FOREX MANAGEMENT - FX rates, Foreign Investments, Forex risks, USD vs INR

Benifits of using Automated forex trading system

noreply@blogger.com (FERRY) — Thu, 09 Apr 2009 14:32:00 +0000

If you are serious about foreign exchange, foreign exchange or trade, a mechanism for monitoring and controlling their business, without having him around the clock. That's where the automated Forex systems can help a lot. Many of the software for automatic currency have been developed to make trading life easier. We will explore the uses of these systems and see how it can work for you.

Save time tracking Forex

With automated Forex, you can analyze your Forex in real time and make changes to your real account - all through one program. Many of the new system to connect to the signals that are generated by foreign-exchange trading systems. Signals go to your account in real, so you can learn more about their open positions and manage your Forex of a place. These days trade signals can be much easier to manage from day to day when you can not take the time to check all of their trading systems or the opening and closing positions, as required. This is a professional adviser has the right system to your computer!

No hands in the trade needs

With automated Forex, there is no need to practice on Forex trading. Software for you. And the good news is that you continue to work while you sleep! Making trades day or night, so you can rest easy while the software keeps the currency on the trade date and cost.

Save and earn more money with Forex Automation

Time management is the key to success in Forex. Automated Forex gives you the ability to save and earn more money, because you do not lose important opportunities for Forex trading as when you control your trading systems all on your own. As a trader, you can have multiple trading systems in different markets (EUR-USD and others), and is still with them when they successfully automate. Commercial software systems for many of you, enabling you to reduce your business risk and the level of their equity curve.

Practice Forex

Some automated Forex systems allow you to create practice accounts so you can learn how to properly use the system without risk. This is much better that the formal errors from the account and virtual money to lose money as you're learning! If you are not able to create a practice that has its own automated system to find a software program or online application with which you can practice.

Trader psychology is not a factor

Automated Forex transcends their own thoughts and analyzes the market using actual data related to the Forex market. Your own trading psychology could cause you to be costly decisions because emotions or thoughts about the eruption on the market. You may be too emotionally involved to make their own business, sometimes. Automated Forex but will do it for you, help you overcome this problem. Automated exchange transactions, can have peace of mind knowing that your mali "expert advisor" is always watching and shopping for you!

To maximize the benefits of your initial investment, then you need to buy the best you can get in foreign currency, these are the two best on the market.

Steps involved in successful forex trading

noreply@blogger.com (FERRY) — Sat, 11 Apr 2009 09:21:00 +0000

Around 95% of all Forex traders lose money. We are not just talking about it Newbies. If the foreign exchange trading for life as a hobby or just for fun, odds are against success. This is just one surprising fact. However, the remaining 5% of Forex traders manage to pay some costs and lucky few who actually earn money in the currency markets - constantly!

As well as TV programs, said ... "How'd they do this, anyway?"

This is the million dollar question, right? Countless books, seminars and exhibitions were hosted for the answer to this question. This sad reality is that thousands of books were written and countless seminars and interviews were conducted in an attempt to respond to questions from the magic. In reality the situation is that there is no magic formula, no single Holy Grail of Forex trading.

What makes the success of traders, as well as the rest of us did not understand that simple. They have dominated the process of winning when several factors combine to create a personalized and consistent results. They have dominated the process of entry.

The trade process is as follows:

Strategy> Money> Car Domain

Here are some simple tips Forex education which will help you to master the Forex:

Forex Success Tip # 1 - You must have a plan

You must have a written business plan that details all aspects of trading. When you go to the shop, in the amount of risk, strategies for entry and exit, or just a few names. To become a (profitable) Forex trader has to trade arena plan their business plan.

Simplicity rules! Do not make this plan very difficult. A sheet of paper on the mission for you and your business plan should be sufficient. Nothing more is probably too complicated.

Forex Success Tip # 2 - Focus on your personal Psychology

Knowing that you will master the discipline required to execute the trade with high quality sound money management techniques. Lack of discipline in lieu of the fatal operation. Go on the way to identify personal attitudes toward risk and your money. Get intimate with your strengths and weaknesses as a trader, and build a business plan strategies to minimize weaknesses and maximize their strength.

Different personalities lend themselves to different styles of negotiations. Familiar with all the different styles and over time begin to gravitate toward a certain style. Do not fight the impulse as I did. I insisted that he was a day trader, but only limited results. I found my victory percentages are much higher when you swing trades. Guess what is my bread and butter strategies now!

Forex Success Tip # 3 - Have realistic expectations about their

It is difficult, I know! I am on the Internet every day and how amazing advertising. Intermediaries provide free education (the fox in the chicken, if you ask me), forums of all different styles of negotiations and the future. Gurus pushing their system as "the one" who will make big bucks. How to get through all that noise?

Let me say loud and clear now - the whole world is right and the whole world is wrong. You'll need to make a personal commitment to become a successful trader, finding a market that works for you and expect a slow and steady to build wealth through Forex.

What works for me May not work for you. Expect to go through a period of research in which to learn and at the same time, research on the dealer. Please open and not paying attention to all the noise outside.

Forex Success Tip # 4 - Be patient

Rome was not built in one day, and not their own. In fact, I say that all my students, while studying to become a successful Forex traders should not only look at your account balance as an indicator of success or failure.

Through monitoring and increasing their share of trade in high-quality, a much better barometer of their progress as the balance of your account. Cause and effect of the rule here. Over time, when you increase your chances through the implementation of quality routes your account will respond accordingly.

Keep the focus on the process and its results it will blow your mind.

Success Tip # 5 - Managing money is a major priority

I would rather have an excellent strategy, and weak cash in reverse technique. This issue deserves its own blog to do justice. Limit their exposure (see the "danger") allows you to stay in the game and allow the laws of probability to work.

Let's take a casino for example. Require frequent machine players to earn money. Why? They have a game that has more than 50% chance to win money for a house. The more people who play the slots, the greater the benefits of casinos.

Casino risk control by the boards of payment (always in favor of the house!) And increases your chances for a role in maintaining slot machines (read "free drinks"). As a dealer, you should limit the risk by only constitute 1% - 3% of capital available to a single trade. When you execute trades with a sufficiently high probability that the strategy is also clean, as the casinos - but only to stay in the game long term.

In conclusion, surgery is not easy to change. This is a difficult job and that will test the limits of their patience and perseverance. If someone tells you otherwise .., buyers beware! This can be very profitable and rewarding business if done properly. After all it is a profession that requires a learning curve and experience is no different from an airline pilot or engineer. Understanding how to focus and learn the game allows you to get all the benefits advertised. Forex education is your will to dominate the process of Forex Trading.

Term Loans from Financial Institutions and Banks:

noreply@blogger.com (FERRY) — Sat, 25 Apr 2009 03:52:00 +0000

The bulk of term finance required by large and medium industry is provided by term lending institutions which include all India Institutions viz. Industrial Development Bank of India (IDBI), Industrial Finance Corporation of India (IFCI), Industrial Reconstruction Bank of India (IRBI), Small Industries Development Bank of India (SIDBI), etc.

