SOURCES OF FINANCING

Prepared by: Noor Hasniza Haron

 SOURCE OF FINANCING

Factors affecting finance

Private Finance
Long Term Short Term
Initiative

1 Borrowings
Ordinary Share

2 Finance Lease
Preference Share
Ways
to Hire Purchase
3 Share Warrant
raise
Government
assistance
Factors considerations

 Costs
 Duration
 Gearing
 Size of company
 Control of the firm
 Amount to be raised
 Others – purpose for which the finance is needed, repayment
schedule, security offered, company’s tax position, risk of
project being funded./
1
ORDINARY SHARES
 Owners of the company
 Sometimes known as common stocks
 Right to vote.
 Entitled to share in the profits for dividends,
only after dividends have been paid to other
classes of shares
 Rate of dividend is not fixed.
 High risk, high reward
 ISSUE OF SHARES AT PREMIUM

Acer Ent Berhad

Statement of Financial Position as at 31 Dec 2011
Capital RM
Issued and paid up capital 10,000,000 ordinary shares of RM1/-
each 10,000,000
Reserves
Share premium 2,500,000
12,500,000

Current Asset
Bank 12,500,000
12,500,000
 ISSUE OF SHARES AT DISCOUNTS

Acer Ent Berhad

Statement of Financial Position as at 31 Dec 2011
Capital RM
Issued and paid up capital 10,000,000 ordinary shares of RM1/-
each 10,000,000
10,00,000

Current Asset
Discount on shares 1,000,000
Bank 9,000,000
10,000,000
2
Preference share vs OS
 Payment of dividends
 Preference right
 Cummulative payment
 Fixed payment
(The rights of shares are as per the MOA)
 No voting rights except for preferrential dividends remain unpaid for
arrears as per AOA (PS – voting shares)
 Stockholders’ claims on assets of business in event of bankruptcy
 2
Preference Share

2.1 Cummulative Fixed – Carry Forward

2.2 Non Cummulative Fixed – No carry Forward

Fixed+additional up to express in AOA after all

2.3 Participating
had recived

2.4 Fixed & not allowed to participate in excess of

Non- Participating
profit

Can be repurchased from the SH at the future

2.5 Redeemable
date as predetermine at time of issue of share

Can be convert to ordinary shares as per

2.6 Convertible
expressed in the Articles (Date & Rate).
Warrant
 Warrant is a deriavative instrument that gives its holder the right (not
obligation) to buy a given quantity of the underlying shares at a
predetermined price (exercise price) on or before a particular date
(expiry date).
 Warrants are issued and guarantee by the company
 Until you exercise the right. You do not owned stock.
 Sometimes may be issued attached to a right issue, bonds or irredeemabl
to make it more attractive.
 either:
 - exercise your right to buy the company's share at the exercise price,
OR
 - sell the warrant in the open market
 No accounting entries.
 Memorandum of account will be maintained
 3
Warrant

a specific number of shares that can be

3.1 Call Warrant purchased from the issuer at a specific price,
on or before a certain dat

certain amount of equity that can be sold

3.2 Put Warrant back to the issuer at a specified price, on or
before a stated date.

Companies may issue a series of warrants whenever investor demand is

insufficient. Each series may have different conditions and prices, allowing
companies to promote a new, more favorable warrant over a previous series that
is no longer appealing to investors.
Warrant – Bursa Malaysia
 Parent Company issue warrant :-
• SPSETIA-WA, SPSETIA-WB
 Bank/Security firm issue warrant -
• TROP-CA: CW Tropicana Corporation Bhd (CIMB) - 5401CA
(TROP-CA)
• List Date:21-06-2013
• List Price:RM0.1500
• Expiry Date:30-06-2014 ( 277 days left
• Exercise Price:RM1.8500
• Conversion Ratio:2.00W
TERMS USED INVESTING IN WARRANT
 - Exercise price:
 the price warrant holder pay to buy the company share
 - Conversion ratio:
 the number of warrant(s) needed to buy one company
share
 - Expiry date:
 the date the warrant will expire
 - Gearing:
 indicate the level of leverage
 - Premium:
 indicate the difference between mother share price &
warrant price if warrant is exercise
Example 1
Price lower greater leverage

Share Price Share warrant

21 July 2013 RM3.75 RM0.89
22 July 2013 RM4.07 RM1.04
Gain RM0.32 (8.5%) RM0.15 (17%)

Outperfomed the share price

 Example 2
Earlier, Hamidah bought 1000 SPSETIA-WB at RM 0.90
On 22 July, SPSETIA share RM4.07, SPSETIA-WB RM1.04

 - Exercise price: RM2.99 (fixed)

 - Conversion ratio: 1 warrant for 1 share
 - Expiry date: 21 Jan 2013
 - Gearing: 3.91 (4.07/1.04) The higher the gearing, the higher the leverage
(higher potential gain/lost)
 - Premium: -0.98% [(2.99+1.04-4.07)/4.07] x 100. The lower the premium, the
"cheaper" is the warrant

Advise Hamidah either convert everything into shares and sells the share or sell
the warrant directly
Answer
1. Convert everything to share and buying
 Total cost of buying RM 900 (RM0.90 x 1000)
 Assume no other trading cost, total cost of conversion RM 2990 (RM2.99 X 1000)
 Therefore Your cost : RM 3980
 If you sell immediately on 22nd July, you will gain (RM4.07 x 1000) – RM3980 =
RM 107.

