose various ratios can be periodically computed and compared against the norms established in this regard. For efficient management of working capital, management of cash is as important as the management of other items of current assets like receivables and inventories. Too little cash may place the firm in an illiquid position, which may force the creditors and other claimants to stop transacting with the firm. Too much cash results in funds lying idle, thereby lowering the overall return on capital employed below the acceptable level. An adequate amount of cash is always needed for meeting any unforeseen contingencies and also liabilities as well as day-to-day operating expenses of the business. The use of credit in the purchase of goods and services is so common that it is taken for 154 CU IDOL SELF LEARNING MATERIAL (SLM)
granted. Selling goods or providing services on credit basis lead to accounts receivables. Though a lot of discussion is going on in the Indian industry on how to cut down the investments in inventories through concepts such as Just-in-Time (JIT), MRP, etc., investments in receivables have gone up and firms are demanding more credit from banks and specialized institutions to deal with receivables. Since investment in receivables has a cost, managing receivables assumes importance. Receivables management starts with designing appropriate credit policy. Credit policy involves fixing credit period, discount to be offered in the event of early payment, conditions to be fulfilled to grant credit and fixing credit limit for different types of customers. It is essential for the operating managers to strictly follow the credit policy in evaluating credit proposals and granting credit. To evaluate the credit proposal, it is necessary to know the credit worthiness of the customers. Credit worthiness is assessed by collecting information about the customers and then fitting the values into credit evaluation models. There are number of credit evaluation models which range from simple decision tree analysis to sophisticated multivariate statistical models. The firm has to develop a suitable model, test the model with historical data to validate the model and use it for credit evaluation. Models also need to be periodically updated. Once the credit is granted, then it should be monitored for collection. Different methodologies are available to get a macro picture on collection efficiency. Micro analysis in the form of individual customer analysis is done wherever there is a deviation from the expectation. It is equally important in dealing with delinquent customers. There are several options, simple reminders to legal action, available before the credit managers in dealing with such default accounts and appropriate method is to be selected with an objective of benefit exceeding cost. The use of credit policy and credit analysis is not restricted to the operational managers in dealing with day-to-day activities of the firm. In the competitive world, credit policy and analysis provide a lot of strategic inputs. Credit policy of an organization is in line with the desired strategy that the organization wants to pursue to gain certain competitive advantages. KEYWORDS •Terms of Credit: These refer to eligibilityconditions and payment details for granting credit by the company to a customer. •Creditworthiness: Capacity of the customer to meet payment obligations. •Business Analysis: An examination of risk factors influencing business prospects in terms of competition, demand and supplyposition, structure of industry, cost structure, labor relations, etc. •Financial Analysis: An examination of financial performance and ability of a business unit to generate income. 155 CU IDOL SELF LEARNING MATERIAL (SLM)
•Fundamental Analysis: Refers to capital adequacy asset quality, liquidity management and interest over tax sensitivity •Collection Period: Indicates the time taken by the collection department in collecting its book debts. Credit limit: Is the limit up to which credit is granted •Decision Tree: Is a model indicating decision points and chance events for taking a decision. •Credit Scoring System: A system which attempts to rank customers as good, bad or average by a scoring mechanism. •Business Analysis: An examination of risk factors influencing business prospects in terms of competition, demand and supplyposition, structure of industry, cost structure, labor relations, etc. LEARNING ACTIVITY 1. How does the decision on granting credits affect the finance of the company? 2. List some of the major items of operating expenses in your organization such as wages and salaries of staff. UNIT END QUESTIONS A. Descriptive Question 1. Explain important components of receivables management system? 2. Explain, why do we need a credit policy? How do you evaluate credit policy? 3. Do you know, how you assess the credit worthiness of customers? 4. Explain important components of receivables management system? Long Questions 5. Discuss, why do we need a credit policy? How do you evaluate credit policy? 6. Do you know how do you assess the credit worthiness of customers? 7. On June 30, after all, monthly postings had been completed, the Accounts Receivable control account in the general ledger had a debit balance of $291,160; the Accounts Payable control account had a credit balance of $78,734. 8. The July transactions recorded in the special journals are summarized below. No 156 CU IDOL SELF LEARNING MATERIAL (SLM)
entries affecting accounts receivable and accounts payable were recorded in the general journal for July. 1. Sales journal 2. Total sales 3. $168,420 4. Purchases 6. $52,705 5. Total 9. $127,330 journal purchases 12. $48,446 7. Cash receipts 8. Accounts journal receivable column total 10. Cash payments journal 11. Accounts payable column total Required: 1. What is the balance of the Accounts Receivable control account after the monthly postings on July 31? 2. What is the balance of the Accounts Payable control account after the monthly postings on July 31? 3. To what account(s) is the column total of $168,420 in the sales journal posted? 4. To what account(s) is the accounts receivable column total of $127,330 in the cash receipts journal posted? 9. Discuss a few important financial ratios and analysis used in managing receivables. B. Multiple Choice Questions (MCQs) 1. What are the aspects of working capital management? a. Inventory management b. Receivable management c. Cash management d. All of these 2. function includes a firm’s attempts to balance cash inflows and outflows. a. Finance b. Liquidity 157 CU IDOL SELF LEARNING MATERIAL (SLM)
c. Investment d. Dividend 3. Firms which are capital intensive rely on . a. Equity b. Short term debt c. Debt d. Retained earnings 4. Hirer is entitled to claim . a. Depreciation b. Salvage value c. HP payments d. None of above 5. Which of the following is not an advantage of trade credit? a. Easy availability b. Flexibility c. Informality d. Buyout financing 6. From the point of view of the lessee, a lease is a: a. Working capital decision, b. Financing decision, c. Buy or make decision, d. Investment decision 7. 143. For a lesser, a lease is a a. Investment decision, 158 CU IDOL SELF LEARNING MATERIAL (SLM)
b. Financing decision, c. Dividend decision d. None of these 8. 144. Which of the following is not true for a \"Lease decision for the lessee? a. Helps in project selection b. Helps in project financing c. Helps in project location d. All of these 9. 145. Risk-Return trade off implies a. Minimization of Risk, b. Maximization of Risk, c. Ignorance of Risk d. Optimization of Risk 10. Basic objective of diversification is a. Increasing Return, b. Maximizing Return, c. Decreasing Risk, d. Maximizing Risk. Answers 1. d 2. b 3. c 4. a 5. D 6.b 7.a 8.b 9.d 10.c REFERENCES • Van Home, James C., 2002. Financial Management and Policy, Prentice-Hall of India: New Delhi (Part V). • Khan M.Y., Jain P.K., 2002. Cost Accounting and Financial Management, Tata McGraw Hill (Chapters 11-16). • Kulkarni, P.V., Sathya Prasad B.G., 1999. Financial Management, Himalaya 159 CU IDOL SELF LEARNING MATERIAL (SLM)
Publishing: Bombay. • Kuchhal, S.C., 1985. Financial Management, Chaitanya Publishing: Allahabad (Chapter 9 & 10). • Damodaran, A. (2007). Corporate Finance –Theory & Practice, Hoboken, New Jersey: John Wiley and Sons, Inc. • M Y Khan, P K Jain. (2018). Financial Management, New Delhi: Tata Mc Graw Hill. • Pandey, I.M. (2016). Financial Management. New Delhi: Vikas Publication House Pvt. Ltd. • Richard A Brealey, Stewart C myers, Franklin Allen, Pitabas Mohanty. (2018). Principles of Corporate Finance. New Delhi: Tata Mc Graw Hill. 160 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 6 FINANCIAL DECISIONS- I 161 Structure Learning Objectives Introduction Operating Leverage Meaning Computation of Operating Leverage Behaviour Of Operating Leverage Applications Financial Leverage Meaning Computation of Financial Leverage Behaviour Applications Composite Leverage Combined Leverage Ebit - Eps Analysis Importance of Leverages Capital Structure Measures of Capital Structure Designing Capital structure Traditional Approach Net Income (NI) Approach Net Operating Income (NOI) Approach Modigliani and Miller Approach Summary Keywords Learning Activity Unit End Questions CU IDOL SELF LEARNING MATERIAL (SLM)
