Raising Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

“Raising Capital”

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Moscow

2011

CONTENTS

 

Introduction……………………………………………………………………..….3

1. Theoretical basis of the concept of "Capital"…………………………...……….4

1.1 General characteristics of capital……………………………………………….4

1.2 Formation and the cost of capital………………………………………………8

2. The main method of decreasing the Capital……………………………………11

2.1 Issue of securities……………………………………………………………..11

2.2 Production and circulation of bonds…………………………………………..18

2.3 Investment Capital…………………………………………………………….20

2.4. Discounting of capital and income…………………………………………...23

Conclusion………………………………………………………………………...25

References………………………………………………………………………...26

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTRODUCTION

 

Subject ways to increase the capital is always relevant, as the company's management must be clear, at the expense of some renewable resources, it will work, and in any sphere of activity is to invest their capital.

Caring for the provision of business the necessary financial resources are crucial to any business activity.

Therefore, analysis of the availability, source of capital formation and distribution of vital importance.

Task analysis:

- The study of the composition, structure and dynamics of the sources of capital formation companies;

- Identification of factors change their values;

- Determination of the value of individual sources of capital raising and its average price, as well as changes in the factors of the latter;

- Assessment of financial risk (the ratio of debt and equity);

- Evaluation of the changes in the liability balance in terms of improving the financial sustainability of the enterprise;

- Rationale for the optimal variant of the ratio debt to equity.

The purpose of this course is to study the basic ways to increase capital.

In line with the tasks were set: the study of literature on the subject, the disclosure of the general characteristics of debt, the analysis of forms borrowing capital, conclusions.

 

 

 

 

 

 

 

1. THEORETICAL BASIS OF THE CONCEPT OF "CAPITAL"

 

1.1 General description of capital

 

Capital - this means at the disposal of a business entity to perform its activities with a view to profit.

Formed as a business capital from its own (internal) or by borrowing (external) sources.

The main source of financing is equity.

 

Figure 1 - Composition of equity companies

 

The composition of shareholders' equity includes share capital, accumulated capital (reserve and additional capital, the foundation of the social sphere, retained earnings) and other income (targeted funding, charitable donations, etc.).

Share capital - a sum of money for the founders of the authorized activity. State-owned enterprises - the cost of the property belonging to the state for the company with the rights of its own; on joint ventures - the nominal value of shares in limited liability companies - the amount of share owners, to lease the enterprise - the sum of the contributions of its employees and others

The authorized capital is formed during the initial investment. The contributions of the founders of the charter capital may be made in cash, intangible assets, in-kind. The authorized capital is declared when registering the company, and in adjusting its magnitude require re-founding documents.

Additional paid-in capital as a source of funds of the company formed as a result of property revaluation or sale of shares above par value of, and as a result of reinvestment of profits to capital investment.

Reserve capital reserve includes the balances and other similar funds established in accordance with the law or in compliance with legislation.

Social fund is formed in the presence of the organization of objects of housing and land improvement facilities (obtained free of charge, including the donation contract purchased by the organization), not previously recorded in the authorized (share) capital, charter capital, additional capital.

For special-purpose funds and trust fund are received free of charge from the values ​​of individuals and entities, as well as non-repayable and returnable budget allocations for the maintenance of community facilities and to restore the solvency of companies located on budgetary financing.

The main source of equity is net (undistributed) profits of the enterprise, which remains in the back of the company as an internal source of self-financing long-term (Fig. 2). If the company losing money, equity capital is reduced by the amount of damages received.

Considerable weight in the composition of domestic sources of capital allowances have used their own equipment and intangible assets. They do not increase the amount of equity capital, and are the means of its reinvestment.

For other forms of equity include income from rental property, settlements with shareholders, etc. They do not play a significant role in shaping the equity of the enterprise.

 

 

 

 

 

 

Figure 2 - Sources of equity companies

 

The main share in the external sources of equity capital is an additional issue of shares. State-owned enterprises can be provided gratuitous financial aid from the state.

Among other external sources include tangible and intangible assets, the company sent free of charge by individuals and legal entities in order of charity.

