(Que -1)

Write short note on:1. Inventory Management

2. Term Loan
1. Inventory Management
Inventories represent the largest asset category
for manufacturing companies, only to plant & equipment.
Inventory provides flexibility in production
scheduling so that an efficient schedule and high utilization of
capacity may be attained.

Type of inventory
Raw material
Raw material are materials and components
that are inputes and making the final products.
Work in progress
Work in process are refers to goods in the
intermediate stage of production.Work in process also
called stock in process.
Finished good
Finised good consist of final productsthat
are ready for sale.

EOQ Model (economic order quantity)

EOQ model distinguish between three type of costs in
the context of inventory management.

Type of costs
Ordering cost
Carrying cost
Shortage cost

Ordering costs relating to purchased items would include

expenses of the requisitioning, preparation of purchase
order, expediting, transport and receiving and placing in
storage.
Carrying costs include expenses of the interest on capital
loked up in inventory, storage, insurance and obsolescence.
Carrying cost are generally are about 25% of the value of
inventories held.
Shortage costs aries when inventories are shortage are short
of requirement for meeting the needs of production or the
demand of customers.

EOQ Formula :Q = 2FU /

PC

U = annul usage / demand

F = fixed cost per order
P = purchase price per order
C = carrying costs

2.

TERM LOAN

Term Loan Procedure

The procedure associated with a term loan involves the following
principal steps.

A. Submission of loan application

B. Initial processing of loan application
C. Appraisal of the proposed project
D. Issue of letter of sanction
E. Acceptance of the term and conditions by the borrowing unit
F. Execution of loan agreement
G. Disbursement of loan
H. Creation of security
I. Monitoring
A. Submission of loan application
The borrower submits an application form which seeks
comprehensive information about the project. The application form covers
the following aspects:

 Promoters` background
Particulars of the industrial concern
Particulars of the project ( capacity, process, technical arrangements,
management, location, land and buildings, plant and machinery, raw
materials, effluents, labour, housing, and schedule of implementation)
Cost of project
Means of financing
Marketing and selling arrangements
Profitability and cash flow
Economics consideration
Government consents
B. Initial processing of loan application
When the application is received, an officer of the financial
institution reviews it to ascertain whether it is complete for processing. If it is
incomplete the borrow is asked to provide the required additional
information. When the application considered complete, the financial
institution prepares a `Flash Report` which is essentially a summarization of
the loan application.
C. Appraisal of the proposed project
The detailed appraisal of the project covers the marketing, technical,
financial, managerial, and economics aspects. The appraisal memorandum is
normally prepared within two month after site inspection.

D. Issue of the letter of sanction

If the project is accepted, a financial letter of sanction issued to the
borrower. This communicates to the borrower, the assistance sanctioned and
the terms and conditions relating thereto.
E. Acceptance of the terms and conditions by the borrowing unit
On receiving the letter of sanction from the financial institution, the
borrowing unit convenes its board meeting at which the term and condition
associated with the latter of sanction are accepted and an appropriate
resolution is passed to that effect.
F. Execution of loan agreement
The financial institution, after receiving the letter of acceptance from
borrower, sends the borrower, sends the draft of the agreement to the
borrower to be executed by authorized persons and properly stamped as per
the Indian Stamp Act, 1899.

G. Disbursement of loan
Periodically, the borrowers required to submit information on the
physical progress of the projects, financial status of the project,
arrangements made for financing the project, contribution made by the
promoters, projected funds flow statement, compliance with various
statutory requirements, and fulfillment of the pre-disbursement conditions.
Based on the information provided by the financial institutions will
determine the amount of term loan to be disbursed from time to time. Before
entire term loan is disbursed, the borrower must fully comply with the all pre
disbursement term and condition of loan agreement.
H. Creation of security
The term loan (both rupee and foreign) and the deferred payment
guarantee assistance provided by the financial institutions are secured
through the first mortgage, by way of deposit of title deeds, of immovable
properties and hypothecation of movable properties. As the creation of
mortgage, particularly in the case of land, tends to be a time consuming
process, the institution generally permit interim disbursements against
alternate security.
E. Monitoring
Monitoring of project is it the implementation stage as well as the
operational stage. During the implementation stage, the project is monitored
through:
(i)
Regular report, furnished by the promoters, which provide
information about placement of orders, construction of building,
procurement of plant, installation of plant and machinery, trial
production, etc.
(ii)
Periodic site visits,
(iii) Discussion promoter, banker, supplier, creditor and other connected
with the project.
(iv) Progress report submitted by the nominee directors
(v)
Audited account of company.
Q.5 Write an exploratory note on private placement and preferential
allotment.
A private placement is an issue of securities to a select group of
persons not exceeding 49. Private placement of shares and convertible
debenture by a listed company can be of two types: (i) Preferential allotment
and (ii) Qualified institutional placement.
Preferential allotment
When listed company issues share or debentures to a select group
of person in terms of the provision of SEBI (IRDA) Regulations, it is