References LEARNING OBJECTIVES After studying this unit, you will be able to: • Explain the concepts of financial leverage, operating leverage and total leverage • explain the computation process of leverages • assess the behavior and applications ofleverages • analysis the relationship between EBIT and EPS • discuss the importance of leverages • Illustrate various practical problems of leverage INTRODUCTION In the arena of financing decisions, the capital structure decision assumes greater significance. As it deals with debt equity composition of the organization, the resultant risk and return for shareholders is of utmost concern for finance managers. If the borrowed funds are more than owners’ funds, it results in increase in shareholders’ earnings. At the same time, it also increases the risk of the organization. In a situation where the proportion of the equity funds is more than the proportion of the borrowed funds, the return as well as risk of the shareholders will be very low. This underlines the importance of having an optimal capital structure where risk and return to shareholders be matched. The effect of capital structure where risk and return to shareholders may judiciously help the finance managers to decide their short term and long-term strategies. The behavior and application of leverage help sin examining the whole issue in right perspective. Concept and Types of Leverages The dictionary meaning of the term leverage refers to: an increased means for accomplishing some purpose”. It helps us in lifting heavy objects by the magnification of force when a lever is applied to a function. James Horne has defined “leverage as the employment of an asset or funds for which the firm pays a fixed cost or fixed return.” Christy and Roder defines “leverage as the tendency for profits to change at a faster rate than sales.” A few essential characteristics of leverage are as follows: (a) Leverage is applied to the employment of an asset or funds. (b) Profits tend to change at a faster rate than sales. 162 CU IDOL SELF LEARNING MATERIAL (SLM)
(c) There is risk return relationship which is basically found in the same direction. (d) If higher is the leverage, higher will be the risk and higher will be the expected returns. A brief review of various types of leverage is as follows: Return on Investment Leverage is an index of operational efficiency. It is calculated as follows: EBIT Total Assets Asset Leverage is the part of ROI leverage. It is like assets turnover. It is calculated as follows: Sales --------------- Total Assets A firm with a relatively high turnover is said to have a high degree of asset leverage. Operating Leverage is related to fixed cost. It indicates the impact of changes in sales on operating income. It is calculated as follows: Contribution --------------- EBIT Financial Leverage depends upon the ratio of debt and preferred stock together to common shares. It is calculated with the help of EBIT and EBT as below: EBIT --------------- EBT Combined Leverage is the multiplication of operating leverage and financial leverage. 163 CU IDOL SELF LEARNING MATERIAL (SLM)
OPERATING LEVERAGE It takes place when a change in revenue produces a greater change in EBIT. It is related to fixed costs. A firm with relatively high fixed costs uses much of its marginal contribution to cover fixed costs. Meaning It refers to heavy usage of fixed assets. A few definitions are as follows: “The use of fixed operating costs to magnify a change in profits relative to a given change in Sales” Walker & Petty “If a high percentage of a firm’s total costs are fixed costs, then the firm is said to have a high degree of operating leverage. E F Brigham It is a function of three factors: • Fixed costs • Contribution • Volume of Sales A few specific characteristics of operating leverage are as follows: • It affects assets side of Balance sheet • It is related to composition of fixed assets • It is related in fluctuation sin business risk • It affects capital structure and return on total assets. COMPUTATION OFOL The operating leverage can be calculated by the following formula 164 CU IDOL SELF LEARNING MATERIAL (SLM)
Where contribution means sales minus variables costs EBIT means contribution minus fixed costs. If contribution is more than fixed cost, it is favorable financial leverage. In case of vice-versa, it is unfavorable financial leverage. Behaviour of Operating Leverage The behavior of operating leverage may be measured by the degree of operating leverage. The degree of operating leverage is the percentage change in the profits resulting from a percentage change in the sales. It may be put in the form of the following formula: If a firm has a high degree of operating leverage, small change in sales will have large effect on operating income. Similarly, the operating profits of such a firm will suffer loss as compared to decrease in its sales. There will not be any operating leverage, if there are no fixed costs. Applications The operating leverage indicates the impact of change in sales on operating income. If a firm has a high degree of operating leverage, small change in sales will have large effect on operating income. A few areas of application are as follows: Operating leverage has an important role in capital budgeting decisions. Infect, this concept was originally developed for use in capital budgeting. Longtermprofitplanningisalsopossiblebylookingatquantamoffixedcost investment and its possible effects. Generally, a high degree of operating leverage increases the risk of a firm. For deciding capital structure in favor of debt, the impact of further increase in risk will influence capital structure decision. FINANCIAL LEVERAGE It refers to usage of debt in capital structure. It is the use of fixed cost capital (debt) in the total capitalization of the firm. Fixed cost capital includes loans, debentures and preferences share capital. 165 CU IDOL SELF LEARNING MATERIAL (SLM)
MEANING Financial leverage is expressed as the firm’s ability to usefixed financial cost in such a manner so as to have magnifying impact on the EPS due to any change in EBIT (Earnings before Interest and Taxes). In other words, financial leverageisaprocessofusingdebt capital toincreasetheirturnonequity. According to Guthman “Financial leverage is the ability of the firm to use fixed financial changes to magnify the effect of changes in EBIT on the firms EPS. The following are the essentials of financial leverage: (1) It relates to liabilities side of balance sheet (2) It is related to capital structure (3) It is related to financial risk (4) It affects earning after tax and earnings per share (5) It may be favorable or unfavorable. Unfavorable leverage occurs when the firm does not earn as much as the funds cost. Computation of Financial Leverage The financial leverage can be calculated by the following formula: Where EBIT refers to earnings before interest and tax and EBT refers to earnings before tax but after interest Some authorities have used the term financial leverage in the context of establishing relationship between EBIT and EPS. The financial leverage shows the percentage change in EPS in relation to percentage change in EBIT. BEHAVIOUR The behavior of financial leverage may be measured by the degree of financial leverage. The degree of financial leverage may be in the form of the following equation: 166 CU IDOL SELF LEARNING MATERIAL (SLM)
APPLICATIONS Financial leverage is useful in (i) Capital structure planning (ii) Profit Planning Financial leverage helps the finance managers while devising the capital structure of the company. A high financial leverage means high fixed financial costs and high financial risk. Increase in fixed financial costs may force the company into liquidation. COMPOSITE LEVERAGE Both operating and financial leverage magnify the returns. There is combined effect of these leverages on income. Both the leverages are closely concerned with the firm's capacity to meet its fixed costs (both operating and financial). In case both the leverages are combined, the result obtained will disclose the effect of change in sales over change taxable profit. COMBINED LEVERAGE The degree of operating leverage may be combined with the degree of financial leverage. In fact, degree of operating leverage (DOL) is viewed as the first-stage leverage and degree of 167 CU IDOL SELF LEARNING MATERIAL (SLM)
financial leverage (DFL) as the second-stage leverage. Since financial leverage measures the effect of changes in EBIT on earnings avail-able to equity shareholders, it may be calculated by using the following formula The use of this formula may be illustrated before demonstrating the implications of combining DOL and DFL. The data of Table 13.3 for the leverage factors of 20% debt and 80% debt may be utilized to show the effect of an increase of EBIT from Rs. 25 lakhs to Rs. 50 lakhs. The following calculations may be noticed: DFL (80%) the degree of financial leverage at 80% debt. DFL (20%) the degree of financial leverage at 20% debt. The Figures 2.92 and 1.14 can be easily understood. The former implies that when the debt ratio (or the leverage factor) is 80%, a 10% increase in EBIT produces a 29.2% (10 x 2.92) increase in net income available to equity shareholders. At a leverage factor of 20%, a 10% increase in EBIT brings about only an 11.4% (I 0 x 1.14) increase in net income or earnings available to equity shareholders. You may conclude that a high degree of leverage brings about a higher magnification of equity earnings. In the absence of debt, the degree of financial leverage (DFL) will be 1.00 (i.e. unity). The use of debt will lead to DFL above 1.00 or 100%. The DFL may be viewed as a multiplication factor, and when this multiplication factor is 1.00, there is no magnification in net income or return on equity, or in earnings per share. A combination of operating and financial leverage measures the degree of magnification in Net Income (NI), Return on Equity (ROE), and Earnings per Share (BPS) for a given increase in sales. When the use of operating and financial leverage is considerable, small changes in sales will produce wide fluctuations in NI, ROE and EPS. The Degree of Combined Leverage (DCL) may be measured by using the following formula: 168 CU IDOL SELF LEARNING MATERIAL (SLM)