Financial Institutions channel the funds mobilized by them into productive avenues. They make available funds in bigger lots to needy industrial sector. These institutions act as conduits through which scattered savings are aggregated and out to productive channels. Besides, financial institutions help in allocation of funds between different industries and different sectors of the economy in consonance with the priorities laid down in the plans. They, finance to those industries which seek to make a strong base for accelerating the pace of industrialization and foster fast economic development. Today, financial institutions are an instrument in developing the backward areas through rapid industrialization by providing long term finance on concessional rates and help entrepreneurs in selection of projects and make available technical know-how at cheaper rates.

Term loans from financial institutions and banks are a syndicated activity. For big projects financial institutions provide finance on a consortium basis and commercial banks also join them where ‘gap’ is left in financing arrangements of the project costs.

The All-India Financial Institutions comprise six All-India Development banks (AIDBs), three Specialized Financial Institutions (SFIs) and there Investment Institutions. At the state level, there are 18 State Financial Corporations (SFCs) and 28 State Industrial Development Corporations (SIDCs)

Among the AIDBs, IDBI, IFCI, IRBI and SCICI provide financial assistance to medium and large industries, whereas SIDBs caters to the needs of small and tiny industries. The AIDBs also undertake promotional and developmental activities. Of the SFIs, RCTC and TDIC provide risk capital, venture capital and technology development finance and TFCI extends finance to hotels and tourism-related projects. Among the investment institutions, LIC takes care of the business of life insurance, whereas GIC offers general insurance facilities. Both LIC and GIC deploy their funds in accordance with the priorities set out for them. UTI mobilizes the savings of the society through sale of units and channelises them into corporate investments. The investment institutions are major players on the secondary market; they also extend assistance to the corporate sector by way of term loans/ underwriting/ direct subscription to equity and debentures. The SFSs provide finance mainly to small and medium enterprises, whereas SIDCs cater to the needs of medium assistance, the SFCs and SIDCs also play a promotional and developmental role.

With the increasing integration of Indian Economy with the global economy, the financing requirements of corporate sector have undergone tremendous change, and accordingly, financing institutions in India have re-oriented their policies and product range with much sharper customer focus to suit the varied needs of the corporate. With a view to leverage new opportunities thrown open by the developments in the economy, the financial institutions have set up several subsidiaries/ associate institutions offering a wide range of new products and services covering areas such as commercial banking, consumer finance, and investor and custodian services, broking, venture capital financing, infrastructure financing, registrar and transfer services, credit rating and E-commerce.

The Industrial Development bank of India (IDBI)

noreply@blogger.com (FERRY) — Mon, 27 Apr 2009 03:29:00 +0000

The Industrial Development bank of India (IDBI) was established on July 1, 1964 under an Act of Parliament as the principal financial institution for industrial development in the country. IDBI caters to the growing and diverse needs of medium and large scale industries with the main objective of providing financial assistance and coordinating the working of institutions engaged in financing, promoting and developing industries.

IDBI provides direct finance by way of term loans, both in rupees and foreign currencies besides providing support by way of underwriting and direct subscription to shares/ debentures and in the form of deferred payment guarantees. It also refinances term loans given by state-level institutions/banks to medium scale units and rediscounts/ discounts bills of exchange and promissory notes arising out of sale/ purchase or machinery and equipment. IDBI also extends loans to and makes investments in shares and bonds of various financial intermediaries. In response to the growing needs of various segments of industry and on-going changes in the financial sector, IDBI has been taking several steps to re-orient its business strategies and expand the range of its products and services. Besides asset-based financing and equipment leasing, IDBI also provides merchant banking, debenture trusteeship and forex services to cater to the varied needs of the clients. The Bank continued to undertake a wide range of promotional activities relating to programmes for new entrepreneurs, consultancy services for small and medium enterprises and programmes designed for accredited voluntary agencies for economic upliftment of the underprivileged. Its wholly-owned subsidiary, Small Industries Development Bank of India (SIDBI) provides assistance to the small scale sector.

What is investment?

noreply@blogger.com (FERRY) — Tue, 28 Apr 2009 04:52:00 +0000

Investment may be defined as a conscious act on the part of a person that involves deployment of money in securities issued by firms with a view to obtain a target rate of return over a specific period of time.

It is conscious activity in that the investor is expected to be aware of the various avenues of investment available in the market. He makes a comparison of the returns available from each avenue, the element of risk involved in it and then makes the investment decision that he perceives to be the best having regard to the time frame of the investment and his own risk profile.

In reality however, the level of consciousness or awareness on behalf of the investor is not always perfect. Hence the entire investment decisions end up being sub-optimal leading to a persistent effort on the point of the investor to locate alternate avenues of investment that would provide optimal return. This tendency is aided by the fact that fresh investment opportunities keep on appearing in the market with the emergence of new seekers of funds. This is how the cycle of investment moves on.

Investment differs from speculation. Speculation also involves deployment of funds but it is not backed by a conscious analysis of pros and cons. Mostly it is a spur of the moment activity that is promoted and supported by half-backed information and rumors. Speculative deployment of funds is generally prevalent in the secondary equity market. What attracts people to speculation is a rate of return that is abnormally higher than the prevailing market rates. The balancing of risk and return nevertheless operates in speculative activity also and as such the risk element in speculation is very high.

Investment differs from gambling and betting also. But gambling and betting are games of chance return in which dependent upon a particular event happening. Here also, there is no place for research-based activity. The high level of returns provides the incentive for deployment of funds. The risk element in gambling or betting is very high and is known in advance to the players.

What are securities?

noreply@blogger.com (FERRY) — Tue, 28 Apr 2009 05:14:00 +0000

Securities may be defined as instruments issued by seekers of funds in the investment market to the providers of funds in lieu of funds.

These instruments proma facie provide evidence of ownership to the holder of the instrument. The owner is entitled to receive all the benefits due on the instrument and to retrieve his investment at the time of redemption. Securities can broadly be divided into two categories. Debt Securities and Equity Securities. However, Section 2(h) of Securities Contract (Regulation) Act, 1956, defines Securities as under:

Securities include –

1. Shares, scripts, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or any incorporated company or body corporate.

Derivative

Units or any other instrument issued by any collective investment scheme to the Investors in such a schemes.

Security receipt as defined in clause (zp) of Section 2 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

Units or any other such instrument issued to the investors under any mutual fund scheme.

2. Government Securities

3. Such other instruments as may be declared by the Central Government to be Securities and,

4. Rights or Interests in Securities.

What is capital budgeting?

noreply@blogger.com (FERRY) — Tue, 28 Apr 2009 05:33:00 +0000

In modern times, the efficient allocation of capital resources is a most crucial function of financial management. This function involves organization’s decision to invest its resources in long-term assets like land, building facilities, equipment, vehicles, etc. All these assets are extremely important to the firm because, in general, all the organizational profits are derived from the use of its capital in investment in assets which represent a very large commitment of financial resources, and these funds usually remain invested over a long period of time. The future development of a firm hinges on the capital investment projects, the replacement of existing capital assets, and/or the decision to abandon previously accepted undertakings which turns out to be less attractive to the organization than was originally thought, and divesting the resources to the contemplation of new ideas and planning. For new projects such as investment decisions of a firm fall within the definition of capital budgeting or capital expenditure decisions.

