Corporate Financial Management - For Beginners

Identify internal and external financing sources, including retained earnings, equity and preference shares, debentures, bonds, and bank loans, and distinguish long-term, medium-term, and short-term funding options.

Equity share capital raises permanent funds by issuing public shares at face value, creating high-risk ownership with higher returns; dividends are not tax-deductible expenses and tax rules vary.

Understand preference shares, a hybrid equity that receives fixed dividends and has priority over equity shareholders at winding up, featuring cumulative, non-cumulative, redeemable, non-redeemable, and convertible options.

Explore how debentures function as public debt instruments with fixed interest, face value, and redemption, covering secured, unsecured, redeemable, non-redeemable, convertible, and zero-interest variants.

Bonds are debt instruments issued by a company. They feature callable and put options, plain vanilla and convertible forms, including Yankee, euro, samurai bonds.

Bridge finance provides short-term funding from banks to bridge the gap until a long-term loan is approved, enabling a company to start its project on time.

Funds new high-risk ventures promoted by qualified entrepreneurs and outlines four financing types: equity financing, conditional loan, income note, and participating debentures.

Explore lease financing, where owners lease assets to users under operating, finance, and leveraged leases, including sale and lease back, with open and closed ended terms.

Asset securitization converts bank home loans into marketable securities via special purpose vehicles, using loan assets to raise funds and pay investors, while banks finance additional lending.

Trade credit is a short-term financing arrangement where suppliers allow 15–90 days to pay, creating payables for buyers and receivables for sellers, often via bills of exchange or promissory notes.

Accrued expenses are short-term finance liabilities for services received, accrued daily and paid at period end, such as salaries, wages, rent, taxes, and dividends.

Learn how deferred income and advance from customers function as short-term liabilities. Recognize revenue as services are provided or goods are delivered, illustrated by lease and manufacturing examples.

Commercial papers offer unsecured short-term funding for highly rated corporates in five-lac denominations, with interest tied to one-year government bonds and ratings from agencies such as Crisil, CARE, ICRA.

Explore the current ratio, a key liquidity measure, by calculating current assets over current liabilities and identifying items like inventories, debtors, cash, and short-term loans, often around two-to-one.

Learn how to compute the acid test (quick) ratio by dividing quick assets by current liabilities, and understand why inventories and prepaid expenses are excluded from quick assets.

Learn cash ratio, the absolute liquidity measure that compares cash, bank balances, marketable securities, and current investments to current liabilities to assess a firm's immediate solvency.

Learn to calculate basic difference interval ratio and interval measure ratio, liquidity measures of short-term solvency, using cash and bank balance, net receivables, and marketable securities against daily operating expenses.

Compute and compare short-term solvency metrics using current, quick, and cash ratios, interval coverage, and working capital analysis, illustrated with abc limited and pqr limited, highlighting inventory impact.

Explore leverage ratios as long-term solvency measures of a firm's capital structure, including equity, debt, debt-to-equity, debt-to-total assets, and coverage ratios like debt service and interest coverage.

Calculate the equity ratio by dividing owners fund by total sources of funds or by net assets. Higher owners fund reduces risk for lenders and investors.

Learn how to calculate the debt ratio using two formulas: total debts divided by net assets, or total debts divided by owners' fund plus borrowed funds.

Understand debt to equity ratio, calculated as long-term debt, total debt, or total outstanding liabilities divided by owners' funds, and higher ratios imply less creditor protection, guiding capital structure decisions.

Learn how the debt to total assets ratio equals total outstanding liabilities divided by total assets, and see how a higher ratio shows assets less backed by equity.

Calculate the proprietary ratio by dividing the owners fund by total assets, excluding fictitious assets, and compare it with the equity ratio via net assets.

Analyze capital gearing ratio, comparing fixed cost bearing capital (preference shares, debentures, bonds, loans) to equity share capital plus reserves and surplus minus accumulated losses and fictitious assets, signaling risk.

Calculate the debt service coverage ratio by comparing earnings available for debt service to interest and installments, including net profit after tax, depreciation, amortization, non-operating adjustments, and lease payments.

Explore the interest coverage ratio, also known as times interest earned, a leverage metric showing how ebit covers interest and signals long-term solvency.

Learn how to calculate fixed charges coverage ratio to determine if earnings cover all fixed charges, including interest, lease payments, and preference dividends. Compare it with debt service coverage.

Analyze the dividend coverage ratio as a leverage measure for long-term solvency, covering both preference and equity dividends. Use earnings after tax and the respective liabilities to gauge coverage.

Calculate and compare leverage and capital structure ratios for two companies—equity ratio, debt ratio, debt-to-equity variants, debt-to-total-assets, proprietary ratio, and capital gearing—using balance sheet data.

Solve and analyze leverage and coverage ratios using ABC Limited and PQR Limited. Calculate debt service coverage, interest coverage, fixed charges coverage, and equity dividend coverage, considering depreciation and taxes.

Explore activity ratios: total assets turnover, fixed asset turnover, capital turnover, current assets turnover, and working capital turnover, to gauge how efficiently a firm uses assets and working capital components.

Understand the total assets turnover ratio, an efficiency measure, calculated as sales or cost of goods sold divided by total assets, with guidance on when to use each.

Learn how the fixed asset turnover ratio measures efficiency by comparing sales or cost of goods sold to fixed assets, using closing or average balances, and consider depreciation effects.

Explain the net asset turnover ratio, or capital turnover ratio, computed as sales or cost of goods sold divided by net assets or capital invested, indicating asset efficiency.

Apply the current assets turnover ratio to gauge asset efficiency, using sales or cost of goods sold divided by average or closing current assets; higher ratios signal greater efficiency.

Learn to measure working capital efficiency with working capital turnover ratio, using sales or cost of goods sold, and subtypes: inventory turnover ratio, data turnover ratio, and credit turnover ratio.

Calculate the inventory turnover ratio by dividing cost of goods sold by average inventory, and interpret how often inventory turns over to estimate the holding period.

Learn how the receivables turnover ratio, also known as the debtors turnover ratio, measures credit collections by comparing credit sales to average accounts receivable and estimating the average collection period.

Learn how to calculate payables turnover ratio, a creditors turnover metric, using annual net credit purchases and average accounts payable, to assess liquidity and average payment period.

Compute and compare activity ratios from total assets turnover to working capital turnover using ABC and PQR data, and interpret their implications for efficiency and liquidity.