Et ZC414 13

Project Appraisal
Swagat Kishore Mishra

Department of Economics and Finance
WILP: Project Appraisal
Lecture 13

Email: [email protected]
Tel. 0832-2580207 (O) 08879506995 (M)

1 Course No. ETZC414 Project Appraisal October 13, 2014
Financing of Projects
i. Various sources of financing and
ii. Determination of the optimal financing mix
Capital structure
Shareholders funds: equity capital, preference
capital
Loan funds: debenture capital, deferred credit,
working capital advance

Equity vs Debt
Equity shareholders have a residual claim on the income and
wealth of the firm
Creditors have a fixed claim in form of interest and principal
payment
Dividend paid to equity shareholders is not a tax deductible
payment
Interest paid to creditors is a tax deductible payment
Equity has indefinite life
Debt has fixed maturity

Debt-equity ratio:
planning the capital structure

Earnings per share
Risk
Control
Flexibility
Nature of assets
Earnings per share
The term earnings per share (EPS) represents the portion of a
company's earnings, net of taxes and preferred stock
dividends, that is allocated to each share of common stock.

The figure can be calculated simply by dividing net
income earned in a given reporting period (usually quarterly
or annually) by the total number of shares outstanding during
the same term.
EPS is a carefully scrutinized metric that is often used as a barometer
to gauge a company's profitability per unit of shareholder ownership.

As such, earnings per share is a key driver of share prices. It is also
used as the denominator in the frequently cited P/E ratio.
Let's assume that during the fourth quarter,
Company XYZ reported net income of $4
million. During the same time frame, the
company had a total of 10 million shares
outstanding. In this particular case, the
company's quarterly earnings per share (or EPS)
would be $0.40, calculated as follows:

$4 million / 10 million shares = $0.40
Risk
Business risk: demand variability, price
variability, input prices variability and
proportion of fixed costs

Financial risk: financial leverage or financial
commitment
Control
PROS CONS
Rights issue of
equity capital
No dilution of
control
Severe limits on
financing
Debt capital No financial risk,
limited dilution of
control, lower cost
Higher cost,
financial cost
Public issue of
equity capital
No financial risk Dilution of control,
higher cost, more
regulation
Flexibility
Ability to raise capital
Firm does not fully exhaust its debt capacity
Nature of assets

Tangible assets with liquidity in resale
Primarily intangible assets
Fixed - used to purchase the permanent or fixed assets
of the business (e.g., buildings, land, equipment, etc.)

Working - used to support the small companys normal
short-term operations (e.g., buy inventory, pay bills,
wages, salaries, etc.)

Growth - used to help the small business expand or
change its primary direction.
Capital is any form of wealth
employed to produce more
wealth for a firm.
Equity Capital
Represents the personal investment of the owner(s) in the
business.

Is called risk capital because investors assume the risk of
losing their money if the business fails.

Does not have to be repaid with interest like a loan does.

Means that an entrepreneur must give up some ownership in
the company to outside investors.
Deciding between equity
financing and taking on a loan
for your business is a
challenge for all small
business owners when they
need capital to expand a
business. Should you go to a
bank and apply for a business
loan? Or should you look for
an investor?
Advantages to equity financing:
It's less risky than a loan because you don't have to pay it back, and it's a good
option if you can't afford to take on debt.
You tap into the investor's network, which may add more credibility to your
business.
Investors take a long-term view, and most don't expect a return on their investment
immediately.
You won't have to channel profits into loan repayment.
You'll have more cash on hand for expanding the business.
There's no requirement to pay back the investment if the business fails.

Disadvantages to equity financing:
It may require returns that could be more than the rate you would pay for a bank
loan.
The investor will require some ownership of your company and a percentage of the
profits. You may not want to give up this kind of control.
You will have to consult with investors before making big (or even
routine) decisions -- and you may disagree with your investors.
In the case of irreconcilable disagreements with investors, you may need to cash in
your portion of the business and allow the investors to run the company without
you.
It takes time and effort to find the right investor for your company.
Advantages to debt financing:

The bank or lending institution (such as the Small Business Administration) has no say in
the way you run your company and does not have any ownership in your business.
The business relationship ends once the money is paid back.
The interest on the loan is tax deductible.
Loans can be short term or long term.
Principal and interest are known figures you can plan in a budget (provided that you
don't take a variable rate loan).

Disadvantages to debt financing:

Money must paid back within a fixed amount of time.
If you rely too much on debt and have cash flow problems, you will have trouble paying
the loan back.
If you carry too much debt you will be seen as "high risk" by potential investors
which will limit your ability to raise capital by equity financing in the future.
Debt financing can leave the business vulnerable during hard times when sales take a
dip.
Debt can make it difficult for a business to grow because of the high cost of repaying the
loan.
Assets of the business can be held as collateral to the lender. And the owner of the
company is often required to personally guarantee repayment of the loan.
THANK
YOU
October 13, 2014
Course No. ETZC414 Project Appraisal
25.07.13
20

Et ZC414 13

Uploaded by

Copyright:

Available Formats

Et ZC414 13

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Et ZC414 13

Uploaded by

Copyright:

Available Formats

Project Appraisal

Swagat Kishore Mishra

You might also like