Professional Documents
Culture Documents
Project
Masters of Business Administration (IB)
Accounting and Finance
Semester - I
Dr. N N Sen Gupta
Copyright Amity University
1
ISSUE OF SHARES
&
DEBENTURE
SHARES
Types of shares
1. Preference shares
Cum. Pref. Share, Non Cum. Pref. Share,
redeemable Pref. Share, Non participating pref.
Share, Participating pref. Share
ISSUE OF SHARE
Issue of prospectus
Application money at least 5% of face value of shares
Minimum subscription of 90% mandatory as per sebi ; refund to
the applicants within 42 days of the closure of issue; delayed
refund interest @ 15% p.a.
Allotment money and subsequent calls- min. 1 month period
Sebi rules- size of issue up to 500 crores- shares are fully paid
within 12 months of the date of allotment
Min. Application money paid by the applicant 25% of the issue
price
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Application received:
Bank A/c Dr.
To Equity Share Application A/c
Allotment :
Equity Share Application A/c Dr.
To Equity Share Capital A/c
Contd
Amount due on allotment:
Equity Share Allotment A/c Dr.
To Equity Share Capital A/c
Allotment money received:
Bank A/c Dr.
To Equity ShareAllotment A/c
Contd
First call due:
Equity Share First Call A/c Dr.
To Equity Share Capital A/c
Receipt of call money:
Bank A/c Dr.
To Equity Share Capital A/c
Issue of shares :
Full subscription
Under subscription
Over subscription
- Rejection and full allotment
- Proportional (pro-rata allotment
Over subscription
Excess application money
Adjusted against allotment money.
Any surplus still remaining is either refunded or treated as
calls in advance which is a separate item between share
capital & reserves; Interest @ 6% p.a. Paid by the Co.
Calls in advance A/c
Dr.
Bank (balance if needed) Dr.
To Call (1,2,final) A/c
dr.
DEBENTURES
DEBENTURE
It is a certificate which acknowledges that
the company owes to the persons a sum
of money ,promises that a stated rate of
interest will be paid periodically to the
person named in the certificate .
KINDS OF DEBENTURES
Redeemable / Iredeemable
Secured/ Unsecured
KEY POINTS
Debt- servicing on issue of debentures
Payment of interest
Repayment to debenture holders at
redemption including premium if any
REDEMPTION OF DEBENTURES
Expiry of fixed period
Drawing of lots
Purchase of own debentures in the
open market
Size Structure
Organizational Growth
External Growth
A merger occurs when two companies
voluntarily come together, resulting in a
new legal identity
A takeover is where one company makes
an offer of acquisition to the shareholders
of another (takeovers can be hostile)
Types of Mergers
Horizontal merger is a combination
between firms at the same stage in the
production process (example: DaimlerBenz and Chrysler)
Vertical mergers involve firms at different
stages of the production process
Horizontal Mergers
Many large companies achieve their size
this way
Merged firms may benefit from economies
of scale and increased market share
In some cases these mergers are used to
react to competitors
Vertical Mergers
Vertical mergers can run backward toward the
beginning of the production process or forward
to the end
Backward integration allows control of raw
materials, and may restrict competitor access
Forward integration allows control of the outlet
for the finished product
Economies of scale may be achieved
Internal Sources
Reinvestment of profits
There is an opportunity cost for use of
those funds, therefore, financing through
reinvestment of profits should be judged
on rate of return, just like any other source
of financing
External Sources
Banks
Capital Markets
Money Markets
Government
Trade Credit
Bank Financing
Short- and medium-term financing through
loans and overdrafts
Loans include lines of credit
Capital Markets
Primary markets-the buying and selling of
new stocks and shares
Secondary markets-buying and selling of
existing stocks and shares
Types of Shares
Preference shares
Ordinary shares
Debentures
Preference Shares
Represents ownership in the company
Carry a fixed dividend
Holders have a preference over other
shareholders in the payment of dividends
and on liquidation
No voting rights
Debentures
Debentures are bonds given in exchange for a loan to
the company
Company agrees to repay the borrowed amount at some
date in the future (maturity date), and to make annual
payments of interest until maturity (coupon payments)
Debenture holders will be paid interest before dividends
are paid to shareholders
Debenture holders are NOT owners, but they are
Creditors of the company
This is a form of debt financing
Limits to Growth
Small Firms
What is a small firm?
