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Corporate Finance

Professor Ashok Thampy


Assets and Sources of Funds

The next question is what are the assets that a firm needs to own in order to provide goods
and services to its customers?
The balance sheet provides information on the assets that the firm owns and how these assets
have been funded. Here is the balance sheet of Sun Pharmaceutical Industries which is one of
the largest generic pharma firms in the world.
The balance sheet provides information on the different assets and liabilities of the firm as on
a particular date. As on March 31, 2015, Sun Pharmaceutical Industries, Sun Pharm for short,
had total assets of Rs. 490 billion. In order to finance this much of assets, the firm should also
be having sources of funds to the same level which leads us to the accounting identity:
Total assets = Total liabilities + Equity
The firm needs to make investments in assets that enable it to make and or sell products and
services. These assets, called real assets can be tangible or intangible. Tangible assets include
land, plant, machinery, warehouses, office buildings, transportation equipment, etc.
Intangible assets include technical expertise and know-how, brands and patents. Firms need
both tangible and intangible assets to produce and sell goods and services. The balance sheet
of Sun Pharma reveals that of a total fixed assets of Rs. 110 billion, Rs. 70 billion is tangible
assets and Rs. 20 billion is intangible assets, with another Rs. 20 billion of assets being under
development. Intangible assets can be an important source of competitive advantage,
particularly for technology firms and it is important for firms operating in these industries to
evaluate, develop , and invest in intangible assets. The firm needs to carefully evaluate the
benefits and costs of acquiring these assets which will be discussed under capital budgeting.
Current assets are short term assets of maturity of 1 year or less. Receivables, which are
payments due from customers who have purchased the goods on credit, and which will
usually be paid in a few weeks or maximum of a couple of months, is an example of current
asset. Cash and balance with banks is another example of current assets.
What are the major sources of funds for a corporation?
The two main sources of funds for a firm is debt and equity. Debt is the money that the firm
has borrowed from investors and since it is borrowed, the firm needs to pay interest and
principal on the borrowed funds. Equity capital is the fund provided by the shareholders of
the firm and as such there is no agreement between the firm and the equity holders in terms
of minimum re-payments.
The debt of the firm can be in the form of a loan or in the form of bonds that are issued to
investors in the financial markets. Both these forms of debt require the firm to pay interest
and principal back to the investors of the firm. Among the providers of capital to the firm, the
investors in the debt of the firm have priority of being paid by the firm. So these investors in
the debt capital, face less risk than the investors in equity. Also in the event of the firm being
unable to meet the contracted payments of interest and principal, the lenders to the firm can
force the firm into bankruptcy. The assets of the firm can be sold to meet the obligations that
the firm has towards these lenders. Sun Pharma had Rs. 14 billion of long term borrowings.

© All Rights Reserved. This document has been authored by Professor Ashok Thampy and is permitted for use only within the course "Corporate
Finance" delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illustrations, pictures, scripts,
may be reproduced, or stored in a retrieval system or transmitted in any firms or by any means – electronic, mechanical, photocopying, recording
or otherwise – without the prior permission of the author.
Corporate Finance
Professor Ashok Thampy
Assets and Sources of Funds

The current liabilities of the firm was Rs. 164 billion which includes short-term bank
borrowings and other short-term liabilities which are due within a year such as payables that
the firm owes to its suppliers.
Equity, also called the shareholder’s fund, is the capital contributed by the shareholders of
the firm. As of March 31, 2015, the shareholders of Sun Pharma had invested Rs. 256 billion
as equity capital in the firm. This includes: (1) the initial capital that shareholders invested in
the firm at the time equity shares were sold by the firm, and (2) the capital that has been re-
invested in the business from the profits generated by the firm, also known as retained
earnings.
The total value of assets of the firm is Rs. 490 billion. The liabilities and shareholder funds also
total Rs. 490 billion. Therefore both sides of the balance sheet matches and the accounting
identity that assets = liabilities + equity holds.

Investors in the equity of the firm get a share in the profits of the firm and also get to vote in
electing the members to the board of directors of the firm. It is the board of directors that
oversee the management of the firm on behalf of the shareholders. These investors benefit
from the dividend paid out from the profits if any and from the increase in the price of the
share in the event of the firm performing well. Equity investors also bear the risk of losing
their investment in the case the firm does not perform well as this will lead to a decline in the
price of the share. In the worst case, where the firm is unable to meet the interest and
principal repayment on the debt, as described earlier, the lenders of the firm can take legal
measures to sell the firm’s assets to recover the funds lent to the firm. In the event of
unlimited liability, as in the case of a proprietorship firm or a partnership, if the proceeds from
the sale of assets is not adequate to cover the funds due to the lenders, then the other assets
owned by the owners of the firm – the proprietor or partners as the case may be – can be
used to meet these obligations. However, in the case of a limited liability corporation, the
shareholder’s liability is limited to the share capital invested by the shareholder and his other
assets are not are risk. Limited liability of the shareholders limit their risk in the event of the
downside – the maximum loss is limited to the capital that they have invested in the shares
of the firm.
Let us take the example of Mr. Seth who has purchased 100 shares of Kingfisher Airlines (NSE
symbol: KFA) for Rs. 20 each a few years back. Kingfisher Airlines was one of the large airlines
in India. Currently Kingfisher Airlines is not operating and has debt of about Rs. 90 billion
(approximately USD 1.35 billion) which it owes to various lenders. Fortunately for Mr. Seth,
Kingfisher Airlines is a corporation with limited liability and therefore his loss or liability is
restricted to Rs. 2,000 that he has invested in the shares of Kingfisher Airlines and the banks
cannot go after his personal assets to recover part of the Rs. 90 billion that the company owes
to the banks. As for Mr. Vijay Mallya, the founder of Kingfisher Airlines, his liability is also
limited to the capital he has invested in the airline business unless he has given a personal
guarantee for the loan or pledged other assets as collateral for the loans given to Kingfisher

© All Rights Reserved. This document has been authored by Professor Ashok Thampy and is permitted for use only within the course "Corporate
Finance" delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illustrations, pictures, scripts,
may be reproduced, or stored in a retrieval system or transmitted in any firms or by any means – electronic, mechanical, photocopying, recording
or otherwise – without the prior permission of the author.
Corporate Finance
Professor Ashok Thampy
Assets and Sources of Funds

Airlines. The limited liability that shareholders of corporations enjoy provides protection on
the downside and limits the liability to the amount of funds invested in the shares of the firm.

© All Rights Reserved. This document has been authored by Professor Ashok Thampy and is permitted for use only within the course "Corporate
Finance" delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illustrations, pictures, scripts,
may be reproduced, or stored in a retrieval system or transmitted in any firms or by any means – electronic, mechanical, photocopying, recording
or otherwise – without the prior permission of the author.