Finance For Engineer

FINANCE FOR ENGINEER
MODULE- 3
Funding of Capital projects
Bonds/ Debentures, Preference shares and Equity shares. Cost of Capital –
Meaning, Significance, Weighted Average Cost of Capital (WACC)
Capital structure
• Capital structure refers the combination of equity and debt that a company employs to support its
operations and investments.
Primary components of capital structure:
1.Equity: Equity represents ownership in the company.
It is the value that remains for shareholders after all debts and obligations are settled.
Equity can include:
• Common Shares: These represent ownership in the company and may provide voting rights.
• Preferred Shares: These represent ownership but often come with fixed dividend payments and may have
limited voting rights.
• Retained Earnings: This is the portion of the company's profits that is retained and reinvested in the business
rather than distributed to shareholders as dividends.
2.Debt: Debt represents borrowed funds that the company must
repay over time, typically with interest. Debt can include:
• Debentures /Bonds: Long-term debt securities issued to investors in
exchange for a promise to pay periodic interest and return the
principal at maturity.
• Bank Loans: Short-term or long-term loans obtained from banks or
financial institutions.
Debentures
• Debentures are a type of debt instrument used by companies to raise capital.
• They represent a promise by the issuer to repay the principal to the debenture
holder at a specified maturity date, along with periodic interest payments.
key characteristics
• Debt Obligation
• Interest Payments
• Maturity Date
• Unsecured Debt
• Credit Rating
• Type(Secured vs. Unsecured, Callable vs. Non-Callable, Zero-Coupon)
• Transferability:
• Tax Considerations
Bonds
• Bonds are debt securities that are issued by governments,

municipalities, corporations, or other entities as a way to raise
capital.
key features :
• Face Value:
• Coupon Rate:
• Maturity Date:
• Issuers:
• Tax Considerations,
• Type(Secured vs. Unsecured, Callable vs. Non-Callable, Zero-Coupon
Bonds)
Preference shares
• Preference shares are a type of equity security issued by companies.
• They blend features of both common equity shares and debt (hybrid
form)
• Preference shares represent an ownership interest in a company, but
they come with certain preferential rights, such as a fixed dividend
payment, priority in dividend distribution, and specific liquidation
preferences.
Types:
• Cumulative Preference Shares,
• Non-Cumulative Preference Shares:
• Participating Preference Shares,
• Non-Participating Preference Shares,
• Convertible Preference Shares
• Redeemable Preference Shares

Key features of preference shares
• Dividend Priority,
• Limited Voting Rights,
• Liquidation Preference,
• Variety of Types
Equity shares
• Equity shares represent ownership in a corporation and
entitle shareholders to a portion of the company's profits,
as well as the right to participate in corporate governance
decisions through voting rights.
• Dividend payments based on the company's profitability
and the decisions of the board of directors.
Types of Equity Shares:
• Common Shares
• Founder's Shares
• Management Shares
Key Features of Equity Shares:
• Ownership Stake,
• Dividend Rights,
• Voting Rights:
• Risk and Return,
• Residual Claims:
• Marketability,
• Long-Term Investment
COST OF CAPITAL
• The cost of capital of a firm is the minimum rate of return

expected by its investors.
• It is the weighted average cost of various sources of finance used
by a firm.
• The capital used by a firm may be in the form of debt, preference
capital, retained earnings and equity shares. The concept of cost
of capital is very important in the financial management. A
decision to invest in a particular project depends upon the cost of
capital of the firm or the cut off rate which is the minimum rate of
return expected by the investors.
Significance of cost of capital
• Determinant of capital mix in capital budgeting decisions
• Basis for evaluating financial performance
• Basis for taking financial decisions
MEASUREMENT OF COST OF CAPITAL
METHOD 1
51
Calculate WACC from the following
Capital component Cost of capital (%) Capital structure
Retained earnings 10 25,000
Equity share capital 11 10,000
Preference share capital 9 15,000
Long term dept 6 50,000

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Equity can include:

• Type(Secured vs. Unsecured, Callable vs. Non-Callable, Zero-Coupon)

• Bonds are debt securities that are issued by governments,

• Non-Cumulative Preference Shares:

• Participating Preference Shares,

• Non-Participating Preference Shares,

• Convertible Preference Shares

• Redeemable Preference Shares

• The cost of capital of a firm is the minimum rate of return

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