Size of the firm may be based on number of
employees or amount of revenues
To promote uniformity in Europe, the EU
proposed members use less than 250
employees as the definition of small to medium
sized enterprises (SME)
Under this definition, a large percentage of
manufacturing firms and service firms in the UK
are small firms
Networking
Subcontracting
Networking
Virtual organization
Joint ventures
Consortia
Subcontracting
Current trend is an increase in
subcontracting, where firms delegate a
part of the production process to another
firm, or delegate business services
Examples, subcontracting out accounting
or HR functions to specialist firms
Reduces costs for large firms and creates
a larger market for small firms
Networking
Networking-relationships that exist between
organizations and people within the
organizations
Two basic types:
1) Where firms are members of a network, but
the network has a different name from individual
firms
2) Where firms are part of a network of
independent firms, but the network does not
have a separate identity
Virtual Organization
Virtual organization-a network-based
structure built on partnerships where a
small core operating company outsources
most of its processes
Advantages are increased flexibility,
efficiency, and responsiveness to
changing market conditions
Also minimizes costs
Consortia
A consortium will include contractors,
suppliers, bankers and other groups who
have expertise and resources to carry out
a large product
Example: Eurofighter
Multinationals
Very large companies with central control
but operations in many countries
Growth of multinationals is directly related
to more relaxed exchange controls and
improved communication
Advantages of Multinationals
MNEs can locate their activities where it best
suits them
MNEs can cross-subsidize operations, meaning
profit from one market can support operations in
another
MNEs can avoid tax in some countries by
negotiating tax breaks or using transfer pricing
MNEs can take advantages of subsidies and tax
breaks offered by governments
Labor market
Balance of payments (inflows of
investment, but outflows of dividends and
profits)
Flow of goods
Exploitation of developing countries?
Globalization
Globalization the process of integration
of markets and production world-wide
Two main reasons:
1) Decline in barriers to trade and
investment
2) Rapid advancement in communication
and IT technology
CORPORATE RESTRUCTURING
CORPORATE RESTRUCTURINGcontd.
Mergers and
Acquisitions
Expansion
Predominant reasons for expansion:
Existence
Advantages of Large Scale
Use for Higher Profits
Monopolistic Ambitions
Better Management
Natural Urge
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External Expansion/Business
Combination
It refers to business combination where two
or more concerns combine and expand their
business activities.
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3. Holding Companies:
Its a form of business organization which
is created for the purpose of combining
industrial units by owning a controlling
amount of their share capital.
Reasons of Mergers:
Economies of Scale
Operating Economies
Synergy
Growth
Diversification
Utilization of Tax Shields
Increase in Value
Elimination of Competition
Better Financial Planning
Economic Necessity
2.Vertical Merger
A merger of firms engaged at different stages
of production or distribution of the same
product or service.
Reason:
To take up two diff. stages of work to ensure
speedy production or quick service.
3.Conglomerate merger
When two concerns dealing in totally
different activities join hands it will be a
case of conglomerate merger.
Reason:
To diversify the activities.
Valuation of Firms
Discounted Cash Flow Approach the DCF approach
relates the values of the firm to the present values of its
expected future cash flows.
First Step To estimate the Free Cash Flow for the
explicit forecast period.
Free Cash Flow Free Cash Flow from Operation +
non-operating cash flows
Free Cash Flow from operations = Gross Cash Flow Gross Investments
Taxes (NOPLAT)
Third Step: Computing the continuing value of the firm. Continuing value
represents the value of the Free Cash Flows beyond the explicit forecast
period.