You may note that a number of combinations of DOL and DFL may produce the same DCL. And if management has a target DCL, changes in DOL or DFL may be made to attain the targeted DCL. For instance, if the firm has a high degree of operating leverage clue to the nature of its operations, the degree of financial leverage may be suitably lowered so as not to lower the targeted combined leverage and vice versa. EBIT – EPS ANALYSIS This is a method to study the effect of leverage. It involves the comparisons of alternative methods of financing under various alternative financing proposals. A firm may raise funds in either of the following alternatives: (i) Exclusive use of equity capital (ii) Exclusive use of debt (iii) Various combinations of debt and equity (iv) Various combinations of debt, equity and preferences capital IMPORTANCE OFLEVERAGES Leverages have the magnifying effect. Operating leverage magnifies EBIT with respect to contribution while financial leverage magnifies EPS with respect to EBIT. Financial leverage enhances the EPS without an additional investment. By having judicious assets mix and financing mix, EPS may be increased. A few areas identified in this regard are as follows: Investment in fixed assets (Operating leverage) Capital structure planning (Financial leverage) Profit planning (Combined leverage) Monitoring business and financial risk Maximizing the value of share Improving EPS Judicious mixture of operating leverage and financial leverage. A firm with high operating leverage should not have a high financial leverage. Similarly, a firm having low operating leverage will stand to gain by having a high financial leverage. If both leverages are increased, the possibility of bearing more risk will increase. 169 CU IDOL SELF LEARNING MATERIAL (SLM)
CAPITAL STRUCTURE The capital structure is the particular combination of debt and equity used by a company to finance its overall operations and growth. Debt comes in the form of bond issues or loans, while equity may come in the form of common stock, preferred stock, or retained earnings. Short-term debt is also considered to be part of the capital structure. Both debt and equity can be found on the balance sheet. Company assets, also listed on the balance sheet, are purchased with this debt and equity. Capital structure can be a mixture of a company's long-term debt, short-term debt, common stock, and preferred stock. A company's proportion of short-term debt versus long-term debt is considered when analyzing its capital structure. When analysts refer to capital structure, they are most likely referring to a firm's debt-to- equity (D/E) ratio, which provides insight into how risky a company's borrowing practices are. Usually, a company that is heavily financed by debt has a more aggressive capital structure and therefore poses greater risk to investors. This risk, however, may be the primary source of the firm's growth. Debt is one of the two main ways a company can raise money in the capital markets. Companies benefit from debt because of its tax advantages; interest payments made as a result of borrowing funds may be tax deductible. Debt also allows a company or business to retain ownership, unlike equity. Additionally, in times of low interest rates, debt is abundant and easy to access. Equity allows outside investors to take partial ownership in the company. Equity is more expensive than debt, especially when interest rates are low. However, unlike debt, equity does not need to be paid back. This is a benefit to the company in the case of declining earnings. On the other hand, equity represents a claim by the owner on the future earnings of the company. Measures of Capital Structure Companies that use more debt than equity to finance their assets and fund operating activities have a high leverage ratio and an aggressive capital structure. A company that pays for assets with more equity than debt has a low leverage ratio and a conservative capital structure. That said, a high leverage ratio and an aggressive capital structure can also lead to higher growth rates, whereas a conservative capital structure can lead to lower growth rates. DESIGNING CAPITAL STRUCTURE Capital structure is the major part of the firm‘s financial decision which affects the value of the firm and it leads to change EBIT and market value of the shares. 170 CU IDOL SELF LEARNING MATERIAL (SLM)
Capital structure is the major part of the firm‘s financial decision which affects the value of the firm and it leads to change EBIT and market value of the shares. There is a relations hip among the capital structure, cost of capital and value of the firm. The aim of effective capital structure is to maximize the value of the firm and to reduce the cost of capital. There are two major theories explaining the relations hip between capital structure, cost of capital and value of the fir m. Traditional Approach It is the mix of Net Income approach and Net Operating Income approach. Hence, it is also called as inter mediate approach. According to the traditional approach, mix of debt and equity capital can increase the value of the firm by reducing overall cost of capital up to certain level of debt. Traditional approach states that the Ko decreases only within the responsible limit of financial leverage and when reaching the minimum level, it starts increasing with financial leverage. Assumptions Capital structure theories are based on certain assumption to analysis in a single and convenient manner: • There are only two sources of funds used by a firm; debt and shares. • The firm pays 100% of its earning as dividend. • The total assets are given and do not change. • The total finance re ma ins constant. • The operating profits (EBIT) are not expected to grow. • The business risk remains constant. • The firm has a perpetual life. • The investors behave rationally. 171 CU IDOL SELF LEARNING MATERIAL (SLM)
Net Income (NI) Approach Net income approach suggested by the Durand. According to this approach, the capital structure decision is relevant to the valuation of the firm. In other words, a change in the capital structure leads to a corresponding change in the overall cost of capital as well as the total value of the firm. According to this approach, use more debt finance to reduce the overall cost of capital and increase the value of fir m. Net income approach is based on the following three important assumptions: • There are no corporate taxes. • The cost debt is less than the cost of equity. • The use of debt does not change the risk perception of the investor. where V = S+B V = Value of fir m S = Market value of equity B = Market value of debt Market value of the equity can be ascertained by the following formula: 172 CU IDOL SELF LEARNING MATERIAL (SLM)
S =NI/ Ke where NI = Earnings available to equity shareholder Ke = Cost of equity/equity capitalization rate Format for calculating value of the firm on the basis of NI approach. Net Operating Income (NOI) Approach Figure 6.1 Another modern theory of capital structure, suggested by Durand. This is just the opposite of the Net Income approach. According to this approach, Capital Structure decision is irrelevant to the valuation of the firm. The market value of the firm is not at all affected by the capital structure changes. According to this approach, the change in capital structure will not lead to any change in the total value of the firm and market price of shares as well as the overall cost of capital. NI approach is based on the following important assumptions; • The overall cost of capital remains constant; • There are no corporate taxes; • The market capitalizes the value of the firm as a whole; Value of the firm (V) can be calculated with the help of the following formula 173 CU IDOL SELF LEARNING MATERIAL (SLM)
V = E BIT /K0 Modigliani and Miller Approach Modigliani and Miller approach states that the financing decision of a firm does not affect the market value of a firm in a perfect capital market. In other words MM approach maintains that the average cost of capital does not change with change in the debt weighted equity mix or capital structures of the fir m. Modigliani and Miller approach is based on the following important assumptions: • There is a perfect capital market. • There are no retained earnings. • There are no corporate taxes. • The investors act rationally. • The dividend payout ratio is 100%. • The business consists of the same level of business risk. SUMMARY Leverage refers to the use of an asset or source of funds which involves fixed costs or fixed returns. Leverages can be operating, financial and combined. Operating leverage uses fixed operating costs to magnify the effects of changes in sales on the operating profits. Operating leverage may be favorable or unfavorable. High operating leverage is good when sales increase. Financial leverage affects financial risk of the firm. In financial leverage, the source of fund which wants fixed refund so that more than proportionate change in EPS may be reflected. Combined leverage is the multiplication of financial and operating leverage. In order to keep the risk under control, low financial leverage be kept along with high degree of operating leverage. EBIT – EPS analysis may help the financial managers to choose the optimum capital structure. KEYWORDS • Leverage: is the employment of an asset or funds for which the firm pays a fixed cost or fixed return. • Operating Leverage: is the use of fixed operating costs to magnify a change in profits relative to a given change in sales. • Financial Leverage: is the tendency of residual income to vary disproportionatelywith operating profit. 174 CU IDOL SELF LEARNING MATERIAL (SLM)