Gross Debt (Fig. 3) - are loans from banks and finance companies, loans, accounts payable, leasing, commercial paper, etc. It is divided into long-term (over one year) and short-term (one year).

 

Figure 3 - Classification of debt

 

For the purposes of attracting borrowed funds are divided into the following types:

- Funds raised for the reproduction of fixed assets

  and intangible assets;

- Funds raised for working capital assets;

- Funds raised to meet social needs.

The form of borrowing may be in cash, marketable, in the form of equipment (lease), etc.;

by source, they are divided into external and internal;

in the form of security - on collateralized or mortgage, warranty or guarantee and unsecured.

In the formation of the capital structure must take into account the peculiarities of each of its components.

Equity capital is characterized by simplicity of attraction, providing a more stable financial condition and reduce the risk of bankruptcy. The need for it due to the demands of self-financing enterprises. It is the foundation of their autonomy and independence. Feature of equity is that it is invested for the long term and is most at risk. The higher the proportion of the total capital and lower leverage ratio, the higher the buffer that protects lenders against loss and risk of capital losses.

However, equity is limited in size. In addition, funding of the company only at their own expense is not always advantageous for him, especially in cases where production is seasonal in nature. Then, at certain periods will accumulate a lot of money on bank accounts, and at other times they will be missed. It should also be borne in mind that if the prices of financial resources are low, and the company can provide a higher rate of return on invested capital than pay for the loans, it is attracting borrowed funds, it may enhance its market, the position and profitability of its own ( equity) capital.

At the same time if the funds are enterprises established mainly due to short-term liabilities, its financial situation is unstable, as with capital short-term use needs constant operative work: control over their timely return and bringing in traffic for a short time other capitals. The disadvantages of this source of funding should also include the complexity of the procedure of recruitment, high dependence on interest on loans from financial market conditions and increased in connection with this compromising the company's solvency.

The degree of optimality ratio debt to equity depends largely on the financial position of the company and its stability. [1, c. 125]

 

1.2 Formation and the cost of capital

 

Capital, as well as other factors of production, has a cost, which forms the level of operating and investment costs.

The cost of capital - is it the price that the company pays for his involvement in a variety of sources.

Since the cost of capital is part of the profits that the company should pay for the use of the generated or attracted new capital to ensure a process of production and sales, this figure is the minimum rate of profit from operating activities. If the profitability of operating activities is lower than the price of capital, it will lead to "eating away" of capital and bankruptcy.

Cost of debt in the form of bank loans (CDC) is calculated as follows:

CDC = (Interest on loans / funds raised by credit) x (1 - Kn).

If the interest on the loan are included in the cost of production, then the real price of credit will be less than the level of income tax (KH).

The cost of borrowed capital, attracted zatechet bond (Tsobl) can be determined as follows:

Tsobl = Gross amount of interest on bonds / Present value of bonds.

The cost of trade credit provided in the form of short-term deferral of payment:

Tst.kr = CI x 360 (1 - Book) / D = 10% x 360 (1 ± 0,24) / 90 = 30.4%

where CI - level of price premium for a deferred payment,%;

       D - duration of the deferral of payments to suppliers of inventory.

Similarly, determine the price of the promissory note debt.

The cost of finance lease is defined as follows:

Tsfl = (Ci - ON) (Book) / 1 - Zfl,

where Cn - the annual interest rate on the lease,%;

AT - Annual rate of depreciation of an asset, attracted by lease,%;

        Book - The income tax rate as a decimal fraction; Zfl - the ratio of costs to bring the asset under a financial lease for the cost of the asset (as a decimal).

The cost of internal accounts payable are usually equal to zero, because the company did not incur any costs to service that debt.

Weighted average cost of capital of the enterprise (WACC) is defined as follows:

WACC = Σ (x Udi Tsi).

Consequently, its level depends not only on the value of the individual terms of capital but also on the proportion of each source of capital formation to its total amount. With an increase in the proportion of more expensive resources, the average price of a capital increase tenge and vice versa. Calculate the impact of these factors can be a way of absolute differences:

Δ WACC udi = Σ (x Δudi Tsio); Δ WACC Tsi = Σ (Δ x Δ Udi Tsi)

Optimize the structure of the sources of capital needed so that the average price dropped him.