Capital budgeting refers to long-term panning for proposed capital outlays and their financing. Thus, it includes both raising of long-term funds as well as their utilization. It may, thus, be defines the “firm’s formal process for acquisition and investment of capital”. To be more precise, capital budgeting decision may be defined as “the firms’ decision to invest its current find more efficiently in long-term activities in anticipation of an expected flow of future benefit over a series of years.” The long-term activities are those activities which affect firms operation beyond the one year period. Capital budgeting is a many sided activity. It contains searching for new and more profitable investment proposals, investigating, engineering and marketing considerations to predict the consequences of accepting the investment and making economic analysis to determine the profit potential of investment proposal. The basic features of capital budgeting decisions are:

1. Current funds are exchanged for future benefits;

2. There is an investment in long-term activities; and

3. The future benefits will occur to the firm over series of years.

Need for Capital Investment

noreply@blogger.com (FERRY) — Tue, 28 Apr 2009 17:25:00 +0000

Need for Capital Investment:

This is probably the logical question and the answer to that is rather easy. The following factors give rise to the need for capital investments:

1. Wear and tear of old equipments.

2. Obsolescence

3. Variation in product demand necessitating change in volume of production.

4. Product improvement requiring capital additions.

5. Learning-curve effect

6. Expansion.

7. Change of plant site.

8. Diversification.

9. Productivity improvement.

Some of these factors are self-explanatory. However, we add a few explanatory lines on a few of these factors. Obsolescence occurs when alternative methods of equipments for performing a function become available which are significantly better either in terms of quality of newness of the product or plant safety. In a high consumption economy like U.S.A, this problem is acute. In an economy like India, the problem of obsolescence is still rare. Only in certain investments for manufacturing export products (e.g, garments, jute goods, cotton textiles), this problem exists. Product improvements require changes in equipments and this problem is also not an important factor in influencing capital investment decisions in India, expecting changes special product qualities like radios, transistors, televisions etc.

Learning curve consideration influences capital decisions in the sense that new equipments might be such as to cut down learning time and effect considerable saving on training expenses. For reasons such as expansion, new sources of raw materials, new markets, labour conditions, transportation or termination of a lease, an entire plant may have to be relocated. The cost of removing a plant is enormous and management may decide to undertake modernization through a complete new layout and equipment purchases. Many progressive companies seek out new markets and new products. They may even like to acquire another company for purpose of diversification. All these major capital investments. In some industries, wage escalation may force management to acquire labour-saving equipment machinery to effect saving on wages and at the same time improve productivity.

Investment decision – Management Perspective

noreply@blogger.com (FERRY) — Tue, 28 Apr 2009 17:31:00 +0000

Usually, in investment problems, much attention is focused on how to choose among alternative projects, so that one is tempted to believe that this constitutes the only problem in capital decisions. However, if we examine carefully, it is easy to realize that choice among alternatives is only one facet albeit the important facet of the problem from the top management perspective. The other facets are implementation and control as applied to all phases of capital investment, and these are important aspects because in the ultimate analysis, the top management is accountable to Board of directors and owners for the success or failure of investment plans.

Let us examine in brief how investment decisions are influenced by management perspective. Obviously, we have to start with the company objectives which provide the broad guidelines to policies, plans and operations. A possible objective might be to maximize return on investment in which case the management might seek to minimize investment by selecting only a few capital projects that yield the highest returns. On the other hand, the objective may be to maximize sales volume and in that case all capital investment that yield a net profit (may be small) would be made without undue concern. If the management is guided by a growth objective, expansionary investment involving high capital cost would be undertaken.

Within the board company objectives, top management also reviews the competitive position of the company and if the competition is sharper, the management looks out continuously to evaluate and upgrade the equipments to achieve greater efficiency at least cost. In big companies, the management sets out policies to guide lower levels of management in the search for evaluation of and initiation of capital projects.

Top management has also to keep watch on company funds which finance investments. It cannot allow funds to lie idle just because suitable project is not at hand. The cost of idle funds is substantial and hence the need for looking out for suitable investment opportunities. If such opportunities exist then the management must spare funds and if existing finds are inadequate it should raise funds externally. It should be remembered that if there is no profitable investment opportunity with in the company, the dividend policy of the company should be liberal. Funds for capital investment must be arranged on a long-term basis otherwise borrowings short and investing long can lead to lack of liquidity and consequent troubles. The major source of long-term funds are long-term borrowing, new equity capital (sale of stock) and retained earnings. Sometimes, a change in the inventory system also releases funds by effecting reduction in inventory to be carried. The selection of the right source of funds is again influenced by management’s own belief and value judgement and such other factors like outsider control, dilution of equity, price earnings ratio, cost of funds etc.

And finally, the top management is usually concerned with implementation and control aspects of investment projects. Specific responsibilities are to be assigned to specific individuals or cells and project reports have to be carefully studies. In big projects, improved methods like programme evaluation review technique (PERT) or critical path method (CPM) may be used.

Importance of capital budgeting

noreply@blogger.com (FERRY) — Tue, 28 Apr 2009 17:32:00 +0000

Capital budgeting decisions are of paramount importance in financial decision. So it needs special care on account of the following reasons:

1. Long-term Implications: A capital budgeting decision has its effect over a long time span and inevitably affects the company’s future cost structure and growth. A wrong decision can prove disastrous for the long-term survival of firm. On the other hand, lack of investment in asset would influence the competitive position of the firm. So the capital budgeting decisions determine the future destiny of the company.

2. Involvement of large amount of funds: Capital budgeting decisions need substantial amount of capital outlay. This underlines the need for thoughtful, wise and correct decisions as an incorrect decision would not only result in losses but also prevent the firm from earning profit from other investments which could not be undertaken.

3. Irreversible decisions: Capital budgeting decisions in most of the cases are irreversible because it is difficult to find a market for such assets. The only way out will be scrap the capital assets so acquired and incur heavy losses.

4. Risk and uncertainty: Capital budgeting decision is surrounded by great number of uncertainties. Investment is present and investment is future. The future is uncertain and full of risks. Longer the period of project, greater may be the risk and uncertainty. The estimates about cost, revenues and profits may not come true.

5. Difficult to make: Capital budgeting decision making is a difficult and complicated exercise for the management. These decisions require an over all assessment of future events which are uncertain. It is really a marathon job to estimate the future benefits and cost correctly in quantitative terms subject to the uncertainties caused by economic-political social and technological factors.

Kinds of capital budgeting decisions:

Generally the business firms are confronted with three types of capital budgeting decisions. (i) The accept-reject decisions; (ii) mutually exclusive decisions; and (iii) capital rationing decisions.

1. Accept-reject decisions: Business firm is confronted with alternative investment proposals. If the proposal is accepted, the firm incur the investment and not otherwise. Broadly, all those investment proposals which yield a rate of return greater than cost of capital are accepted and the others are rejected. Under this criterion, all the independent proposals are accepted.

2. Mutually exclusive decisions: It includes all those projects which compete with each other in a way that acceptance of one precludes the acceptance of other or others. Thus, some technique has to be used for selecting the best among all and eliminates other alternatives.