• Combined Leverage: expresses the relationship between revenue on account ofsales and the taxable income. • ROI Leverage: is the ratio of EBIT and total assets. • Trading on Equity: Financial leverage is also sometimes called on trading on equity. • EPS: Earnings per share is calculated by dividing earnings available to equity shareholders with number of equity shares. LEARNING ACTIVITY 1. Illustrate the concept of operating leverage. 2. State the applications of operating leverage in the changed socio-economic Indianscenario UNIT END QUESTIONS A. Descriptive Question 1. Discuss your understanding about leverage? What are the different types of leverages? 2. Explain, what is operating leverage? How is it different from financial leverage? Illustrate. 3. Discuss, what is combined leverage? Explain its significance. Illustrate EBIT – EPS Analysis 4. State the applications of operating and financial leverage. Long questions 5. Explain the significance of operating leverage? Discuss its effect on risk. When does financial leverage become favorable? Discuss its impact on risk. 6. The following are the details: A Company BCompany Sales 10,00,000 6,00,000 Variable cost 4,00,000 2,40,000 Fixed cost 2,40,000 1,80,000 Interest 1,00,000 1,00,000 Calculate the following: a) Degree of operating leverage and financial leverage of both the firms. 175 CU IDOL SELF LEARNING MATERIAL (SLM)
b) Comment on the risk position. B. Multiple Choice Questions (MCQs) 1. Other things being constant,' if Firm A has more Operating leverage than Firm B, then a given percentage decline in sales will cause a larger percentage decline for Firm A than for Firm B in a. EBIT b. Net Income c. Both (a) and (b) d. Neither (a) nor (b) 2. One of the components of a firm's financial structure that is not a component of its capital structure is: a. debentures b. reserves c. convertible preference d. shares 3. Operating leverage = a. Contribution x Earnings before Interest and tax b. Contribution / Earnings before interest and tax c. Earnings before interest and tax / Contribution d. Earnings before interest and tax + Contribution 4. - Earnings per share = a. Number of Equity shares / (Profit after tax – Preference dividend) b. (Profit after tax – Preference dividend) / Number of Equityshares c. (Profit after tax + Preference dividend) / Number of Equity shares d. Number of Equity shares / (Profit after tax + Preference dividend) 176 CU IDOL SELF LEARNING MATERIAL (SLM)
5. Price earnings ratio = a. Market Price per share / Earnings per share b. Earnings per share / Market Price per share c. Market Price per share x No. of shares) / Earnings per share d. Market Price per share / (Earnings per share x No. of shares). 6. Scrutiny of financial transactions is called a. Budgeting b. Auditing c. Programming d. Accounting 7. The presence of fixed costs in the total cost structure of a firm results into a. Financial Leverage b. Operating Leverage c. Super Leverage d. None of these 8. A view that dividend policy of a firm has a bearing on share valuation advocated byJames E. Walter is based on which one of the following assumptions. a. Retained earnings is only source of financing b. Cost of capital does not remain constant c. Return of investment function d. All of these 9. The term \"capital structure\" refers to: 177 a. long-term debt, preferred stock, and common stock equity. b. current assets and current liabilities. c. total assets minus liabilities. d. shareholders' equity. CU IDOL SELF LEARNING MATERIAL (SLM)
10. A critical assumption of the net operating income (NOI) approach to valuation is: a. that debt and equity levels remain unchanged. b. that dividends increase at a constant rate. c. that ko remains constant regardless of changes in leverage. d. that interest expense and taxes are included in the calculation. Answers 1. c 2. d 3. b 4. c 5. A 6.b 7.b 8.a 9.a 10.c REFERENCES • Singh J.K. \"Financial Management\" Dhanpat Rai & Co. Pvt. Ltd.; Delhi - 110006 Van Horne, J.C. \" Financial Management and Policy, Prentice Hall of India, New Delhi. • Khan, M Y & Jain P.K., \"Financial Management - Text and Problems\" Tata McGraw Hill, Mumbai. • Kulkarni, P.V. & Satya Prasad \"Financial Management”, Himalaya Publishing House, Mumbai. • Upadhyay, K.M. \" Financial Management\" Kalyani Publishers, Ludhiana. Maheshwari, S.N. \"Financial Management - Principles and Practice”, Sultan Chand & Sons, Delhi. • Damodaran, A. (2007). Corporate Finance –Theory & Practice, Hoboken, New Jersey: John Wiley and Sons, Inc. • M Y Khan, P K Jain. (2018). Financial Management, New Delhi: Tata Mc Graw Hill. • Pandey, I.M. (2016). Financial Management. New Delhi: Vikas Publication House Pvt. Ltd. • Richard A Brealey, Stewart C myers, Franklin Allen, Pitabas Mohanty. (2018). Principles of Corporate Finance. New Delhi: Tata Mc Graw Hill. 178 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 7 FINANCIAL DECISIONS- II Structure Learning Objectives Introduction Long term financing Importance of long-term finance Objectives of Long-term Financing Sources ofLong-Term Finance Long Term Sources of Finance / Funds Medium Term Sources of Finance / Funds Short Term Sources of Finance / Funds Long-Term Sources of Finance Short term financing Types of Short Term Financing Example of Short Term Finance Advantages of Short Term Loans Disadvantages of Short Term Loans Capital Structure Capital Structure Components Capital Structure Theories Net Income Approach Net Operating Income Approach Traditional Approach Modigliani and Miller Approach (Mm Approach) Summary Keywords Learning Activity Unit end questions Suggested Reading 179 CU IDOL SELF LEARNING MATERIAL (SLM)
LEARNING OBJECTIVES After studying this unit, you should be able to • List the concepts of financing • Explain about and difference of short term and long term financing • State about capital structure theories and there assumptions INTRODUCTION Long-term finance can be defined as any financial instrument with maturity exceeding one year (such as bank loans, bonds, leasing and other forms of debt finance), and public and private equity instruments. Maturity refers to the length of time between origination of a financial claim (loan, bond, or other financial instrument) and the final payment date, at which point the remaining principal and interest are due to be paid. Equity, which has no final repayment date of a principal, can be seen as an instrument with nonfinite maturity. The one year cut-off maturity corresponds to the definition of fixed investment in national accounts. The Group of 20, by comparison, uses a maturity of five years more adapted to investment horizons in financial markets (G-20 2013). Depending on data availability and the focus, the report uses one of these two definitions to characterize the extent of long-term finance. Moreover, because there is no consensus on the precise definition of long-term finance, wherever possible, rather than use a specific definition of long-term finance, the report provides granular data showing as many maturity buckets and comparisons as possible. LONG TERM FINANCING The Sources of Long Term Finance are those sources from where the funds are raised for a longer period of time, usually more than a year. Long term financing is required for modernization, expansion, diversification and development of business operations. Generally, the companies resort to the sources of long-term finance when they have an inadequate cash balance and need capital to carry out its operation for a longer period of time. Importance of long-term finance Extending the maturity structure of finance is often considered to be at the core of sustainable financial development. Long-term finance contributes to faster growth, greater welfare, shared prosperity, and enduring stability in two important ways: by reducing rollover risks for borrowers, thereby lengthening the horizon of investments and improving performance, and by increasing the availability of long-term financial instruments, thereby allowing households and firms to address their life-cycle challenges (Demirgüç-Kunt and Maksimovic 1998,1999; 180 CU IDOL SELF LEARNING MATERIAL (SLM)
Caprio and Demirgüç-Kunt 1998; de la Torre, Ize, and Schmukler, 2012). The term of the financing reflects the risk-sharing contract between providers and users of finance. Long-term finance shifts risk to the providers because they have to bear the fluctuations in the probability of default and other changing conditions in financial markets, such as interest rate risk. Often providers require a premium as part of the compensation for the higher risk this type of financing implies. On the other hand, short-term finance shifts risk to users as it forces them to roll over financing constantly. The amount of long-term finance that is optimal for the economy as a whole is not clear. In well-functioning markets, borrowers and lenders will enter short- or long-term contracts depending on their financing needs and how they agree to share the risk involved at different maturities. What matters for the economic efficiency of the financing arrangements is that borrowers have access to financial instruments that allow them to match the time horizons of their investment opportunities with the time horizons of their financing, conditional on economic risks and volatility in the economy (for which long-term financing may provide a partial insurance mechanism). At the same time, savers would need to be compensated for the extra risk they might take. Objectives of Long-term Financing • To purchase new asset or equipment • To finance the permanent part of the working capital • To enhance the cash flow in the firm • To invest in R&D operations • To construct or build new construction projects • To develop a new product • To design marketing strategies or increase facilities • To expand business operations • The long term financing could be done internally, i.e. within the organization or externally, i.e. from outside the organization. SOURCES OF LONG TERM FINANCE Sources of finance for business are equity, debt, debentures, retained earnings, term loans, working capital loans, letter of credit, euro issue, venture funding etc. These sources of funds are used in different situations. They are classified based on time period, ownership and control, and their source of generation. It is ideal to evaluate each source of capital before 181 CU IDOL SELF LEARNING MATERIAL (SLM)