CVn = FCFn+1 / (K g)
Where,
CVn = Continuing value of the firm at the end of
the year n.
FCFn+1 = Expected free cash flow for the year
n+1
K = weighted average cost of capital
G = expected perpetual growth rate of the free
cash flow.
Deal Structuring
Deal Structuring
contd.
Forms of financing:
1. Cash Offer
Advantage:
It will not cause any dilution in the ownership
as well as EPS of the company.
5. Leveraged Buyout
Definition
A leveraged buyout is a strategy involving
the acquisition of another company using
a significant amount of borrowed money
(bonds or loans) to meet the cost of
acquisition.
Brief history
Leveraged buyouts have had a notorious
history, especially in the 1980s when several
prominent buyouts led to the eventual
bankruptcy of the acquired companies. This was
mainly due to the fact that the leverage ratio
was nearly 100% and the interest payments
were so large that the company's operating cash
flows were unable to meet the obligation.
LBO Mechanics
The first stage of operation consists of raising
the cash required for the buyout and devising a
management incentive system. About 10 per
cent of the cash is put up by investor group and
50-60 per cent is raised by borrowing against
the company's assets in secured bank
acquisition loans. The LBO represents debt
bonding activity.
Apollo Management
Bain Capital
The Blackstone Group
The Carlyle Group
Goldman Sachs Capital Partners (PIA)
Hellman & Friedman
Kohlberg Kravis Roberts (KKR)
Madison Dearborn
Providence Equity Partners
Silver Lake Partners
Thomas H. Lee Partners
TPG Capital, L.P.
Warburg Pincus
Caxton-Iseman Capital, LLC
Failures
Some LBOs in the 1980s and 1990s resulted in corporate
bankruptcy, such as Robert Campeau's 1988 buyout of
Federated Department Stores and the 1986 buyout of the
Revco drug stores. The failure of the Federated buyout
was a result of excessive debt financing, comprising
about 97% of the total consideration, which led to large
interest payments that exceeded the company's
operating cash flow. In response to the threat of LBOs,
certain companies adopted a number of techniques, such
as the poison pill to protect them against hostile
takeovers by effectively self-destructing the company if it
were to be taken over.
contd.
Illustration
(Rs. in crore)
Firm T
Firm S
Combined
24
37
61
Current assets
13
21
32
50
82
Shareholders Fund
10
18
28
Borrowings
16
20
36
Current liabilities
12
18
32
50
82
Assets
Total
Liabilities
Total
Firm
Purchase Method
Under the purchase method, the assets &
liabilities of the acquiring firm after the
acquisition of the target firm may be stated
at their existing carrying amounts or at the
amounts adjusted for the purchase price
paid to the target company. The assets &
liabilities after merger are generally
revalued under the purchase method.
Firm S acquired Firm T by assuming all its assets and liabilities. The fair
value of Firm Ts fixed assets and current assets is Rs. 26 crore and Rs.
7crore. Current liabilities are valued at book value while the fair value of
debt is estimated to be Rs. 15 crore. Firm S raises cash of Rs. 15 crore to
pay to Ts shareholders by issuing shares worth Rs. 15 crore to its own
shareholders. The balance sheets of the firms before acquisition and the
effect of acquisition are shown in Table. The balance sheet of firm S (the
acquirer) after acquisition is constructed after adjusting assets, liabilities and
equity.
Illustration
(Rs. in crore)
Firm T
Firm S
Firm S after
Merger
24
37
63
Current assets
13
20
Goodwill
32
50
86
Shareholders Fund
10
18
33
Borrowings
16
20
35
Current liabilities
12
18
32
50
86
Assets
Total
Liabilities
Total
Due diligence
Due diligence, by definition, is the verification of all
information given to a company by any prospective
business associate.
Example
A large mortgage broker, Empire Mortgage, was planning to purchase a
smaller brokerage.
Before signing the final papers, the CEO of Empire Mortgage decided to
conduct a due diligence investigation, which revealed a trail of criminal
behavior by the smaller brokerages principal officer. Included were three
indictments for
trafficking in cocaine
possession with intent to sell
and delivering controlled substances
It also revealed a conviction for domestic violence.