3. Capital rationing decisions: Capital budgeting decision is a simple process in those firms where fund is not the constraint, but in majority of the cases, firms have fixed capital budget. So large amount of projects compete for these limited budgets. So the firm rations them in a manner so as to maximize the long run returns. Thus, capital rationing refers to the situations where the firm has more acceptable investment requiring greater amount of finance than is available with the firm. It is concerned with the selection of a group of investment out of many investment proposals ranked in the descending order of the rate or return.

Security Analysis and Portfolio management

noreply@blogger.com (FERRY) — Tue, 28 Apr 2009 17:33:00 +0000

Security analysis is closely linked with portfolio management. The main objective of Security analysis is to appraise is intrinsic value of security. As already started, there are two basic approaches which are made in the direction viz. (1) Fundamental Approach, and (2) Technical approach. There is third approach known as Efficient Capital Market Theory for assessing market price of a security.

1. The Fundamental Approach: The Fundamental approach suggests that every Stock has an intrinsic value which should be equal to the present value of the future Stream of income from that stock discounted at an appropriate risk related rate of Interest. Estimate of real worth of a stock is made by considering the earnings potential of firm which depends upon investment environment and factors relating to specific industry, competitiveness, quality of management. Operational efficiency, profitability, capital structure and dividend policy. Thus, security analysis is done to evaluate the current market value of particular security with the intrinsic or theoretical value. Decisions about buying and selling an individual security depend upon the conferred relative value. Sinc6 this approach is based on relevant facts, it gives true estimate of the value of a security and it is widely use in estimation of security prices

2. Technical Approach: The other technique of security analysis is known as Technical Approach. The basic assumption of this approach is that the price of a stock depends on supply and demand in the market place and has little relationship with its intrinsic value. All financial date and market information of a given security is reflected in the market price of a security. Therefore, an attempt is made through charts to identify price movement patterns which predict future movement of the security, The main tools used by technical analysis are: (1) The Dow Jones theory which asserts that stock prices demonstrate a pattern over four to five years and these patterns are mirrored by indices of stock prices. The theory employs two Dow Jones Averages - the industrial average and the transportation average. If industrial average is rising, then transport average should also rise. Simultaneous price movement is the maid prediction which may show bullish as well as bearish results (2) Chart Patterns are used along with Dow Jones Theory to predict the market movements. Various types of charts are used for this purpose.

3. Efficient Capital Market Theory: The theory is familiarly known as "Efficient Capital Market Hypothesis: (ECMH). It is based on the assumption that in efficient capital markets prices of traded securities always fully reflect all publicly available information concerning those securities. For market efficiency there are three essential conditions:

(1) All available information is cost free to all market participants,

(2) No transaction costs, and

(3) All investors similarly view the implications of available information on current prices and distribution of future prices of each security.

It has been empirically proved that stock prices behave randomly under the above conditions. These conditions have been rendered unrealistic in the light of the actual experience because there is not only transaction cost involved but brokers have their own information base made available by processing compute fed date. Moreover, information is not costless and all investors do not take similar views.

Research studies devoted to test the ECMH are put into three categories i.e.

(a) the week form theory,

(b) the semi-strong form, and

(c) the strong form.

(a) The Weak Form theory: This theory states that current security prices fully reflect information available in the market regarding historical events of the company Study of the historical sequence of prices, can neither assist the investment analysts or investors to abnormally enhance their investment neither return nor improve their ability to select stocks. It means that knowledge of past patterns of stock prices does not aid investors to make a better choice. Random Walk Theory is the offshoot of this test. The theory states that stock prices exhibit a random behavior.

Random walk Hypothesis; The Hypothesis presupposes that stock prices move randomly. No sure prediction can be made of future movement of stock prices on the basis of given prices at the end of one period. There is no relationship between today's price and tomorrow's price. Price movement is a random. The various statistical tests conducted in U.K. and U.S.A. on stock price have proved that the "extent of dependence between Successive price changes is negligible".

(c) Semi-strong form of Efficient Market Hypothesis: This hypothesis holds that security prices adjust rapidly to all publicly available information such as functional statements and reports and investment advisory reports, etc. All publicly available information, whether good or bad is fully reflected in security prices. The buyers and sellers will raise the price as soon as a favorable price of information is made available to the public; opposite will happen in case of unfavorable piece of information. The reaction is almost instantaneous, thus, printing to the greater efficiency of securities market. lt is to be noted that the semi-strong form of efficient market hypothesis includes that week form of efficient market hypothesis also because internal market information is a part of all publicly available information.

(c) The Strong Form test of the inside information and the Efficiency of the Market: This test is concerned with whether two sets of individuals - one having inside information about the company and the other uninformed could generate random effect in price movements. The strong form holds that the prices reflect all information that is known. It contemplates that even the corporate officials cannot, benefit from the inside information of the company. The market is not only efficient but also perfect. Lt is to be noted that it includes both the weak form and semi-strong form of efficient market hypothesis. The findings are that very few and negligible people are in such a privileged position to have inside information and may make above-average gains but they do not affect the normal functioning of the market.

Efficient Market Hypothesis has put to challenge the fundamental and a technical analyst to the extent that random walk model is valid description of reality and the work of charists is of no real significance is stock price analysis. In practice, it has been observed that markets are not fully efficient in the semi-strong or strong sense. Inefficiencies and imperfections of certain kinds have been observed in the studies conducted so far to test the efficiency of the market. Thus, the scope of earning higher returns exists by using original, unconventional and innovative techniques of analysis. Also, the availability of inside information and its rational interpretation can lead to strategies for deriving superior returns.

Formation of a Company

noreply@blogger.com (FERRY) — Wed, 29 Apr 2009 08:25:00 +0000

The principal steps involved in setting up of a company are as follows.

A group of individuals, interested in promoting a company, bar themselves together. They are called the promoters.

The promoters prepare two documents: (a) Memorandum Association; and (b) Articles of Association. The former spells or inter alia, the objectives of the company, the amount of capital that the company would be authorized to raise, and the different types of shares the company plans to issue; the latter specifies the rules and regulations for managing the affairs of the company.

The promoters submit the Memorandum of Association and the Articles of Association to the Registrar of companies for the approval.

The Registrar of Companies examines these documents. If he finds them in order, he issues a certificate called the, Certificate of Incorporation, and this brings the company formally into existence.

The company raises funds by issuing shares to the public. Once funds are raised, the company obtain; from the Registrar of Companies a 'certificate of commencement of Business. This enables it to actively commence its business operations.

Financing of a Company

noreply@blogger.com (FERRY) — Wed, 29 Apr 2009 08:27:00 +0000

The important sources of finance are as follows:

Equity Capital this represents the ownership capital provided by equity Share holders who subscribe to the equity shares issue by the firm.

Reserves and surplus: The profits of the company that are ploughed back in the business are referred to as reserves and surplus.

Debenture Capital The debt capital raised by the firm by issuing debentures to investors is called the debenture capital.

Term loans Long-term borrowings from financial institutions and commercial banks mainly for financing fixed assets are referred to as term loans.

