This document discusses various sources of financing for businesses including traditional sources like personal savings and retained profits. It describes ownership capital provided by shareholders and non-ownership capital from lenders. Specific ownership capital tools include common stock, which provides ownership and voting rights, and preferred stock, which guarantees dividend payments. Non-ownership capital generally takes the form of bank loans with fixed repayment terms. The document also discusses factors that influence stock prices and different forms of business ownership.

1. Chapter 5
Financing Feasibility Study

2. Sources of finance for business
1. Traditional Sources of Finance
A company’s assets,
Invoice discounting,
Personal savings
Undistributed profits
2. Ownership capital :
Ownership capital is the capital owned by the shareholders of a
company.
These funds are usually used for large expenses, such as new
product development, expansion into a new market.
3. Non-ownership capital:
Non-ownership capital includes funds raised from lenders, such
as banks and creditors. Companies typically borrow a fixed
amount from a bank, at a predetermined interest rate and with a
fixed repayment schedule

3. Ownership capital
1. Common stocks:
Definition: Securities representing equity ownership in a corporation
, providing voting rights, and entitling the holder to a share of the
company's success through dividends.
 Common stock is ownership in a company, just the basic stock
that we're used to trading. Companies sell common stock through
public offerings, and it's traded among investors on the secondary
market.
 Those who hold the stock hope to earn dividends from their share
of company profits.

4. Ownership capital
2. Preferred Stock:
 Like common stock, preferred stock is sold by companies and is
then traded among investors on the secondary market.
 Preferred stock is less risky than common stock, therefore
investors can expect less reward, It's designed to provide an
income generating opportunity for investors while raising capital
for the underlying company
 In many ways preferred stock works like bonds. While bonds
guarantee regular interest payments, preferred stock guarantees
regular dividend payments for a specified time.

5. Non-Ownership Capital
 Non-ownership capital includes funds raised from lenders, such as
banks and creditors.
 Companies typically borrow a fixed amount from a bank, at a
predetermined interest rate and with a fixed repayment schedule.
 Certain bank accounts offer overdraft facilities. This is used by
companies to meet their short-term fund requirements, as they
usually come at a very high interest rate.

6. Source of Finance : Duration
Depending on the date of maturity, sources of finance can be
clubbed into the following:
 Long-term sources of finance
 Medium-term sources of finance
 Short-term sources of finance

7. Long-term sources of finance
Long-term financing can be raised from the following sources:
 Share capital or common share
 Preference shares
 Retained earnings
 Bonds of different types
 Loans from financial institutions
 Loans from commercial banks
 Venture capital funding
 International

8. Medium-term sources of finance
Medium-term financing can be raised from the following sources:
 Preference shares
 Bonds
 Public deposits/fixed deposits for duration of three years
 Commercial banks
 Financial institutions
 External commercial borrowings
 Foreign currency bonds

9. Short-term sources of finance
Short-term financing can be raised from the following sources:
• Trade credit
• Commercial banks
• Fixed deposits for a period of 1 year or less
• Advances received from customers

10. Common Stock BasicsCommon Stock Basics
 Dividends are payments made by a corporation to its shareholder
members. It is the portion of corporate profits paid out to
stockholders.
 Dividend Payout Ratio: The percentage of earnings paid to
shareholders in dividends.
= dividends / net income

11. Common Stock BasicsCommon Stock Basics
 Capital Gain: Profit that results when the price of a security
held by a mutual fund rises above its purchase price and the
security is sold (realized gain).
 Income Stock: A stock that has a high, consistent, dividend
paid annually.
 Book Value: the value of the equity of the firm divided by the
number of shares outstanding.
 Market Value: is the price per share of the specified security
multiplied by the number of shares outstanding for the specified
security.

12. Advantages of Preferred Stocks
 Collects the dividends per share before common shares
 It can be concerted into common share or to bonds
 Gets its value at the time of liquidations before common stocks
Disadvantages of Preferred Stocks
 It has a higher cost than bonds
 Represents a fixed financial burden on the project
 Their profits are not exempt from taxes
 Face the same risks faced by common shares.

13. Factors Affect Stock Prices
 Demand and supply of stocks
 Company Performance
 Investor Behavior
 Economic Growth Data
 The Foreign Institutional Investor
 Political Conditions

14. Types of Ownership

15. 1. Sole Proprietorship – One Owner
 Easy and inexpensive to form
 Few government regulations & reporting requirements
 No corporate income tax, only personal income tax
Advantages
 ! Hard to obtain large amounts of borrowing
 ! Unlimited liability (owner liable for total debt)
 ! Difficult to transfer ownership
Disadvantages

16. 2. PARTNERSHIP
 An agreement (verbal or written) between owners as
to:
! % of capital invested by each partner
! How are profits shared?
! How is it dissolved and/or ownership transferred?
 Same advantages and disadvantages as a one owner
 Usually larger enterprise than sole proprietorship.

17. 3. CORPORATION
 Needs to be registered with a state as a legal entity,
irrespective of who owns it.
 Owners receive shares in corporation
 Shareholders, who don’t necessarily know much about
managing the company, elect board of directors Board
members are expected to oversee the “proper” running of
the company.
 Board of directors appoints managers, generally different
from owners, and is expected to ensure that managers act
in the best interest of shareholders.

18. 3. CORPORATION

19. 3. CORPORATION

20. Retain earning
• The percentage of net earnings not paid out as
dividends, but retained by the company to be
reinvested in its core business or to pay debt. It
is recorded under shareholders' equity on the
balance sheet.

21. But why does the company retain
part of profit?
• In most cases, companies retain their earnings
in order to invest them into areas where the
company can create growth opportunities, such
as buying new machinery or spending the
money on more research and development.

22. Loan
• A loan is a debt provided by an entity
(organization or individual) to another entity at an
interest rate.
• In a loan, the borrower initially receives or
borrows an amount of money, called the principal,
from the lender, and is obligated to pay back or
repay an equal amount of money to the lender at a
later time.
• The loan is generally provided at a cost, referred
to as interest on the debt, which provides an
incentive for the lender to engage in the loan.

23. Bond
• A bond is a debt investment in which an
investor loans money to an entity (typically
corporate or governmental) which borrows the
funds for a defined period of time at a variable
or fixed interest rate. Bonds are used by
companies, municipalities, states and
sovereign governments to raise money and
finance a variety of projects and activities.
Owners of bonds are debtholders, or creditors,
of the issuer.

24. Characteristics of Bonds
Most bonds share some common basic characteristics including:
•Face value is the money amount the bond will be worth at its maturity,
and is also the reference amount the bond issuer uses when calculating
interest payments.
•Coupon rate is the rate of interest the bond issuer will pay on the face
value of the bond, expressed as a percentage.
•Coupon dates are the dates on which the bond issuer will make interest
payments. Typical intervals are annual or semi-annual coupon
payments.
•Maturity date is the date on which the bond will mature and the bond
issuer will pay the bond holder the face value of the bond.
•Bond Price : price of the bond fluctuates in the market in accordance
with changes in interest rates

25. Rental finance
• The project can rent any equipment cannot be
owned by the entrepreneur.
• The rent legal obligations and legal forms can
be stated ad formalized in accordance to the
contract between the two parties of the
contract rented out and the rented