opting for it. Sources of capital are the most explorable area especially for the entrepreneurs who are about to start a new business. It is perhaps the toughest part of all the efforts. There are various capital sources, we can classify on the basis of different parameters. Having known that there are many alternatives to finance or capital, a company can choose from. Choosing the right source and the right mix of finance is a key challenge for every finance manager. The process of selecting the right source of finance involves in-depth analysis of each and every source of fund. For analyzing and comparing the sources, it needs the understanding of all the characteristics of the financing sources. There are many characteristics on the basis of which sources of finance are classified. On the basis of a time period, sources are classified as long-term, medium term, and short term. Ownership and control classify sources of finance into owned and borrowed capital. Internal sources and external sources are the two sources of generation of capital. All the sources have different characteristics to suit different types of requirements. Let’s understand them in a little depth. Figure 7.1 According to Time Period Sources of financing a business are classified based on the time period for which the money 182 CU IDOL SELF LEARNING MATERIAL (SLM)
is required. The time period is commonly classified into the following three: Long-term financing means capital requirements for a period of more than 5 years to 10, 15, 20 years or maybe more depending on other factors. Capital expenditures in fixed assets like plant and machinery, land and building, etc. of business are funded using long-term sources of finance. Part of working capital which permanently stays with the business is also financed with long-term sources of funds. Long-term financing sources can be in the form of any of them: Sources of finance for business are equity, debt, debentures, retained earnings, term loans, working capital loans, letter of credit, euro issue, venture funding etc. These sources of funds are used in different situations. They are classified based on time period, ownership and control, and their source of generation. It is ideal to evaluate each source of capital before opting for it. Sources of capital are the most explorable area especially for the entrepreneurs who are about to start a new business. It is perhaps the toughest part of all the efforts. There are various capital sources, we can classify on the basis of different parameters. Having known that there are many alternatives to finance or capital, a company can choose from. Choosing the right source and the right mix of finance is a key challenge for every finance manager. The process of selecting the right source of finance involves in-depth analysis of each and every source of fund. For analyzing and comparing the sources, it needs the understanding of all the characteristics of the financing sources. There are many characteristics on the basis of which sources of finance are classified. On the basis of a time period, sources are classified as long-term, medium term, and short term. Ownership and control classify sources of finance into owned and borrowed capital. Internal sources and external sources are the two sources of generation of capital. All the sources have different characteristics to suit different types of requirements. Let’s understand them in a little depth. LONG TERM SOURCES OF FINANCE / FUNDS MEDIUM TERM SOURCES OF FINANCE / FUNDS SHORT TERM SOURCES OF FINANCE / FUNDS 183 CU IDOL SELF LEARNING MATERIAL (SLM)
LONG-TERM SOURCES OF FINANCE Long-term financing means capital requirements for a period of more than 5 years to 10, 15, 20 years or maybe more depending on other factors. Capital expenditures in fixed assets like plant and machinery, land and building, etc. of business are funded using long-term sources of finance. Part of working capital which permanently stays with the business is also financed with long-term sources of funds. Long-term financing sources can be in the form of any of them: • Share Capital or Equity Shares • Preference Capital or Preference Shares • Retained Earnings or Internal Accruals • Debenture / Bonds • Term Loans from Financial Institutes, Government, and Commercial Banks • Venture Funding • Asset Securitization • International Financing by way of Euro Issue, Foreign Currency Loans, ADR, GDR, etc. Medium Term Sources ofFinance Medium term financing means financing for a period of 3 to 5 years and is used generally for two reasons. One, when long-term capital is not available for the time being and second when 184 CU IDOL SELF LEARNING MATERIAL (SLM)
deferred revenue expenditures like advertisements are made which are to be written off over a period of 3 to 5 years. Medium term financing sources can in the form of one of them: Preference Capital or Preference Shares Debenture / Bonds Medium Term Loans from Financial Institutes Government, and Commercial Banks Lease Finance Hire Purchase Finance Short Term Sources of Finance Short term financing means financing for a period of less than 1 year. The need for short-term finance arises to finance the current assets of a business like an inventory of raw material and finished goods, debtors, minimum cash and bank balance etc. Short-term financing is also named as working capital financing. Short term finances are available in the form of: Trade Credit Short Term Loans like Working Capital Loans from Commercial Banks Fixed Deposits for a period of 1 year or less Advances received from customers Creditors Payables Factoring Services Bill Discounting etc. (1) Equity-Shares: Equity Shares, also known as ordinary shares, represent the ownership capital in a company. The holders of these shares are the legal owners of the company. They have unrestricted claim on income and assets of the company and possess all the voting power in the company. In fact, the foremost objective of a company is to maximize the value of its equity shares. 185 CU IDOL SELF LEARNING MATERIAL (SLM)
Being the owners of the company, they bear the risk of ownership also. They are entitled to dividends after paying the preference dividends. The rate of dividend on these shares is not fixed and depends upon the availability of divisible profits and the intention of the directors. They may be paid a higher rate of dividend in times of prosperity and also run the risk of no dividends in the period of adversity. Similarly, when the company is wound up, they can exercise their claim on those assets which are left after the payment of all other claims including that of preference shareholders. Advantages of Equity / Ordinary Shares: (A) Advantages to the Company: Equity shares offer the following advantages to the company: (i) Permanent Source of Funds – Equity capital is a permanent capital, and is available for use as long as the company continues. The management is free to utilize such capital and is not bound to refund it. (ii) Increase in the Borrowing Capacity – The equity capital increases the company’s shareholder’s funds. Lenders normally lend in proportion to the amount of shareholder’s funds. Higher amount of shareholder’s funds provides higher safety to the lenders. (iii) Not Bound to Pay Dividend – A company is not legally bound to pay dividend to its equity shareholders. The payment of dividend depends on the availability ofdivisible profits and the discretion of directors. A company can reinvest whole of its income, if it so desires. (iv) No Need to Mortgage the Assets – The company need not mortgage its assets to secure equity capital. Hence, if the company desires to raise further finance from other sources, it can easily do so by mortgaging its assets. (B) Advantages to Investors: (i) Right to Control – Equity shareholders are the real owners of the company. They have the right to elect the directors as well as vote in the meetings of the company. (ii) Increase in Rate of Dividends – In case of higher profits in the company, these shareholders are handsomely rewarded in the form of higher dividends. (iii) Increase in Market Value – Usually a portion of the profits is ploughed back into the business which results in enhanced earning power of the company and increase in the market value of its shares. (iv) Bonus Shares – Equity shareholders have a claim on the residual income ofthe company. This residual income is either directly distributed to them in the form of dividendor 186 CU IDOL SELF LEARNING MATERIAL (SLM)
indirectly in the form of bonus shares. (v) Right Shares – Equity shareholders are entitled to get right shares whenever thecompany issues new shares. The subscription price at which the right shares are offered to them is generally much below the share’s current market price. (vi) Easy to Sell – In comparison to investment in fixed properties, the investment in equity shares is much liquid because the shares can be sold in the market whenever needed. Disadvantages of Equity Shares: (A) Disadvantages to the Company: (i) High Cost of Funds – Equity shares have a higher cost for two reasons. Firstly, as compared to interest, dividends cannot be deducted from the income of the company while calculating taxes. Dividends are paid out of post-tax profits. Secondly, equity shares have high floatation cost in terms of underwriting, brokerage and other issue expenses in comparison to other securities. (ii) No Advantage of Trading on Equity – If a Company issues only equity shares, it will be deprived of the benefits oftrading on equity. For availing the benefit of trading on equity, it is essential to issue debentures or preference shares with fixed yields lower than the earning rate of the company. (iii) Manipulation by a Group of Shareholders – Shares of a company can be purchasedand sold in the stock market. Hence, a group of shareholders may control the company by purchasing shares and they may use such control for their personal advantage at the cost of company’s interests. (B) Disadvantages to Investors: (i) Irregular Dividend – Dividend paid on equity shares is neither regular nor at a fixed rate. In case of lower profits, the company can reduce or suspend payment of dividend. In case of higher profits too, the company is not legally bound to distribute dividends. Entire profits may be ploughed back for expansion and development of the company. (ii) Fall in the Market Value of Shares – If the company does not earn sufficient profits, the shareholders have to bear the loss because of fall in the market value of shares. (iii) No Real Control over the Company – There are a number of shareholders and most of them are scattered and unorganized. Hence they are unable to exercise effective and real control over the company. (iv) Ownership Dilution – If the new shares are issued to the public, it may dilute the 187 CU IDOL SELF LEARNING MATERIAL (SLM)