The distribution of the periods of inflows (loans, credits, revenues from sales of shares) must take into account the various costs and cover those periods related to investment and operation of the assets received. [2, c. 110]

This opens up the opportunity to move from consideration of the effectiveness of the project itself to the analysis of the project in its financial environment from the operating flow of real money to financial flows of real money - they relate to investments.

Financial inflows:

- Paid-up share capital

- Subsidies, grants,

- Long-and medium-term loans,

- Short-term loans, bank overdraft,

- Increase in accounts payable.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2. The main method of decreasing the Capital

 

2.1 Issue of securities

 

In a market economy the main sources of raising capital is the issuance of debt and equity securities. The world practice knows various ways to share issue. The most common method is through the issue of investment institutions who bought the entire issue and sell its fixed-price natural and legal persons. The most prevalent during the privatization of the enterprise.

The next way - selling directly to investors for subscription. Differs from the preceding that the intermediate sale of shares in issue of the investment institution is not made. The company, distributing its shares, in this case, relies on his own strength - finished extensive advertising, a wide avenue. It is believed that only healthy firms are able to afford this method.

The third way - the trend for sale. One of the few investment institutions to buy the entire issue from the borrower at a fixed price, and then arranges sale or auction, the results of which determine the optimal price of the shares.

Fourth - in small quantities of shares to sell them very effectively by placing broker, the borrower reduces the costs of public offering.

Fifth - the method of the pyramid. The company issues shares and attracting investors to the continued growth of their market value, artificially supporting their growth as well as the liquidity of the shares due to the continuous involvement of more and more new investors. The organizers did not pay attention to the effective investment of funds, and the constant improvement of their market value. [3, c .78]

The accumulation of money capital plays an important role in a market economy. Direct the process itself of money-capital accumulation preceded by a stage of its manufacture. Once the money-capital is created or produced, it is necessary to divide a portion of that again goes into production, and the part that is temporarily released. The latter, as a rule, represents the combined funds of enterprises and corporations, accumulated in the market of loan capital by financial institutions and securities market.

The origin and circulation of capital, represented by securities, which is closely related to the functioning of the market of real assets, ie market, in which the sale and purchase of material resources. With the advent of securities (equity assets) is like a split of capital. On the one hand, there is real capital, represented by the operating assets, on the other - it is reflected in securities.

The appearance of this variety of capital associated with the development needs to attract an increasing amount of credit due to complexity and expansion of commercial and industrial activities. Thus, the stock market historically began to develop on the basis of loan capital, as purchase of securities does not mean that other, as the transfer of money capital in the loan.

Issue of securities - issuance of shares, bonds and other debt obligations carried out by commercial and industrial companies, credit institutions and the state. Public issue of securities - securities offerings of all comers. Closed Issue of securities - securities offerings to a limited circle of investors. Issue of securities included, the decision to issue securities, its registration, the development of a prospectus, its registration, the publication (when open), the sale of the securities to investors first (issue), registration of the report on the results of emission. [4, c. 186]

Issue of securities under a statutory means of RK of July 2, 2003 № 461-11 «On securities market" sequence of operations of the issuer of securities placement. [5, c. 83] These actions are to place the securities are combined into a series of stages, which form the procedure of issue of securities.

In general, the procedure for issuance of securities involves the following steps: deciding on the placement of securities, approval of the decision on the issue (additional issue) of securities, state registration of the issue (additional issue) of securities, securities offerings, the state registration of issue report ( additional issue) of securities.

In the case of placement of shares in the establishment of joint-stock company, as well as in the case of placement in the reorganization of legal entities, except for the reorganization of a takeover, the state registration of the report on the issue (additional issue) of securities is done simultaneously with the state registration of the issue (additional issue ) securities, and securities offerings made to the state registration of the issue (additional issue) of securities. These differences are explained by characteristics of the securities issue in these cases are discussed in more detail in the relevant sections of this chapter.

Stages of the procedure for issuing the securities are in a certain logical sequence. Violation of this sequence is recognized by the unfair issue and is grounds for refusal of registration of the issue (additional issue) of securities, suspension of issuance of securities and the recognition of the issue (additional issue) of securities failed.