Working capital Advances short-term borrowings from commercial banks for financing current assets are called working capital advances.

Trade credit This represents the credit extended by suppliers of raw materials, intermediates, components, etc.

Cost and Management Accounting – Elements of Cost:

noreply@blogger.com (FERRY) — Thu, 30 Apr 2009 09:19:00 +0000

One of the basic purposes of a system of cost accounting is to determine the cost of products (or services). This information is required, inter alia, for estimating the cost of goods sold and valuing inventories. This chapter discusses the framework for cost determination. It is organized into five sections as follows:

* Elements of cost
* Flow of costs
* Product costing
* Problems in cost determination
* Standard costing

ELEMENTS OF COST

In a manufacturing enterprise the total cost may be divided into two broad categories: manufacturing costs and non-manufacturing costs.

Manufacturing Cost

Cost accounting has traditionally been concerned with manufacturing costs. Only in recent years has the analysis of non-manufacturing costs received more attention. However, the principal focus of cost accounting continues to be on manufacturing costs. The reasons for this are: (i) the general accounting practice is to include only manufacturing costs in the valuation of inventories; and (ii) manufacturing activity is more standardised and routinised compared to non-manufacturing activities (like general administration, marketing and research and development). The three elements of manufacturing costs are material, labour, and manufacturing overhead.

Material A distinction is made between direct materials and indirect materials when the product is the relevant cost objective. Direct materials are those which can be logically and readily identified with the product. Lumber required for manufacturing furniture, steel for manufacturing automobiles, and crude-oil for petroleum products are examples of direct materials. When we talk of material cost of a product, we refer to the cost of direct materials only.

Indirect materials are those which are not readily identified with the product. Examples of indirect materialsare: glues, nails, and tacks. These are included under manufacturing overhead

Labour As in the case of materials, a distinction is made between direct labour and indirect labour. Direct labour represents labour which works directly on the product (the cost objective for our present purposes). Examples of direct labour are: lathe operators, welders, assembly workers. The cost element labour includes the cost of direct labour only. Indirect labour represents labour which does not work directly on the product. Examples: foremen, janitors, watchmen. Indirect labour is included under manufacturing overhead.

Manufacturing Overhead This refers to manufacturing costs other than direct material and direct labour costs. The major items included under manufacturing overhead are indirect materials, indirect labour, factory supplies, utilities depreciation, repairs and maintenance, and rent and insurance.

Non-manufacturing Costs

Cost accountants are now bestowing attention to non-manufacturing costs as well. There is a realisation that these costs need to be analysed more penetratingly for purposes of planning and control. While the sub classification of non-manufacturing costs is not as well defined as for the manufacturing costs, we will, for our purposes, divide them into four components: (i) distribution costs, (ii) research and development costs, (iii) financial costs, and (iv) administrative costs.

Distribution Costs These include costs incurred in marketing-related activities such as selling, distribution, transportation advertising, sales promotion, etc.

Research and Developmental Costs These are incurred for developing new products or processes, improving existing products or processes, and searching for new knowledge. Representing outlays on scientific research and development efforts - not for production and marketing activities - these costs are assuming greater significance with rapid changes in technology.

Financial Costs The principal financial cost is the interest on working capital advance, term loans, and debentures. Other financial costs that may be incurred by a business are commitment fee and bank commission.

Administrative Costs This category includes the cost of general administration and other costs which logically do not fit into other classifications. Important items included under this head are: salaries of top managerial personnel, directors’ fees, public relations expense, general accounting costs, audit and legal fees, and head office expenses.

Flow of costs

noreply@blogger.com (FERRY) — Thu, 30 Apr 2009 09:21:00 +0000

There are two different approaches, as discussed below, for determining the cost of goods sold in a manufacturing concern.

Absorption costing:

Under the traditional method of accounting all the costs incurred in manufacturing, irrespective of their behavior with respect to volume, are regarded as product costs and included in the cost of the manufactured product. This method is referred to as absorption costing or full costing because the product absorbs the full amount of manufacturing costs. Non-manufacturing costs (distribution costs, research and development costs, financial costs, and administrative costs) are regarded as period costs, to be expensed in the assuming period in which they are incurred or to the amortized over several accounting periods. The flow of costs under absorption costing is shown in Exhibit - 1. Product costs, also known as inventoriable costs, are treated as assets until the product is sold, when they are matched against revenues.

Direct Costing

Direct costing, also referred to as variable costing or marginal costing, has received a great deal of attention in the past few decades. Under this system, manufacturing costs are segregated between those which vary directly with volume and those which are fixed. Only the variable costs (direct material direct labour, and variable manufacturing overhead costs) are used for valuing inventories and determining the cost of goods sold. The remaining manufacturing expenses are treated as period costs. The flow of costs under direct costing is shown in Exhibit - 2.

Factors influencing investment decision

noreply@blogger.com (FERRY) — Mon, 04 May 2009 17:15:00 +0000

Capital investment decisions are not governed by one or two factors, because the investment problem is not simply one of replacing old equipment by a new one, but is concerned with replacing an existing process in a system with another process which makes the entire system more effective. We discuss below some of the relevant factors that affects investment decisions:

(i) Management Outlook: lf the management is progressive and has an aggressively marketing and growth outlook, it will encourage innovation and favor capital proposals which ensure better productivity on quality or both. In some industries where the product being manufactured is a simple standardized one, innovation is difficult and management would be extremely cost conscious. In contrast, in industries such as chemicals and electronics, a firm cannot survive, if it follows a policy of 'make-do' with its existing equipment. The management has to be progressive and innovation must be encouraged in such cases.

(ii) Competitor’s Strategy: Competitors' strategy regarding capital investment exerts significant influence on the investment decision of a company. If competitors continue to install more equipment and succeed in turning out better products, the existence of the company not following suit would be seriously threatened. This reaction to a rival's policy regarding capital investment often forces decision on a company'

(iii) Opportunities created by technological change: Technological changes create new equipment which may represent a major change in process, so that there emerges the need for re-evaluation of existing capital equipment in a company. Some changes may justify new investments. Sometimes the old equipment which has to be replaced by new equipment as a result of technical innovation may be downgraded to some other applications, A proper evaluation of this aspect is necessary, but is often not given due consideration. In this connection, we may note that the cost of new equipment is a major factor in investment decisions. However the management should think in terms of incremental cost, not the full accounting cost of the new equipment because cost of new equipment is partly offset by the salvage value of the replaced equipment. In such analysis an index called the disposal ratio becomes relevant.

Disposal ratio = (Salvage value, Alternative use value) / Installed cost

(iv) Market forecast: Both short and long run market forecasts are influential factors in capital investment decisions. In order to participate in long-run forecast for market potential critical decisions on capital investment have to be taken.

(v) Fiscal Incentives: Tax concessions either on new investment incomes or investment allowance allowed on new investment decisions, the method for allowing depreciation deduction allowance also influence new investment decisions.

(vi) Cash flow Budget: The analysis of cash-flow budget which shows the flow of funds into and out of the company may affect capital investment decision in two ways. 'First, the analysis may indicate that a company may acquire necessary cash to purchase the equipment not immediately but after say, one year, or it may show that the purchase of capital assets now may generate the demand for major capital additions after two years and such expenditure might clash with anticipated other expenditures which cannot be postponed. Secondly, the cash flow budget shows the timing of cash flows for alternative investments and thus helps management in selecting the desired investment project.