referred to as a preferential allotment. Since preferential allotment is

amenable to potential abuse, it is subject to the following regulation:
Special Resolution: The shareholders of the company must pass a
special resolution or the central government must grant a special
approval before a company makes a preferential allotment.
Pricing: The price at which a preferential allotment of shares is made should
not be lower than a higher of the average of the weekly high and low of the
closing prices of the share quoted on the stock exchange during the six
months period before the relevant date or during the two week period before
the relevant date.

Open offer: A preferential allotment of 15 per cent or more of the equity

necessitates an open offer to the existing shareholder s under the SEBI
takeover code.

Lock -in period: Securities issued to the promoter group of any other
category of investors by way of a preferential allotment are subject to a lockin period of one year this means that they are not transferable for that
period.

(Que 3) Why preferences share is called a

hybried security ? Do you agree that it
combines that worst features of ordinary
share & bonds?
A hybried security is a security that combines elements of
two securities, such as debt and equity.
e.g , include convertible bonds and income securities.
In case of preference shares, although they are legally
shares, they also provided a fixed return like bond do.

Preference shares from an intermediate class of

security between equities and debt. If the issuer is
liquidated, they carry the right to receive interest and
return of capital in priority to ordinary shareholders.
However, from a legal perspective, they are capital stock
and therefore may entitie holders to some degree of
control depending on whether they contain rights.
Share & bond is a better investment. The essential
between shares (equity) and bonds is that investing in
share is about buying partial ownership in a company, as
opposed to bonds which involves making a loan to it.
When an investor buy shares, the value will tend to
reflect the earnings experience of the firm good & bad.
In contrast bond can never earn more than its face
value (plus coupons). Shares have an unlimited ability for
appericiation but, at the same time, greater downside
risk ( because they are lower down the capital structure
in the event of an bankruptcy).
Bond return = Current yield + Capital gain
Stock return = Current yield + Earnings growth +
Price earning multiple change
Features
Ordinary shareholders have the right to vote at
annual general meeting.
Ordinary shareholders have ability to elect the bond
of directors of a company.

 Ordinary shareholders dividends can be higher than

Preference shareholders dividends for ordinary
shares are not fixed.
Like all share investing, investing in ordinary shares
carries risks, including the risk of iosing your initial
investment and the risk of receiving a lower than
excepted return.
Yield of the bond at the issuance date, could be
different from the coupon value if the bond is offering
a premium redemption. Yield value would determine
the premium redeption value & intermediary put
redemption value.

FINANCIAL DECISIONS IN A FIRM

There are three broad areas of financial decision making viz.,
capital budgeting, capital structure, and working capital
management.

Capital Budgeting
The first perhaps the most important decision that any
firm has to as make is to difine the business or business that it
wants to be. This is referred to as strategic planning and it has a
significant bearing on how capital is allocated in the firm.
Once the managers of a firm choose the business or business
they want to be in, they have to develop a plan to invest in
building, machineries, equipments, research and development,
godowns, showrooms, distribution network, information
infrastructure, brands, and oter long-lived assets.

Capital Structure
Once a firm has decided on the investment projects it wants to
undertake, it has to figure out ways and means of financing them.

The key issues in capital structure decision are: What is the

optimal dividend payout ratio for the firm? Which specific
instruments of equity and debt finance should the firm employ?
Which capital markets should the firm raise finance? At what price
should the firm offer its sequrities?

Capita structure and dividend decision should be guided by

consideration of cost and flexibility, in the main.

Working Capital Management

Working capital management, also referred to as short- term
financial management, refers to the day-to-day financial activities
that deal with current assets (inventories, debtors, short-term
holdings of marketable securities, and cash) and current liabilities
(short-term debt, trade creditors, accruals, and provisions).