Scribd
Upload
129 views22 pages

Video Lecture 7 On ES10

This document discusses different types of business organizations and capital financing. It describes equity capital supplied by owners and borrowed capital supplied by others with interest. Business organizations include sole proprietorships, partnerships, and corporations. Corporations have perpetual life and limited owner liability. Capital can be raised through common stock, preferred stock, and bonds. Bonds are issued with a face value and interest rate, and may be retired through sinking funds or new bond issues. Sample problems demonstrate bond pricing and yields.

Uploaded by

jerromecymouno.garcia
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
129 views22 pages

Video Lecture 7 On ES10

This document discusses different types of business organizations and capital financing. It describes equity capital supplied by owners and borrowed capital supplied by others with interest. Business organizations include sole proprietorships, partnerships, and corporations. Corporations have perpetual life and limited owner liability. Capital can be raised through common stock, preferred stock, and bonds. Bonds are issued with a face value and interest rate, and may be retired through sinking funds or new bond issues. Sample problems demonstrate bond pricing and yields.

Uploaded by

jerromecymouno.garcia
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 22

CAPITAL FINANCING

EQUITY AND BORROWED CAPITAL

Equity capital or ownership funds are those supplied


and used by the owners of an enterprise in the expectation
that a profit will be earned.

Borrowed Funds or capital are those supplied by


others on which a fixed rate of interest must be paid and the
debt must be repaid at a specified time.
Types of Business Organizations
A. Individual Ownership. The individual ownership
or sole proprietorship is the simplest form of business
organization, wherein a person uses his or her own capital
to establish a business and is the sole owner.
Advantages of the individual ownership:
1. It is easy to organize.
2. The owner has full control of the enterprise.
3. The owner is entitled to whatever benefits and
profits that accrue from the business.
4. It is easy to dissolve.
Disadvantages of the Individual Ownership:
1. The amount of the equity capital which can be accumulated is
limited.
2. The organization ceases upon the death of the owner.
3. It is difficult to obtain borrowed capital, owing the uncertainty
of the life of the organization.
4. The liability of the owner for his debts is unlimited.
B. The Partnership. A partnership is an association of two or
more persons in the purpose of engaging in a business or profit.

Advantages of the Partnership:


1. More capital may be obtained by the partners pooling
their resources together.
2. It is bound by few legal requirements as to its accounts,
procedures, tax forms and other items of operation.
3. Dissolution of the partnership may take place at any time
by mere agreement of the partners.
4. It provides an easy method whereby two or more persons
of differing talents may enter into business, each carrying those
burdens that he can best handle.
Disadvantages of the Partnership;
1. The amount of capital that can be accumulated is
definitely limited.
2. The life of the partnership is determined by the life
of the individual partners. When any partner dies, the
partnership automatically ends.
3. There may be serious disagreement among the
individual partners.
4. Each partner is liable for the debts of the
partnership.
C. The Corporation. The corporation is a distinct legal entity,
separate from the individuals who owns it, and which can engage
in almost any type of business transaction in which a real person
could occupy himself or herself.
Advantages of the Corporation:
1. It enjoys perpetual life without regard to any change in the
person of its owners, the stockholders.
2. The stockholders of the corporation are not liable for the
debts of the corporation.
3. It is relatively easier to obtain large amounts of money for
expansion, due to its perpetual life.
4. The ownership in the corporation is readily transferred.
5. Authority is easily delegated by the hiring of managers.
Disadvantages Of the Corporation:
1. The activities of the corporation are limited to those stated in
its chapter.
2. It is relatively complicated in formation and administration.
3. There is a greater degree of governmental control as
compared to the other types of business organization.
Capitalization of a Corporation
The capital of a corporation is acquired through the sales of
stock. There are two principal types of capital stock. The Common
stock and the Preferred stock.
Common Stock represents ordinary ownership without
special guarantee of return. Common stock holders have certain
legal rights, among which are the following:
1. Vote at stockholder’s meetings.
2. Elect directors and delegates to them power to conduct
the affairs of the business.
3. Sell or dissolve the corporation.
4. Make and amend the by laws of the corporation.
5. Subject to government approval, amend , or change
or capital structure.
6. Participate in the profits.
7. Inspect the books of the corporations.