Due to these unsuspected findings, Empire dropped its acquisition plan,
possibly saving itself from exposure to fraud, embezzlement, or worse.
Due diligence reduces risk by ensuring the credibility of all companies and
individuals with whom a company conducts business
Companies that are wise conduct due diligence investigations routinely to
verify information and uncover discrepancies, overstatements, and unrevealed
facts. This extra check ensures that everyone involved in a proposed
relationship is accurately presented.
Ineffective Management
Financial Bungling
Stiff competition
Reluctance of financial
institutions to provide funds
for revival/rehabilitation
High input cost
Erosion of net worth due to
continuous losses
FINANCIAL RESTRUCTURING
Investment is made in the form of equity
participation, loan, non-plan assistance or
through the revival packages which involve
sustainable outgo from Government or write-off
of past losses and infusion of fresh capital, etc.
Measures such as waiver of loan/interest/ penal
interest, conversion of loan into equity,
conversion of interest including penal interest
into loan, moratorium on payment of loan/
interest, Government guarantee, etc. are also
taken to improve financial strength of the
company.
BUSINESS RESTRUCTURING
Change of management
Organizational restructuring
Hiving off viable units for formation of
separate company
Closure of unviable units
Formation of joint ventures by induction of
partners capable of providing technical,
financial and marketing inputs
Change in product mix
Improving marketing strategy.
MANPOWER RATIONALISATION
Through approved Voluntary Retirement
Scheme(VRS).
Appointment of experts/core specialists
Intra and Inter organisation transfers
Accountability
Competent, skilled& trained management
Profit sharing (ESOPs)
Charter amendments
supermajority: 67% or more of votes
necessary to approve control change
fair fair- -price: price: supermajority clause
can be avoided if supermajority clause can be
avoided if price is high enough (P/E or P/B)
staggered board: only 1/K of board is elected
each year
poison pills: something to kill sharks that are
eager to eat
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GREENMAIL
Greenmail
Greenmail: Situation in which a large block of
stock is held by an unfriendly company. This
forces the target company to repurchase the
stock at a substantial premium to prevent a
takeover. It is also known as a "Bon Voyage
Bonus or a "Goodbye
Kiss".
Greenmail
Definition: Greenmail or greenmailing is a
corporate
acquisition
strategy
for
generating large amounts of money from
the attempted hostile takeovers of large,
often undervalued or inefficient companies.
Anti-greenmail developments
Internal Revenue Code Section 5881 of
1986 imposes 50% excise tax on recipient of
greenmail payments
Greenmail
Example: Raider takes large stake in
company, express interest in takeover
Management resists, offers to buy him out
at large premium over market price.
Raider gets huge profits without even
bidding for firm. Managers keep jobs.
Shareholders get drop in market price of
their stock.
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Greenmail Example
Bass Bros. acquire 9.9% of Texaco stock,
expressed interest in the other 90.1%.
Texaco paid $1.3 billion ($55 per share), $137
million over market price.
Outside shareholders got $35 per share.
Example
Disneys buyback of 11.1 percent of its stock
from Saul Steinbergs Reliance Group in 1984,
which gave Steinberg a quick $60 million profit.
The day the buyback was announced, the price
of Disneys stock dropped approximately 10
percent.
A group of stockholders sued, and Steinberg
and the Disney directors were forced to pay $45
million to Disney stockholders.
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ACCOUNTING FOR
SHARE CAPITAL
(b)
(c)
(d)
(b)
(c)
(d)
2.
Under the Capital Clause of the Memorandum of
Association of
the Company, it is must to
state
(a)
(b)
(c)
(d)
None of these
2.
Under the Capital Clause of the Memorandum of
Association of
the Company, it is must to
state
(a)
(b)
(c)
(d)
None of these
3.
(a)
(b)
(c)
(d)
3.
(a)
(b)
(c)
(d)
4.
