FINANCIAL PLANNING AND ALTERNATIVES AND EBIT AND EPS REALTIONSHIP

FINANCIAL PLANNING AND ALTERNATIVES AND EBIT AND EPS REALTIONSHIP

FINANCIAL PLANNING

FINANCIAL PLANNINGIn business, a financial plan can refer to the three primaryfinancial statements created within abusiness plan.Financial forecastor financial plan can also refer to an annual projection of income and expenses for acompany, division or department.A financial plan can also be an estimation of cash needs and a decision on how to raise the cash, such as through borrowing or issuing additional shares in a company.

DEFINITION OF FINANCIAL PLANNING

Financial Planning is the process of estimating the capital required and determining its competition. It is the process of framing financial policies in relation to procurement, investment and administration of funds of an enterprise.

OBJECTIVES OF FINANCIAL PLANNING Determining capital requirements- This will depend upon factors like cost of current and fixed assets, promotional expenses and long- range planning. Capital requirements have to be looked with both aspects: short- term and long- term requirements.

OBJECTIVES OF FINANCIAL PLANNINGDetermining capital structure- The capital structure is the composition of capital, i.e., the relative kind and proportion of capital required in the business. This includes decisions of debt- equity ratio- both short-term and long- term.

OBJECTIVES OF FINANCIAL PLANNINGFraming financial policies with regards to cash control, lending, borrowings, etc.A finance manager ensures that the scarce financial resources are maximally utilized in the best possible manner at least cost in order to get maximum returns on investment.

IMPORTANCE OF FINANCIAL PLANNINGAdequate funds have to be ensured.Financial Planning helps in ensuring a reasonable balance between outflow and inflow of funds so that stability is maintained.Financial Planning ensures that the suppliers of funds are easily investing in companies which exercise financial planning.

IMPORTANCE OF FINANCIAL PLANNINGFinancial Planning helps in making growth and expansion programmes which helps in long-run survival of the company.Financial Planning reduces uncertainties with regards to changing market trends which can be faced easily through enough funds.Financial Planning helps in reducing the uncertainties which can be a hindrance to growth of the company. This helps in ensuring stability an d profitability in concern.

FINANCIAL ALTERNATIVE

MEANINGAn investment that is not one of the three traditional asset types (stocks, bonds and cash). Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of their complex nature, limited regulations and relative lack of liquidity. Alternative investments include hedge funds, managed futures, real estate, commodities and derivatives contracts.

SOURCES OF CAPITALEquityPreference sharesDebentures (debt )Borrowings from bankAngel investors Seed capitalVenture capitalPrivate equity

ALTERNATIVE SOURCES OF CAPITALAngel InvestorsAngel investors are affluent individuals who provide capital for a business start-up, usually in exchange for ownership equity. These individuals are looking for a higher rate of return than would be given by more traditional investments (typically 25% or more).

Angel investors are an excellent source of early stage financing and high-growth start-ups. They are often willing to tread where there is too much risk for banks and not enough profit potential for venture capitalists

VENTURE CAPITAL

Venture capital is not suitable for all entrepreneurs. It is an option for small companies that have a seasoned management team and very aggressive growth plans; however, venture capitalists will rarely invest in small businesses that have no intention of going public. If a company does have the qualities venture capitalists seek such as a solid business plan, a good management team, investment and passion from the founders, a good potential to exit the investment before the end of their funding cycle, and target minimum returns in excess of 40% per year, it will find it easier to raise venture capital.

The venture capitalist objective is to invest in a company for a short period of time say 5 years and then cash out of the business while making a significant return on their investment

SEED CAPITALThe initial capital used to start a business. Seed capital often comes from the company founders' personal assets or from friends and family. The amount of money is usually relatively small because the business is still in the idea or conceptual stage. Such a venture is generally at a pre-revenue stage and seed capital is needed for research & development, to cover initial operating expenses until a product or service can start generating revenue, and to attract the attention of venture capitalists.

PRIVATE EQUITYPrivate equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity. Capital for private equity is raised from retail and institutional investors, and can be used to fund new technologies, expand working capital within an owned company, make acquisitions, or to strengthen a balance sheet.

The majority of private equity consists of institutional investors and accredited investors who can commit large sums of money for long periods of time. Private equity investments often demand long holding periods to allow for a turnaround of a distressed company or a liquidity event such as an IPO or sale to a public company.

EBIT AND EPS RELATIONSHIPINCOME STATEMENTSALESLESS : VARAIABLE COSTCONTRIBUTIONLESS: FIXED COSTEBITLESS: INTERESTEBTLESS: TAXPATEPS= PAT/ NO OF EQUITY SHAREHOLDER

INTRODUCTIONIt examines how different capital structures affect earnings available to shareholders (Earning Per Share).

It is the analysis of the effect of financing alternatives on earnings per share.

To design the capital structure of the firm in such a way so as to minimize the cost of capital.

EBIT-EPS analysis is a method to study the effect of leverage under alternative methods of financing.

INCOME STATEMENTSALESLESS : VARAIABLE COSTCONTRIBUTIONLESS: FIXED COSTEBITLESS: INTERESTEBTLESS: TAXPATEPS= PAT/ NO OF EQUITY SHAREHOLDER

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EBITEBIT is usually listed on a companys income statement. It is near the bottom of the statement and indicates the companys profit before it pays interest and taxes. It represents the companys actual operating profit and its ability to produce income.

INCOME STATEMENTSALESLESS : VARAIABLE COSTCONTRIBUTIONLESS: FIXED COSTEBITLESS: INTERESTEBTLESS: TAXPATEPS= PAT/ NO OF EQUITY SHAREHOLDER

EPSEPS is also often found on a companys income statement. After deducting Interest and Tax you Profits after tax which you divide by number of Equity shareholder.INCOME STATEMENTSALESLESS : VARAIABLE COSTCONTRIBUTIONLESS: FIXED COSTEBITLESS: INTERESTEBTLESS: TAXPATEPS= PAT/ NO OF EQUITY SHAREHOLDER

STATEMENT SHOWING THE EPS UNDER EXISTING & PROPOSED ALTERNATIVE

ParticularsPresentiDebentureiiP. Share iiiEq. ShareEBIT(-)Interest1,00,00020,0001,20,00030,0001,20,00020,0001,20,00020,000EBT(-)Tax 50%80,00040,00090,00045,0001,00,00050,0001,00,00050,000EAT(-)P. Dividend40,00016,00045,00016,00050,00032,00050,00016,000ESH() No. of Equity Shares24,0004,00029,0004,00018,0004,00034,0006,000EPSChange in EPSRs 6.00-Rs 7.25+1.25Rs 4.50-1.50Rs 5.67-0.33

ALTENATIVES

PRICE EARNINGS RATIOA valuation ratio of a company's current share price compared to its per-share earnings.Market Value per Share /Earnings per Share (EPS)For example, if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95).

INCOME STATEMENTSALESLESS : VARAIABLE COSTCONTRIBUTIONLESS: FIXED COSTEBITLESS: INTERESTEBTLESS: TAXPATEPS= PAT/ NO OF EQUITY SHAREHOLDER

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