2. Sell the warrant directly

(RM 1.04 x 1000) – RM 900 = RM 140

Note:-
EXPIRY DATE:- You must exercise the warrant before expiry date.
Advisable not to buy warrant which is closed to the expiry date.
 Retained Profits
Advantages
 Doesn’t have to be
repaid
 No interest is payable

Disadvantages
 Not available to a new
business
 Business may not make
enough profit to plough
back

 This source of finance is only

available for a business which has
been trading for more than one
year
 It is when the profits made are
ploughed back into the business
Borrowing
 Company may raise fund by borrowing from the public/financial
institutions.
 The documents that the companies issues stating the terms of the
borrowing is called debentures.
 Debentures are loan capital with fixed rate of interest payable by
company regardless of the performance of the company.
 Debentures include, bonds, stocks, notes and other evidence of
indebtedness of the company.
 Debentures may be redeemable that is repayable or at by specific dates.
 Debentures may be convertable( (can be converted into ordinary shares).
 Debentures may be liste/traded on the stock exchanged.
 The rights attached to the debentures are transferable.
Debentures Shares

Fixed rate of interest regardless the OS – not compulsory, depends on

company are profitable or not dividend policy
PS – fixed but depends on the profitability
of the company

Debentures holders are creditors? No OS – owners and voting rights.

voting rights.

Debentures holders – priority claim Shareholders after the shareholders

Debenture interest is an expense to the Dividends are distributions of profits

company

Trustee to act in behalf of

debentureholders and the rights and
obligation as per the trustee deeds
LEASE – FORM OF DEBT FINANCING

 A lease is an agreement whereby the lessor conveys to the lessee the right
to use an asset for an agreed period of time in return for a payment.

 The lease term is a non cancelable period the lessee has contracted to
lease asset from the lessor.

 The minimum lease payment is the total payments made by the lessee
over the lease period and may include guaranteed residual value which
is the residual value guaranteed by lessee that in any event becomes
payable at the end of the lease term
 1 FINANCE LEASE 2 OPERATING LEASE

 A finance lease is an arrangement that  An operating lease does not transfer

transfers substantially all the risks and
rewards incidental to ownership of the
asset.
 It is generally entered into for a substantial
period of an asset’s useful life and the
lessee regards leasing as a means of
financing the use of the asset
substantially all the risks and rewards
incidental to ownership.
 It is generally entered into for a short
period and the lessee can discontinue
contract without being penalized

 Risks of ownership include the possibilities of losses from idle capacity or technological
obsolescence and of variations in return due to changing economic conditions,
 rewards include the expectations of profitable operations over the asset’s economic life and
of gain from appreciation in value or realization of residual value.
Determinants of finance lease
 Finance leases meet any one of these four conditions:
1. Title is transferred to lessee at end of lease term.
2. Lease contains bargain purchase option (an option to buy asset at
very low price).
3. Term of lease is greater than or equal to 75% of estimated
economic life of asset.
4. Present value of minimum lease payment is greater than or equal
to 90% of fair value of leased property.
Why operating lease?
 An operating lease is not capitalized;
 it is accounted for as a rental expense in what is known as
"off balance sheet financing."
 For the lessor, the asset being leased is accounted for as an
asset and is depreciated as such.
 Operating leases have tax incentives and do not result in
assets or liabilities being recorded on the lessee's balance
sheet, which can improve the lessee's financial ratios.
 WHY WE CHOOSE LEASE
Few things to consider:-

 Leasing may be attractive to firm with low credit rating.

 Lease can be obtained more easily than loan can be arranged because
lessor retains title to asset.

 Full recovery of asset in the event of default is much easier than if asset
were owned by lessee.

 Down payment in purchased asset is much higher than deposit required

on lease

 Use of operating leases may increase lessee’s overall credit availability

since they do not appear on the balance sheet.
SALE AND LEASEBACK
TRANSACTIONS
 Firm sells fixed asset (e.g. building) to lender/lessor and then immediately
leases back the property.

 Seller/lessee receives large inflow of cash that may be used to finance

other aspects of business and in return, enters into long-term lease
obligation.

 A leaseback arrangement is useful when companies need a source of

financing, but the asset is still needed in its operation.

 The lessor benefits in receiving a series of stable payments over a certain

period of time.
Leveraged Lease
 Involves third-party lender:
 Lessor (e.g. commercial bank) borrows 80% or less of cost of asset
from third-party lender.
 Lessor purchases asset and leases it to lessee.
 Lessor has title to asset and is thus entitled to full depreciation benefits.
Hire Purchase
Hire purchase (HP)
 hire purchase (HP) financing is one of the most common ways for people
to buy private vehicles.
 If you take on HP financing, you become the hirer while the financier
financing the vehicle is the owner.
 As the hirer, you will have to pay instalments to the financier based on an
agreed duration while you will have possession of the vehicle.
 When all instalments are paid up, ownership is then transferred to you,
the hirer.
 Under a hire purchase contract, the buyer is leasing the goods and does
not obtain ownership until the full amount of the contract is paid.
Every hire-purchase agreement—

 (a) shall—
(i) specify a date on which the hiring shall be deemed to have commenced;
(ii) specify the number of instalments to be paid under the agreement by the
hirer;
(iii) specify the amounts of each of these instalments and the person to whom
and the place at which the payments of these instalments are to be made;
And any Late payment charges
(iv) specify the time for the payment of each of those instalments;
(v) contain a description of the goods sufficient to identify them;
(vi) specify the address where the goods under the hirepurchase agreement are