(a)
(b)
(c)
(d)
None of these
4.
(a)
(b)
(c)
(d)
None of these
5.
Participating Preference Share
carries
is one which
(a)
(b)
(c)
(d)
5.
Participating Preference Share
carries
is one which
(a)
(b)
(c)
(d)
6.
Unless otherwise stated, the
shares are deemed
to be
preference
(a)
Non-cumulative,Non-participating
and Non-convertible.
(b)
Cumulative, Non-participating
and Convertible.
(c)
(d)
6.
Unless otherwise stated, the
shares are deemed
to be
preference
(a)
Non-cumulative,Non-participating
and Non-convertible.
(b)
Cumulative, Non-participating
and Convertible.
(c)
(d)
Prospectus of a company is
(a)
(b)
(c)
(d)
All of above
Prospectus of a company is
(a)
(b)
(c)
(d)
All of above
8.
An application of shares is
(a)
An acceptance of an offer to
take shares made by the
company in its prospectus
(b)
(c)
(d)
None of these
8.
An application of shares is
(a)
An acceptance of an offer to
take shares made by the
company in its prospectus
(b)
(c)
(d)
None of these
9.
at premium
(a)
(b)
(c)
(d)
None of these
9.
(b)
(c)
(d)
None of these
10.
(b)
(c)
(d)
10.
(b)
(c)
(d)
11.
If some shares are issued to a vendor who
supplied a fixed asset, these shares are
(a)
(b)
required to be disclosed
separately under sub-head
issued capital.
(c)
required to be disclosed
separately under sub-head
authorised capital.
(d)
None of these.
11.
If some shares are issued to a vendor who
supplied a fixed asset, these shares are
(a)
(b)
required to be disclosed
separately under sub-head
issued capital.
(c)
required to be disclosed
separately under sub-head
authorised capital.
(d)
None of these.
12.
Maximum amount that can be collected as
premium as a
percentage of face value = ?
(a) 5%
(b) 25%
(c) 100%
(d) Unlimited
12.
Maximum amount that can be collected as
premium as a
percentage of face value = ?
(a) 5%
(b) 25%
(c) 100%
(d) Unlimited
Issue of
Debentures
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1.
(a)
1.
(a)
2.
2.
3.
Convertible Debentures are
which are
those debentures
3.
Convertible Debentures are
which are
those debentures
4.
false?
4.
false?
5.
In case of an issue of a debenture
of Rs
100 at Rs 110, Rs 10 is to be
credited to:
(a)
(b)
(c)
(d)
5.
In case of an issue of a debenture
at Rs 110, Rs 10 is to be credited to:
(a)
(b)
(c)
(d)
of Rs 100
6. Debenture Redemption
Premium
Account is a
(a)
(b)
(c)
(d)
Personal Account
Real Account
Nominal Account
None of these
6.
Personal Account
Real Account
Nominal Account
None of these
7.
In the Balance Sheet of a
Company
Debenture Redemption Premium Account appears
under
the head:
(a)
(b)
(c)
(d)
(e)
Share Capital
Reserves & Surplus
Secured Loans
Miscellaneous Expenditure
Unsecured Loans
7.
In the Balance Sheet of a
Company
Debenture Redemption Premium Account appears
under
the head:
(a)
(b)
(c)
(d)
(e)
Share Capital
Reserves & Surplus
Secured Loans
Miscellaneous Expenditure
Unsecured Loans
8.
Interest on Debentures is
calculated on
(a) Its face value
(b)
Its issue price
(c) Its book value
(d)
Its cost price
(e) Its market value
8. Interest on Debentures is
calculated on
(a)
(b)
(c)
(d)
(e)
9.
In Balance Sheet of a Company,
Interest accrued
but not due on
debentures appears under the
head
9.
In Balance Sheet of a Company,
Interest accrued
but not due on
debentures appears under the
head
Thank You
Please forward your query
To: Nnsengupta@gmail.com
CC: manoj.amity@panafnet.com
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