(vii) Non-economic factors: new equipment may make the workshop a pleasant place and permit more socializing on the job. The effect would be reduced absenteeism and increased productivity. It may be difficult to evaluate the benefits in monetary terms and as such we call this as non-economic factor. Let us take one more example. Suppose the installation of a new machine ensures greater safety in operation. It is difficult to measure the resulting monetary saving through avoidance of an unknown number of injuries. Even then, these factors give tangible results and do influence investment decisions.

RATIONALE OF CAPITAL BUDGETING DECISIONS

noreply@blogger.com (FERRY) — Mon, 04 May 2009 17:25:00 +0000

The rationale behind the capital budgeting decisions is efficiency. A firm has to continuously invest in new plant or machinery for expansion of its operations or replace worn out machinery for maintaining and improving efficiency. The main objective of the firm is to maximize profit either by way of increased revenue or by cost reduction. Broadly, there are two types of capital budgeting decisions which expand revenue or reduce cost.

1. Investment decisions affecting revenue: It includes all those investment decisions which are expected to bring additional revenue by raising the size of firm's total revenue. It is possible either by expansion of present operations or the development of new product in line. In both the cases fixed assets are required.

2. Investment decisions reducing costs; It includes all those decisions of the firms which reduces the total cost and leads to increase in its total earnings i.e. when an asset is worn out or becomes outdated, the firm has to decide whether to continue with it or replace it by new machine. For this, the firm evaluates the benefit in the form of reduction in operating costs and outlays that would be needed to replace old machine by new one. A firm will replace an asset only when it finds it beneficial to do so. The above decision could be followed decisions following alternative courses: i.e., Tactical investment decisions to strategic investment decisions to strategic investment decisions, as briefly defined below

3. Tactical investment decisions; It includes those investment decisions which generally involves a small amount of funds and does not constitute a major departure from what the firm has been doing in the past.

4. Strategic investment decisions: Such decisions involve large sum of money and envisage major departure from what the company has been doing in the past. Acceptance of strategic investment will involve significant change in the company's expected profits and the risk to which these profits will be subject. These changes are likely to lead stock-holders and creditors to revise their evaluation of the company.

NCR'S RISK MANAGEMENT STRATEGY

noreply@blogger.com (FERRY) — Wed, 06 May 2009 16:34:00 +0000

In 1997, NCR embarked on a new phase of its existence, which began in 1884 when John H. Patterson founded the National Cash Register Company, maker of the first mechanical cash register. The new NCR, which was acquired by AT & T in 1991 and was subsequently spun off from At & T at the end of 1996, is divided into four major business groups:

• Computer System Group

• Communications industry Business Unit

• Financial Systems Group

• Retail Systems Group

The Computer System group develops, manufactures, and markets computer systems. The other three groups represent specific industries targeted by NCR.

NCR generated $8 billion in revenues in 1995, the smallest of the AT&T groups (the new AT & T generated $51 billion in revenues, and Lucent Technologies generated $21 billion in revenues). However, NCR is the most international of the group, generating over 50 per cent of its revenues abroad, whereas AT & T as a whole generated only 10.9 per cent of total revenues from abroad. NCR has 3,79,000 employees worldwide, 19,000 of whom are in the United States. It also has 1100 offices and 31 development and manufacturing locations in more than 130 countries. Its top five countries in revenues are Japan, Germany, Switzerland, the United Kingdom, and France.

NCR's leadership team is divided into product groups, geographic areas (Americas Region, Asia/pacific Region, and Europe and Middle East/Africa Region), and functional areas (such as Global Human Resources, Corporate Strategy, and finance and Administration.). The role of the leadership team is to set the vision, mission, and direction for NCR.

Effective July 1, 1996, Earl C. shanks was hired away from Farley industries Inc. and named as the head of the company's treasury functions. He reports directly to Per-Olof Loof, head of the Financial Systems, Group and member of NCR's leadership team. This was an important appointment, because in 1991 when AT & T acquired NCR, virtually all of NCR's treasury functions were transferred to AT & T. Thus Shank's mission is to rebuild the treasury group from zero. He is responsible for creating a global organization which will manage the company/s worldwide cash flows and foreign-exchange risk, establish adequate borrowing facilities, establish and implement finance and investment objectives and strategies for pension assets and benefits.

In 1990, the last year NCR issued an annual report before the merger, it noted that transfer pricing between geographic divisions is done at market prices. It also emphasized how interdependent its units are: "The methods followed in developing the geographic area data require the use of estimation techniques and do not take into account the extent to which NCR's product development, manufacturing, and marketing depend upon each other. Thus, the information may not be as indicative of results as it would be if the geographic areas were independent organizations".

Similar breakdowns are not found in the AT & T Annual Report, since foreign revenues are only 10.9 per cent of total revenues. AT & T provides revenues, operating income, and identifiable assets for only two geographic segments: United States and other geographic areas. FASB Statement Number 14 does not require the disclosure of geographic segment data if foreign revenues, earnings, and identifiable assets are less than 10 per cent of total revenues. However, AT & 1's Annual Report mentions that foreign revenues in its segment disclosures include only revenues from foreign-based operations. Revenues from all international activities, including the foreign-segment revenues and those from international telecommunications services and export sales, provided 26.2 percent of consolidated revenues in 1995. AT & T had hoped to generate 50 percent of its revenues from abroad by the turn of the century. However, NCR, with nearly 60 percent of its revenues coming from abroad, is clearly more global than AT & T in general.

Prior to the merger, NCR took advantage of foreign capital markets to borrow money. ln its 1990Annual Report, NCR reported notes payable totaling $182 million, classified as short-term borrowings from banks, mainly denominated in foreign currencies. NCR also included long-term obligations denominated in Eurodollars and in Japanese Yen.

If AT & T uses foreign capital markets, it does not disclose much information. AT & T's 1995 Annual Report describes its debt obligations but does not disclose whether any are in a foreign currency. The annual report mentions, however, that a consortium of lenders provides revolving credit facilities to AT & T and AT & T Capital Both AT & T and AT & T Capital maintain lines of credit with different consortiums of primary foreign banks. In addition, AT & T lists its stock on exchanges in Brussels, Geneva, London, Paris, and Tokyo, in addition to several in the United States, so it is gaining access to equity capital abroad.

The objective of NCR's risk-management strategy was to neutralize economic exposure from foreign-currency fluctuations, first through operational strategies and second with foreign-exchange contracts. To illustrate how significance those contracts were, on December 31, 1990 NCR had $1.271 billion in outstanding forward contracts, of which 60 per cent were in European currencies and 40 per cent were in Pacific currencies. There were no contracts in Latin American currencies, because those financial markets were not developed enough for forward contract.

From an organizational standpoint, NCR put a lot of responsibility on the shoulders of group management. Each geographic unit had a group vice president and finance director responsible for the overall risk-management strategy of the group, subject to the approval of top management and corporate treasury. Each of the eight regions that composed the Latin America/Middle East/Africa group had a general manager and a finance director. Once the risk-management strategy and had been determined, the execution of the strategy was left to the local level, where market conditions vary considerably.