ownership and control of the existing shareholders. The control of the company may change to new shareholders who may reap the benefits of the company’s prosperity and progress. (v) Loss on Liquidation – In case of liquidation, equity shareholders have to bear the maximum risk. Out of the realized value of assets, first the claims of creditors and then preference shareholders are satisfied, and the remaining balance, if any, is paid to equity shareholders. In most of the cases, equity shareholders do not get anything in case of liquidation. To conclude, equity shares are the most convenient and popular source of long-term finance for a company. For new company recourse to equity share financing is most desirable because the management is under no legal obligation to pay dividends to shareholders and the management can retain its earnings entirely for their investment in the enterprise. However, for obtaining further finance in case of any existing company, the management should, as far as possible, avoid issuing equity shares. From investor’s point of view, equity shares are riskier as there is uncertainty regarding dividend and capital gains. Investors who desire to invest in safe securities with a regular and fixed income have no attraction for such shares. On the contrary, the investors who are more ambitious and ready to bear risk in consideration of higher returns prefer these shares. (2) Preference Shares: Preference share capital is another source of long-term financing for a company. As the name suggests, these shares carry preferential rights over equity shares both regarding the payment of dividend and the return of capital. These shares carry a fixed rate of dividend and such dividend must be paid in full before the payment of any dividend on equity shares. Similarly, at the time of liquidation, the whole of preference capital must be paid before any payment is made to equity shareholders. (3) Ploughing Back of Profits: A new company can raise finance only from external sources such as shares, debentures, loans etc. But, an existing company can also generate finance through its internal sources, i.e., retained earnings or ploughing back of profits. When a company does not distribute whole of its profits as dividend but reinvests a part of it in the business, it is known as ploughing back of profits or retention of earnings. This method of financing is also known as self-financing or internal financing. Ploughing back of profits is made by transferring a part of after-tax profits to various reserves such as General Reserve, Reserve Fund, Replacement Fund, Dividend Equalization Fund etc. Such retained earnings may be utilized to fulfil the long-term, medium-term and short-term 188 CU IDOL SELF LEARNING MATERIAL (SLM)
financial requirements of the firm. Advantages: (i) Economical Method – It is very economical method of financing. (ii) A Cushion to Absorb the Shocks of the Business – A concern with large reserves can easily absorb the shocks of trade cycles and the uncertainty of market. (iii) Helpful in Following a Balanced Dividend Policy – Such a company can follow the policy of paying regular and balanced dividends because it can use retained earnings for paying dividends in the years when there are inadequate profits. (iv) Helpful in Making the Company Self-Dependent – Ploughing back of profits makes the company self-dependent because it has not to depend upon outsiders such as banks, financial institutions, debentures etc. (v) Increase in the Credit Worthiness of the Company – Since the company need not depend upon outside sources for its financial needs; it increases the credit worthiness of thecompany. (vi) Helpful in the Repayment of Long-Term Liabilities – It enables the company to repay its long-term loans and debentures and thus relieves the company from the burden of fixed interest payments. (B) Disadvantages or Dangers of Excessive Ploughing Back: (i) Misuse of Retained Earnings – It is not necessary that the management may always use the retained earnings to the advantage of shareholders. They may invest the funds in unprofitable areas or may invest in other concerns under the same management, bringing little gain to the shareholders. (ii) Over-Capitalization – Retained earnings are used for the issue of bonus shares which may result to over-capitalization without any corresponding increase in its earnings. (iii) Creation of Monopolies – Continuous ploughing back of profits over a long time may lead a company to grow into a monopoly. This is more likely to occur when other companies find it difficult to procure finance from the market whereas an existing concern continues to grow through its retained earnings. (iv) Manipulation in the Value of Shares – Ploughing back of profits provides the management an opportunity to manipulate the market value of its shares. In the name of ploughing back of profits, they may declare lower dividends and when the share values fall in the market, they may purchase them at reduced prices. Later, they may increase the rate of dividend out of past profits and may sell their shares at a profit. 189 CU IDOL SELF LEARNING MATERIAL (SLM)
(v) Dissatisfaction among the Shareholders – Excessive ploughing back of profits may create dissatisfaction among the shareholders since the rate of dividend is quite low in relation to the earnings of the company. (vi) Hindrance in the Free Flow of Capital – According to Prof. Pigou,” Excessive ploughing back entails social waste, because money is not made available to those who can use it to the best advantage of the community, but is retained by those who have earned it.” Despite the above disadvantages, the ploughing back of profits is a popular source of long- term finance and is widely used by most of the companies. (4) Debentures: Debentures are one of the frequently used methods by which a company raises long-term funds. Funds acquired by issue of debentures represent loans taken by the company and are also known as ‘debt capital’. A debenture is a certificate issued by a company under its seal acknowledging a debt due by it to its holders. In USA there is a distinction between debentures and bonds. There, the term bond refers to an instrument which is secured on the assets of the company whereas the debentures refer to unsecured instruments. But, in India no such distinction is made between bonds and debentures and the two terms are used as synonymous. According to Section 2 (30) of the Companies Act, 2013, “the term debenture includes debenture stock, bonds and any other securities of a company whether constituting a charge on the assets of the company or not.” (5) Loans from Financial Institutions: Financial Institutions are another important source of long-term finance. In India, a number of special financial institutions have been established by the Government at the national level and state level to provide medium-term and long-term loans to the industrialundertakings. Financial institutions established at the national level include Industrial Development Bank of India (IDBI), Industrial Finance Corporation of India (IFCI), Industrial Credit and Investment Corporation of India (ICICI), Industrial Reconstruction Corporation of India (IRCI), Unit Trust of India (UTI), Life Insurance Corporation of India (LIC), General Insurance Corporation (GIC) etc. Financial institutions established at the state level include State Financial Corporations (SFCs) and State Industrial Development Corporations (SIDCs). For example, In Haryana, Haryana State Financial Corporation (HFC) and Haryana State Industrial Development Corporation (HSIDC) have been established. 190 CU IDOL SELF LEARNING MATERIAL (SLM)
Characteristics of Loans from Financial Institutions: (i) Maturity – Maturity period of term loans provided by Financial Institutions ranges between 6 to 10 years. (ii) Direct Negotiation – Terms and conditions of such loans are directly negotiated between the borrower and the financial institution providing the loan. (iii) Security – Such loans are always secured. While the assets financed by loans serve as primary security, all the present as well as the future immovable assets of the borrower constitute secondary security. (iv) Restrictive Covenants – To protect their interests the financial institutions impose a number of restrictive terms and conditions. These are called covenants. These covenants may be in respect of maintaining a minimum current ratio, not to create further charge on assets, not to sell fixed assets without the lender’s approval, restrain on taking additional loan, reduction in debt-equity ratio by issuing additional shares etc. Financial Institutions may also restrict the payment of dividend, salaries and perks of managerial staff. Covenants may also include the appointment of nominee director by financial institutions to safeguard their interests. (v) Convertibility – Financial institutions usually insist on the option of converting their loans into equity shares of the company, (vi) Repayment Schedule – Such loans have to be repaid according to predetermined schedule. The common practice in India is the repayment of principal in equal instalments and payment of interest on the outstanding loan. Advantages and Disadvantages of Loans from Financial Institutions: Such loans offer all the advantages and disadvantages of debenture financing. An additional disadvantage from borrower’s viewpoint is that the loan contracts contain certain restrictive covenants which restrict the managerial freedom. The right of lenders to appoint nominee directors on the board of the borrowing company may further restrict the managerial freedom. (6) Lease Financing: Lease is a contract between the owner of an asset and the user of such asset. Owner of the asset is called ‘Lessor’ and the user is called ‘Lessee’. Under the lease contract, the owner of the asset surrenders the right to use the asset to another party for an agreed period of time for an agreed consideration called the lease rental. The lessee pays a fixed rental to the lessor at the beginning or at the end of a month, quarter, half year, or year. At the end of the period of lease contract, the asset reverts back to the lessor, who is the legal owner of the asset. 191 CU IDOL SELF LEARNING MATERIAL (SLM)