Preferred Stock
Preferred stockholders are guaranteed a definite dividend on
their stocks. In case the corporation is dissolved, the assets
must be used to satisfy their claims of the preferred
stockholders before those of the holders of the common
stock. Preferred stockholders usually have the right to vote in
meetings, but not always.
Financing with Bonds
A bond is a certificate of indebtedness of a corporation
usually for a period not less than ten years and guaranteed by a
mortgage on certain assets of the corporation or its subsidiaries.
Bonds are issued when there is need for more capital such as for
expansion of the plant or the services rendered by a corporation.
The face value of a bond is the amount stated in a bond.
When the face value has been repaid, the bond is said to have
been retired or redeemed. The bond rate is the interest rate
quoted on the bond.
Classification of Bonds
1. Registered bonds. The name of the owner of this bond
is recorded on the books of the corporation and interest
payments are sent to the owner periodically without any action
on his part.
2. Coupon Bonds. The coupon bond have coupon attached
to the bond for each interest payment that will come due during
the life of the bond. The owner of the bond can collect the
interest due by surrendering the coupon to the offices of the
corporation or at specified banks.
Methods of Bond Retirement:
1. The corporation may issue another set of bonds equal to the
amount of bonds due for redemption.
2. The corporation may set up a sinking fund into which periodic
deposits of equal amount are made. The accumulated amount in the
sinking fund is equal to the amount needed to retire the bonds at the
time they are due.
A = periodic deposit to the sinking fund
F = accumulated amount, the amount needed to retire the bond
i = rate of interest in the sinking fund
r = bond rate per period
I = interest of the bonds per period
A + I = Total periodic expense
A = = F (A/F, i%,n)

A=F(

I = Fr
Example
A bond issue of Php200,000 in 10 year bonds, in Php1,000 units
paying 16% interest in semiannual payments, must be retired by the
use of a sinking fund that earns 12% compounded semiannually. What
is the total semiannual expense? Ans: I = Php21,436.911
Bond Value
The value of the bond is the present worth of all future amounts
are expected to be received through ownership of the bond.
Let F = face or par value
C = redemption or disposal price (often equal to F)
r = bond rate
n = number of periods before redemption
i = investment rate or yield per period
P = value of the bond n periods before redemption
P = Fr [] + C
SAMPLE PROBLEMS
1. A man wants to make 14% nominal interest compounded
semiannually on a bond investment. How much should the man be
willing to pay for now for a 12% Php10,000-bond that will mature in 10
years and pays interest semiannually? Ans: P = Php8,940.599
2. Mr. Romualdo bought a bond having a face value of Php1,000 for
Php970. The bond rate was 14% nominal and interest payments were
made to him semiannually for a total of 7 years. At the end of the
seventh year, he sold the bond to a friend at a price of 16% nominal on
his investment. What was the selling price. Ans: C = Php1,154.033
3. A Php1,000-bond which will mature in 10 years and with a bond rate
of 8% payable annually is to be redeemed at par at the end of this
period. If it is sold at Php1,030, determine the yield at this price.
Ans: i = 7.57%
ASSIGNMENT
1. A corporation sold an issue of 10-year bonds having a total face
value of Php15,000,000 for Php 14,500,000. The bond bear interest
at 16%, payable semiannually. The company wishes to establish a
sinking fund for retiring the bond issue and will make semiannual
deposits that will earn 13 % compounded semiannually. Compute
the annual cost for interest and redemption of these bond.
2. A company has issued 11-year bonds, with a face value of
Php1,000,000, in P1,000 units. Interest at 15% is paid quarterly. If
an investor desires to earn 21% nominal interest on Php100,000
worth of these bonds, what would the selling price have to be?
3. A Php1,500-bond which will mature in 12 years and with a bond
rate of 14% payable annually is to be redeemed at par at the end
of this period. It is sold now for Php1,390, determine the yield at
this price

You might also like