Foreign-Exchange Risk Management

noreply@blogger.com (FERRY) — Mon, 11 May 2009 03:47:00 +0000

Foreign-Exchange Risk Management in the older NCR:

Prior to 1991, NCR was organized differently than it is now on a geographic basis. However, it was still considered one of the world’s premier MNEs in terms of the amount of foreign to total revenues. Although the new NCR has an Americas division that includes North America and Latin America, the old NCR had a Latin America/Middle East/Africa geographic region that encompassed the world's most volatile regions at the time.

Foreign-exchange Risk Management under AT& T

Foreign-exchange exposure was greater under AT & T than it was for NCR, but international was a smaller part of its total business, so AT & T started with little real expertise in the area. As AT & T began to expand its foreign revenues, both in terms of exports and imports as well as foreign direct investment, it had to develop policies and procedures for managing exposures. When AT & T acquired NCR, it permitted NCR to retain its foreign currency risk-management responsibilities for foreign operations, but philosophical conflicts arose over the best way to deal with exposures. For example, NCR felt it was important to hedge balance sheet as well as cash flows exposures, whereas AT & T did not feel inclined to hedge balance sheet exposures. In its 1995 annual report, AT & T discussed its general philosophy for hedging foreign-exchange exposures:

We enter into foreign-currency exchange contracts, including forward, option and swap contracts, to manage out exposure to changes in currency exchange rates, principally Canadian dollars, Deutsche marks, pounds sterling and Japanese yen. Some of the contracts involve the exchange of two currencies, according to the local needs of foreign subsidiaries. The use of these derivative financial instruments allows us to reduce our exposure to risk that the eventual dollar net cash inflows and outflows, resulting from the sale of products to foreign customers and purchases from the foreign suppliers, will be adversely affected by changes in exchange rates. Our foreign exchange contracts are designated for firmly committed or forecasted purchases and sales. These transactions are generally expected to occur in less than one year. For firmly committed sales and purchases, gains and losses are recognized as adjustments to the underlying hedged transactions when the future sales and purchases are recognized, or immediately if the commitment is canceled. Gains or losses on foreign exchange contracts that are designated for forecasted transactions are recognized in other income as the exchange rate change.

Planning of Capital Expenditure:

noreply@blogger.com (FERRY) — Mon, 11 May 2009 03:53:00 +0000

Capital budgeting is concerned with activities ranging from planning the availability, allocation and control of expenditure or long-term as well as short-term investment funds.

Planning of capital expenditure could be done to finance the capital expenditure plans of the company for short-term or long-term periods and hence the long-term plan budget and short-term plan budget.

As regards long-term plan budget, the period covered under the planning is three to five or more years. The planning for such expenditure assumes a composite form involving all aspects of economic forecasts for the outlook of entire industry in which the company performs with its unit and forecast for the company with probable or expected coverage of market share. On the basis of this forecast plant managers estimate their prospective capital expenditure, the marketing managers plan their market shares, the personnel managers assess the requirements for manpower and technical hands to achieve targeted production results, and the finance managers plans, for the funds to be made available for investment taking into consideration the above requirements. The long-range capital budget is continually revised with changing economic conditions, the marketing conditions, the marketing environment, structure of wages and the inflationary pressures in the economy. It is flexible in nature and oriented towards a long-range growth planning for the company.

As regards short-period Capital budgeting, involving short-range planning for funds, it covers expenditure for a short duration involving the period covered within one or two years. It does not involve large capital expenditure but covers temporary need for funds for different departments within the company depending upon the degree of urgency, profitability and savings to be achieved with reference to the capital costs to be incurred. Short run capital expenditure plans get converted into long-term plans of capital expenditure. Short run capital expenditure plans get converted into long-term plans of capital expenditure. Short-term capital expenditure plan is known as operating budget and is concerned with revenues and expenses related to firms daily operations.

Significance of planning for capital expenditure is derived only with major investment proposals and the use of funds over a long period. The most important factor affecting the planning horizon is the rate of change in technology in the industry. The advancement in technology may warrant capital investment for short as well as long period depending upon the changing pace of technology and technological obsolescence: long-term plan, however, helps the company to analyze its needs and directions into the distant future involving a technological change.

Capital expenditure control

noreply@blogger.com (FERRY) — Mon, 11 May 2009 03:54:00 +0000

Planning and control are inter-linked and consecutive steps for the successful implementation of any programme. Planning done for incurring capital expenditure is followed by control devices to assess the divergences between the expected and achieved results. Control for capital expenditure is expressed keeping in view the above objective.

It may be recalled that capital expenditure is classified into three main forms viz:

1. Expenditure made to reduce costs;

2. Expenditure made to increase revenue;

3. Expenditure which is justified on non-economic grounds.

With exercise control over capital expenditure in any of the above categories, the capital expenditure analysis should concentrate on three types of outlays viz: 1. Major projects, 2. Routine expenditure, and 3. Replacement.

As regards major projects, strategic investment may be made for expansion of productive capacity or achieving product innovation or preparing barriers against capital fluctuations. In the second type of outlay, routine expenditure may be working condition improvement, maintenance expenditure, competition oriented expenditure etc. Thirdly, replacement need may arise to avoid capital wastage for existing equipment to check its disposal value or it may be obsolescence replacement. In all circumstances, proper attention is to be devoted in analyzing the need for the capital expenditure so that it would be curtailed to the minimum required.

One important aspect of control device is to match the demand schedule for the capital and the supply of capital from different sources. Demand comes for capital from all departments and it is at this level control could be exercised to keep the demand at the bare minimum required for the objective inherent in capital investment decisions. Supply of capital, on the other hand, is a scarce commodity and the company has to incur expenditure for availing it. This necessitates for the finance manager to exercise economy in capital expenditure so that optimum benefit could be obtained with the use of scarce capital sources. This establishes the need for capital rationing to impose constraints on capital expenditure under prevailing market conditions and place self-imposed constraints to check the funds being raised from outside agencies like borrowings. Thus, the device of capital rationing is adopted to control capital expenditure.

Capital Rationing

noreply@blogger.com (FERRY) — Mon, 11 May 2009 03:57:00 +0000

The firm may put a limit to the maximum amount that can be invested during a given period of time, such as a year. Such a firm is then said to be resorting to capital rationing. A firm with capital rationing constraints attempts to select the combination of investment projects that will be within the specified limits of investments to be made during a given period of time and at the same time provide greatest profitability.

Capital rationing may be effected through budget ceiling. A firm may resort to capital rationing when it follows the policy of financing investment proposals only by ploughing back its retained earnings. In that case, capital expenditure in a given period cannot exceed to amount of retained earnings available for reinvestment. Management may also introduce capital rationing when a department is authorized to make investments up to a limit beyond which investment decisions will be made by higher level management.