As the legal owner, it is the lessor (and not the lessee), who will be entitled to claim depreciation on the leased asset. At the end of lease period, the lessee is usually given an option to buy or further renew the lease contract for a definite period. Leasing is, thus, a device of long term source of finance. Lessee gets the right to use the asset without buying them. His position is akin to that of a person who uses the asset with borrowed money. The real position of lessor is not renting of asset but lending of finance and hence lease financing is, in effect, a contract of lending money. The lessee is free to choose the asset according to his requirements and the lessor is actually the financier. Advantages of Leasing: (A) Advantages to the Lessee: (i) Additional Source of Finance – Leasing facilitates the use of assets without making any immediate payment. Thus the scarce financial resources of the business may be preserved for other purposes. (ii) Simplicity – Borrowing from banks and financial institutions involve time consumingand complicated procedures whereas a leasing contract is simple to negotiate and free from cumbersome procedures. (iii) Free from Restrictive Covenants – Lease financing is free from restrictive covenants whereas the financial institutions often put a number of restrictions on borrowers, such as, conversion of loan into equity, appoint nominee directors, restrictions on payment of dividend, and so on. (iv) Flexibility in Fixing the Rentals – Lease rentals are fixed in such a way that the lessee is able to pay them from the cash flows generated from his businessoperations. Thus flexibility is not available in case of loans from financial institutions where the loans are repaid in instalments resulting in heavy burden in the earlier years of a project, whereas the project may actually generate substantial cash flows in later years. (v) Safety from the Risk of Obsolescence – In a lease contract, the lessor being the owner of the leased asset bears the risk of obsolescence. Lessee is free to cancel the lease in case of change of technology. (vi) Benefit of Maintenance – Lessee gets the benefit of maintenance and specializedservices provided by the lessor. For example, computer manufacturers who lease out computers provide such services. (vii) No Effect on Debt-Equity Ratio – Lease is considered a ‘hidden form of debt’ because neither the leased asset nor the lease liability is depicted on the balance sheet. Lease financing, therefore, does not affect the debt raising capacity of the enterprise. 192 CU IDOL SELF LEARNING MATERIAL (SLM)
(viii) Tax Benefits – Lease rentals can be adjusted in such a way that the lessee can reduce his tax liability. (B) Advantages to the Lessor: (i) Fully Secured – The lessor’s interests are fully secured because he is the owner of the leased asset and can take possession of the asset in case the lessee defaults. (ii) Tax Benefits – The lessor is entitled to claim the depreciation of leased asset and thus reduces his tax liability. (iii) High Profitability – Leasing business is highly profitable to the lessor because the rate of return is more than what the lessor pays on his borrowings. Limitations of Leasing: (i) Costly Source of Finance – Lease financing is a costly source of finance for the lessee because lease rentals include a profit margin for the lessor as also the cost of risk of obsolescence. (ii) Restrictions on the Use of Asset – Leasing contracts usually impose certain restrictions on the use of the asset or require compulsory insurance, and so on. In addition, the lessee is not free to make alterations to the leased asset. (iii) Consequences of Default – Since the lessee is not the owner of the leased asset, the lessor may take over the possession of the same, in case of default in payment of lease rentals, (iv) Excessive Penalties – Sometimes, lessee has to pay excessive penalties if he terminates the lease before the expiry of lease period, (v) Not Entitled to Tax-Benefits – Lessee is not entitled to certain tax benefits like depreciation and investment allowance because he is not the owner of the asset. SHORT TERM FINANCING Short term financing means the financing of business from short term sources which are for a period of less than one year and the same helps the company in generating cash for working of the business and for operating expenses which is usually for a smaller amount and it involves generating cash by online loans, lines of credit, invoice financing. It is also referred to as working capital financing and is used for inventory, receivables, etc. In most cases, this type of financing is required in the business process because of their uneven cash flow into the business or due to their seasonal business cycle. 193 CU IDOL SELF LEARNING MATERIAL (SLM)
TYPES OF SHORT TERM FINANCING Below are the types of Short Term Financing Trade Credit This is the floating time allowed the business to pay for the goods or services which they have purchased or received. The general floating time allowed to pay is 28 days. This helps the businesses in managing their cash flows more efficiently and help in dealing with their finances. Trade credit is a good way of financing the inventories which means how many numbers of days the vendor will be allowed before its payment is due. The trade-credit is offered by the vendor as an inducement in continuing business and that is why it costs nothing. Working Capital Loans Banks or other financial institutions extend loans for a shorter period after studying the business nature, its working capital cycle, past records, etc. Once the loan is sanctioned and disbursed by the bank or other financial institutions it can be repaid in small installments or can be paid in full at the end of loan tenure depending on the agreed terms of loans between both the parties. It is often advised to finance the permanent working capital needs through these loans Invoice Discounting It refers to arranging the funds against the submission of invoices whose payments are to be received in the near future. The receivables invoices are discounted with the banks, financial institutions or any third party. On submission of bills, they will pay the discounted value of bills and on the due date, they on the business behalf will collect the payment. Factoring It is a similar arrangement of finance like invoice discounting. It is debtor finance in which business sells their accounts receivable to a third party whom we call factor at a rate which is lower than the net realizable value. It can be of any type with recourse or without recourse unlike invoice discounting which can only be with recourse. Business Line of Credit It is the best way of financing working capital needs. The business can approach the bank for approval of a certain amount based on their credit line structure judged through a credit score, 194 CU IDOL SELF LEARNING MATERIAL (SLM)
a model of business, projected inflows. The business can withdraw the amount as and when needed subject to the maximum approved amount. They can again deposit the amount as and when it gets available. Moreover, the best thing is that interest is charged on the utilized amount on daily reducing balance method. In this manner, it becomes a very cost-efficient mode of financing. Example of Short Term Finance Marry took a loan of $10,000 for a period of 6 months at the 5% APR. Since the loan is for the shorter period i.e. the period of less than one year, it will be treated as the short term finance. After the 6 months marry has to repay the loan amount along with the interest due. Advantages of Short Term Loans Less interest: As these are to be paid off in a very short period within about a year, the total amount of interest cost under it will be least as compared to long term loans which take many years to be paid off. The long term loan total interest cost might be more than the principal amount. Disbursed Quickly: As the risk involved in defaulting of the loan payment is lesser than that of the long-term loan as they are having a long maturity date. Because of this, it takes lesser time to get sanctioned the short term loan as their maturity date will be shorter. Thus one can get the loan sanctioned and fund disbursed very quickly. Less Documentation: As it is less risky, the documents required for the same will also be not too much making it an option for all to approach for short term loans. Disadvantages of Short Term Loans The main disadvantage of the short term finance is that one can get a smaller amount of loan only and that too with shorter maturity date so that the borrower won’t get burdened with bigger installments. It is fixed that the period of loan will be less than 1 year and if a high amount of loan is sanctioned, the monthly installment will come very high resulting in an increase in the chance of default in repayment of loan which will affect the credit score adversely. It can leave the borrower with no other option than to come into the trap of the cycle of borrowing in which one continues borrowing to repay the previous unpaid loan. In this cycle, the interest rate keeps on increasing and can terribly affect the business and its liquidity. CAPITAL STRUCTURE Capital Structure means a combination of all long-term sources of finance. It includes Equity Share Capital, Reserves and Surplus, Preference Share capital, Loan, Debentures and other 195 CU IDOL SELF LEARNING MATERIAL (SLM)