When placing the issuer's securities (the underwriter, issuing a consortium) shall, upon demand of the investor to bring him to review the issue prospectus of securities or a copy thereof.

The issuer (underwriter, issuing a consortium) shall have the right to charge the investor a fee for providing a copy prospectus of securities in an amount not exceeding the cost of its manufacture.

An investor may apply to the authority with a request to verify the copy of the prospectus issued securities prospectus, held by the authorized agency, providing the authorized agency for these purposes a copy of this. [3, c. 167]

Placement of non-equity securities is subject to restrictions set forth in this Law and other legislative acts of the Republic of Kazakhstan.

The issuer (underwriter, issuing a consortium) shall be entitled to placement of securities through subscription to the unorganized securities market.

Placement of securities on the organized securities market in accordance with the internal documents of the auction.

The issuer shall, within ten calendar days after the state registration of securities prior to their placement among an unlimited number of investors to publish in the printed edition in Kazakh and Russian languages, message placement of equity securities.

Notice of placement of equity securities must include: full name and location of the issuer, the date of state registration of securities, their type and quantity, subject placement, information about the department and officers of the issuer, the name and location of the underwriter (syndications) through which it is possible to get acquainted with the prospect of issue of securities or other information about them, information on the offering price of securities and payment.

Placement of equity securities in the unorganized securities market is carried out through auctions or subscription on the basis of written applications submitted by investors by the issuer (underwriter, syndications). Requirements for the conditions and modalities of the auction or subscription set the internal documents of the issuer.

It is prohibited in placement of securities to establish a preferential right to purchase equity securities by one investor to another, except when using the shareholders pre-emptive rights of the shares or securities convertible into shares or in case of execution by the Issuer previously assumed obligations, establishing the right of holders of derivatives securities for the acquisition of equity securities of this issuer.

Issuer (underwriter, syndications) is prohibited in public offering to contract with the obligation to return their purchase.

The issuer (underwriter, issuing a consortium) must submit to the registrar (the nominee) order the transfer of securities purchased on the account of the investor in the register of holders of securities within two business days from the date of execution of investor obligation to pay for securities.

Order and pay for the shares features regulated by the laws of the Republic of Kazakhstan. Payment bonds shall be only in cash.

Placement of shares by subscription at the price the same for all persons who acquire equity securities within a given location. Placement of bonds by subscription by the conditions and order determined by the prospect of issuing bonds.

Authority may decide to suspend placement of equity securities in the event of failure by the issuer of the report on placement of equity securities, and if in the process of reviewing the report on the placement of equity securities will be discrepancy revealed the information specified in the report to be submitted for public registration of securities.

The decision to suspend placement of equity securities is directed by the authorized body of the issuer, the registrar, which maintains the register of holders of these securities, and the central depository.

Within three calendar days from receipt of the decision of the authorized body to suspend the placement of equity securities, the issuer shall publish in the printed edition of the message at the state and Russian languages ​​to suspend placement of equity securities and to take all steps to facilitate the elimination of violations within the period prescribed by the authorized body . Resumption of placement of equity securities is carried out after removal of violations by written notice to the authorized body.

Treatment of equity securities in the secondary market of securities is carried out by the commission of the securities market in the organized or unorganized market securities civil transactions with these securities.

Conditions and procedure for settlement of transactions with equity securities and their registration in the registry of holders of securities or accounting system of securities nominee established in accordance with the Act and regulations of the authorized body.

Authority may decide to suspend the circulation of securities by blocking all or part of the equity securities at all, or separate accounts in the registry of holders of securities and (or) the accounting system of nominal holding of securities in case of violation of requirements provided by law and other regulations of the Republic of Kazakhstan, provides:

1) the rights and interests of investors in the acquisition of equity securities;

2) The conditions and procedures for transactions with equity securities.

If a decision to suspend the circulation of securities on the grounds, the authority shall send written orders to eliminate violations revealed by the issuer and persons involved (participate) in the transaction. These persons shall within the period prescribed by the authorized body, to eliminate the violations and submit a written report to the authorized body on the implementation of regulations or of the impossibility of removing the violations.