Capital rationing may result in accepting several small investment proposals then accepting a few large investment proposals so that there may be full utilization of budget ceiling. This may result in accepting relatively less profitable investment proposals if full utilization of budget is a primary consideration. Similarly, capital rationing also means that the firm foregoes the next most profitable investment falling after the budget ceiling even though it is estimated to yield a rate of return much higher than the required rate of return. Thus, capital rationing does not lead optimum results.

Calculating the Cost of Equity Capital

noreply@blogger.com (FERRY) — Sun, 31 May 2009 16:24:00 +0000

The cost of debt capital (as well as preference capital) can be calculated fairly easily. This is because it entails a well-defined burden in terms of interest payment and principal payment. Estimating the cost of equity capital, however, is difficult as there is no fixed dividend or principal payment burden associated with it. Equity dividend is payable out of the earnings of the firm at the discretion of the board of directors. Further, the question of repaying the equity capital does not ordinarily arise during the life of the firm. In liquidation, of course, equity shareholders are entitled .to the residual assets of the firm.

Theoretically, the cost of equity is the discount rate which equates the present value of the future dividends to the net amount realized from the issue of equity capital. While it is almost impossible to predict the future dividends, it seems reasonable to assume that dividends would grow over time because firms generally reinvest a significant portiorr-40 to 60 percent of their earnings. Such reinvestment tends to enhance future earnings and dividends. Hence the cost of equity may be calculated as follows

Cost of equity = (Expected dividend per share/ Net price realized from issuing an equity share) + Expected annual rate of growth in dividends

(The formula for cost of equity presented here is derived from equating the present value of a dividend stream which is expected to grow at a constant rate with the present market price per share)

As you may have guessed, the difficulty in applying this formula arises mainly with respect to estimating the growth factor. One can begin with the past growth rate as a starting point. Past trends, however, cannot be expected to continue indefinitely in future. Hence the past growth rate figure will have to be adjusted in the light of assessments regarding future developments. Clearly, there will be varying judgments with respect to future growth. Yet, such a judgment is essential in order to get a handle over cost of capital.

If we assume that the expected annual rate of growth in dividends for Horizon Limited is 10 per cent, we get the following estimate for its cost of equity:

(1.8 / 22.75) + 0.10 = 0.1791 or 17.91 per cent.

Debenture capital

noreply@blogger.com (FERRY) — Tue, 28 Jul 2009 12:24:00 +0000

Akin to promissory notes, debentures are instruments for raising long term debt capital. Debentures holders are the creditors of the company. The obligation of the company towards its debenture holders is similar to that of a borrower who promises to pay interest and capital at specified times.

Features

Trustee When a debenture issue is sold to the investing public, a trustee is appointed through a deed. The trustee is usually a bank or an insurance company or a reputable firm of attorneys. Entrusted with the role of protecting the interest of debenture holders, the trustee is responsible to ensure that the borrowing firm fulfils its contractual obligations.

Security Debentures are typically secured by a charge on the immovable properties, both present and future, of the company by way of an equitable mortgage, which is effected by deposit of the title deeds relating to mortgaged assets in favour of the trustees. Debentures not protected by any security are called unsecured or naked debentures.

Redemption Debentures are generally redeemable-perpetual debentures are very rare. The redemption takes place in a pre specified manner. Typically, it occurs between the 5th year and the 9th year. Companies are now required to create a debenture redemption reserve to facilitate timely redemption. A major requirement is that the company should create a Debenture Redemption Reserve equivalent to 50 per cent of the amount of debenture issue before debenture redemption commences.

Interest The interest payment on debentures is a fixed obligation, irrespective of the financial situation of the issuing firm. Typically payable semi-annually, it is a tax-deductible expense.

Right Debentures for Working Capital

Public limited companies can issue "rights" debentures to their share-holders with the object of augmenting the long-term resources of the company for working capital requirements. The key guidelines applicable to such debentures are as follows

The amount of the debenture issue should not exceed (a) 20 percent of the gross current assets, loans and advances minus the long-term funds presently available for financing working capital, or (b) 20 per cent of the paid-up share capital, including preference capital and free reserves, whichever is the lower of the two.

The debt: equity ratio, including the proposed debenture issue, should not exceed 1:1.

The debentures shall first be offered to the existing Indian resident shareholders of the company on a pro rata basis.

Bank of Russia miscalculated the mortgage

noreply@blogger.com (FERRY) — Mon, 05 Oct 2009 07:07:00 +0000

Russia bank analyzed the Russian market for mortgage lending in the first half of 2009, noting a serious worsening in the situation with the mortgage underwriting in the Russian banks. According to CB, the number of banks, regularly issuing the 'ruble mortgage dropped to 100 players, the currency - up to 11. At the same time for six months they have issued loans upto 55 billion rubles., Which corresponds to four years ago.

Review of the status of the mortgage market in the first half of 2009 was published last week in the new issue of the Bulletin of the Bank of Russia. It is based on data from a new form of reporting on mortgage loans by the Central Bank has put in place from 1 January 2009. According to the review of the Central Bank on 1 July 2009 the number of participants of the primary market of mortgage loans decreased from the beginning of the year at 5.5% - to 568 banks. But only 279 banks in the first half provided the mortgage, the rest simply served previously issued loans. Indeed active players have been even less. As the Central Bank, "regularly gave out" mortgages in rubles about 100 banks in foreign currency - 11.

Bankers believe that statistic overly optimistic. "The real issue 10-15 mortgage banks, - said deputy president of the City Mortgage Bank Igor Zhigunov .- Statistics of the Central Bank is distorted due to the stabilization of restructured loans and loans that are issued by mortgage borrowers who find themselves in a difficult situation." Many banks issue credit for one or two a month, so you should not look at the number of players, and the volume, notes deputy director of Alliance and retail banking at Alfa Bank Ilya Zebari.

Indeed, over the same period in 2008 the amount available in the first half of 2009 residential mortgage loans decreased by 6.1 times, in fact returning to the same period in 2006, said the Central Bank. According to the regulator, for the first half the banks were given 44,045 mortgage loans totaling $ 55.4 billion rubles. According to bankers, the real extent of the reduction of the market is higher.

Bank notes that "the main reason for reducing the volume of mortgage lending was a rise in the cost of credit resources, increasing the risks of investing in fixed assets while reducing the possibility of refinancing previously issued loans. The volume of refinanced mortgages by banks for home loans fell in 2008 to 14,6%, to 99 billion rubles. And the beginning of 2009 have almost tripled - to 33.4 billion rubles. The structure of the refinancing has changed significantly. If in 2008, banks sold to other banks 40% of all refinanced loans, then in 2009 - only 29,7%. The share of refinancing through the Agency for Housing Mortgage Lending, which is the main channel for mortgage refinancing, rose from 22,6% to 47,9%.

The market confirmed the trend of concentration in mortgage refinancing AHML, but more categorical in their assessment than the regulator. "AHML - the only source of refinancing," - said Mr Zebari. Alfa-Bank, before the crisis was beginning to refinance alien mortgage, now he wants and expects to sell its entire portfolio AHML. VTB 24 continues to securitize their mortgage portfolios. This is not market transactions. "The demand for mortgage bonds is not, therefore, these portfolios have a hold on their balance sheets, or use them as collateral for Bank loans", - states Mr. printers.