such long-term sources of finance. A company has to decide the proportion in which it should have its own finance and outsider’s finance particularly debt finance. Based on the proportion of finance, WACC and Value of a firm are affected. There are four capital structure theories for this, viz. net income, net operating income, traditional and M&M approach. Capital structure is the proportion of all types of capital viz. equity, debt, preference etc. It is synonymously used as financial leverage or financing mix. Capital structure is also referred to as the degree of debts in the financing or capital of a business firm. Financial leverage is the extent to which a business firm employs borrowed money or debts. In financial management, it is a significant term and it is a very important decision in business. In the capital structure of a company, broadly, there are mainly two types of capital i.e. Equity and Debt. Out of the two, debt is a cheaper source of finance because the rate of interest will be less than the cost of equity and the interest payments are a tax-deductible expense. Capital Structure Components Components of Capital Structure The capital structure of the company is nothing but taking decision-related to the acquisition of funds from various sources and composition of debts and equity. Followings are the multiple sources of funds which the company takes into consideration while determining its capital structure: Figure 7.2 Shareholder’s Funds The owner’s funds refer to generating capital by issuing new shares or utilizing the retained earnings to meet up the company’s financial requirement. However, it is an expensive means of acquiring funds. The three sources of capital acquisition through shareholder’s funds are as 196 CU IDOL SELF LEARNING MATERIAL (SLM)
follows: • Equity Capital: The new shares are issued to the equity shareholders who enjoy the ownership of the company are liable to get dividends in proportion to the profits earned by the company. They are also exposed to the risk of loss associated with the company. • Preference Capital: The preference shareholders enjoy a fixed rate of dividends along with preferential rights of receiving the return on capital in case of the company’s liquidation, over the equity shareholders. However, they have limited rights of voting and control over the company. • Retained Earnings: The company sometimes utilize the funds available with it as retained earnings accumulated by keeping aside some part of the profit for business growth and expansion. Borrowed Funds The capital which is acquired in the form of loans from the external sources is known as borrowed funds. These are external liabilities of the firm, which leads to the payment of interests at a fixed rate. However, there is a tax deduction on such borrowings; it creates a burden on the company. Following are the various types of borrowed funds: • Debentures: It is a debt instrument which the companies and the government issue to the public. Though the rate of interest is quite high on debentures, they are not by any collateral or security. • Term Loans: The fund acquired by the company from the bank at a floating or fixed rate of interest is known as a term loan. This is an appropriate source of fund for the companies which have a good and strong financial position. • Public Deposits: The management invite public through advertisements to create deposits in the company. It facilitates meeting up the medium- or long-term financial needs of the company, such as working capital requirements and enjoy a fixed rate of interest on it. CAPITAL STRUCTURE THEORIES Capital structure or financial leverage deals with a very important financial management question. The question is – ‘what should be the ratio of debt and equity?’ Before scratching our minds to find the answer to this question, we should know the objective of doing all this. In the financial management context, the objective of any financial decision is to maximize the shareholder’s wealth or increase the value of the firm. The other question which hits the mind in the first place is whether a change in the financing mix would have any impact on the value of the firm or not. The question is a valid question as there are some theories which believe that financial mix has an impact on the value and others believe it has no connection. One thing is sure that wherever and whatever way one sources the finance from, it cannot 197 CU IDOL SELF LEARNING MATERIAL (SLM)
change the operating income levels. Financial leverage can, at the max, have an impact on the net income or the EPS (Earning per Share). The reason we are discussing later. Changing the financing mix means changing the level of debts. This change in levels of debt can impact the interest payable by that firm. The decrease in interest would increase the net income and thereby the EPS and it is a general belief that the increase in EPS leads to an increase in the value of the firm. Apparently, under this view, financial leverage is a useful tool to increase value but, at the same time, nothing comes without a cost. Financial leverage increases the risk of bankruptcy. It is because higher the level of debt, higher would be the fixed obligation to honor the interest payments to the debt’s providers. Discussion of financial leverage has an obvious objective of finding an optimum capital structure leading to maximization of the value of the firm. If the cost of capital is high important theories or approaches to financial leverage or capital structure or financing mix are as follows: Discussion of financial leverage has an obvious objective of finding an optimum capital structure leading to maximization of the value of the firm. If the cost of capital is high important theories or approaches to financial leverage or capital structure or financing mix are as follows: Net Income Approach This approach was suggested by Durand and he was in favor of financial leverage decision. According to him, a change in financial leverage would lead to a change in the cost of capital. In short, if the ratio of debt in the capital structure increases, the weighted average cost of capital decreases and hence the value of the firm increases. According to NI approach a firm may increase the total value of the firm by lowering its cost of capital. When cost of capital is lowest and the value of the firm is greatest, we call it the optimum capital structure for the firm and, at this point, the market price per share is maximized. The same is possible continuously by lowering its cost of capital by the use of debt capital. In other words, using more debt capital with a corresponding reduction in cost of capital, the value of the firm will increase. The same is possible only when: 198 CU IDOL SELF LEARNING MATERIAL (SLM)
(i) Cost of Debt (Kd) is less than Cost of Equity (Ke); (ii) There are no taxes; and (iii) The use of debt does not change the risk perception of the investors since the degreeof leverage is increased to that extent. Since the amount of debt in the capital structure increases, weighted average cost of capital decreases which leads to increase the total value of the firm. So, the increased amount of debt with constant amount of cost of equity and cost of debt will highlight the earnings of the shareholders. Illustration 1: X Ltd. presents the following particulars: EBIT (i.e., Net Operating income) is Rs. 30,000; The equity capitalization ratio (i.e., cost of equity) is 15% (Ke); Cost of debt is 10% (Kd); Total Capital amounted to Rs. 2,00,000. Calculate the cost of capital and the value of the firm for each of the following alternative leverage after applying the NI approach. Leverage (Debt to total Capital) 0%, 20%, 50%, 70% and 100%. 199 CU IDOL SELF LEARNING MATERIAL (SLM)
Search
Read the Text Version
- 1
- 2
- 3
- 4
- 5
- 6
- 7
- 8
- 9
- 10
- 11
- 12
- 13
- 14
- 15
- 16
- 17
- 18
- 19
- 20
- 21
- 22
- 23
- 24
- 25
- 26
- 27
- 28
- 29
- 30
- 31
- 32
- 33
- 34
- 35
- 36
- 37
- 38
- 39
- 40
- 41
- 42
- 43
- 44
- 45
- 46
- 47
- 48
- 49
- 50
- 51
- 52
- 53
- 54
- 55
- 56
- 57
- 58
- 59
- 60
- 61
- 62
- 63
- 64
- 65
- 66
- 67
- 68
- 69
- 70
- 71
- 72
- 73
- 74
- 75
- 76
- 77
- 78
- 79
- 80
- 81
- 82
- 83
- 84
- 85
- 86
- 87
- 88
- 89
- 90
- 91
- 92
- 93
- 94
- 95
- 96
- 97
- 98
- 99
- 100
- 101
- 102
- 103
- 104
- 105
- 106
- 107
- 108
- 109
- 110
- 111
- 112
- 113
- 114
- 115
- 116
- 117
- 118
- 119
- 120
- 121
- 122
- 123
- 124
- 125
- 126
- 127
- 128
- 129
- 130
- 131
- 132
- 133
- 134
- 135
- 136
- 137
- 138
- 139
- 140
- 141
- 142
- 143
- 144
- 145
- 146
- 147
- 148
- 149
- 150
- 151
- 152
- 153
- 154
- 155
- 156
- 157
- 158
- 159
- 160
- 161
- 162
- 163
- 164
- 165
- 166
- 167
- 168
- 169
- 170
- 171
- 172
- 173
- 174
- 175
- 176
- 177
- 178
- 179
- 180
- 181
- 182
- 183
- 184
- 185
- 186
- 187
- 188
- 189
- 190
- 191
- 192
- 193
- 194
- 195
- 196
- 197
- 198
- 199
- 200
- 201
- 202
- 203
- 204
- 205
- 206
- 207
- 208
- 209
- 210
- 211
- 212
- 213
- 214
- 215
- 216
- 217
- 218
- 219
- 220
- 221
- 222
- 223
- 224
- 225
- 226
- 227
- 228
- 229
- 230
- 231
- 232
- 233
- 234
- 235
- 236
- 237
- 238
- 239
- 240
- 241
- 242
- 243
- 244
- 245
- 246
- 247
- 248
- 249
- 250
- 251
- 252
- 253
- 254
- 255
- 256
- 257
- 258
- 259
- 260
- 261
- 262
- 263
- 264
- 265
- 266
- 267
- 268
- 269
- 270
- 271
- 272
- 273
- 274
- 275
- 276
- 277
- 278
- 279
- 280
- 281
- 282
- 283
- 284
- 285
- 286
- 287
- 288
- 289
- 290
- 291
- 292
- 293
- 294
- 295
- 296
- 297
- 298
- 299
