CS Professional · Strategic Management and Corporate Finance

Sources of Corporate Funding: formula sheet

Full chapter guide

Key formulas

Debt-equity ratio: Debt-equity ratio = Long-term debt ÷ Shareholders' equity; Shows how much debt is used for each rupee of equity. State what you include in debt.
Capital structure proportion: Weight of a source = Amount of that source ÷ Total long-term capital; Use this to express the mix in percentages.
Interest coverage ratio: Interest coverage = EBIT ÷ Interest; Higher means the company can service debt more comfortably.
Matching principle: Long-term need → long-term source; short-term need → short-term source; A rule of prudence, not a legal rule.
Equity vs preference: core test: Dividend: preference first, at a fixed rate; equity after, variable. Capital on winding up: preference before equity.; Use this as the base of any difference answer.
Value of a right (theoretical ex-rights price): Ex-rights price = (N × Market price + R × Issue price) ÷ (N + R); Value of a right = Cum-rights price − Ex-rights price; N = existing shares held per unit, R = new shares offered per unit. It is a theoretical price and ignores market movements.
Bonus issue effect: Total equity (share capital + reserves) is unchanged; share capital rises and reserves fall by the same amount.; No cash comes in. Ex-bonus market price tends to fall, but this is not a fixed rule.
Cumulative preference arrears: Arrears = Fixed dividend per year × Number of unpaid years; Applies only to cumulative preference shares.
Redemption limit for preference shares: Redeemable within 20 years; irredeemable preference shares cannot be issued; Longer period is allowed only for infrastructure projects, subject to the Act's conditions.
Interest on debenture: Interest = Face value × Coupon rate × Time; Interest is calculated on face value, not issue price. Use it for annual or part-year interest.
Issue price of a debenture: Issue price = Face value − Discount (or + Premium); Redemption is usually at face value unless a redemption premium is stated.
Post-tax cost of debt: Kd = Interest rate × (1 − Tax rate); Interest is tax deductible, so debt is cheaper than its stated rate after tax.
Equated annual instalment of a term loan: Instalment = Loan amount ÷ Present value annuity factor; Each instalment covers both interest and part of the principal. Compute the annuity factor at the loan's interest rate over the number of repayment periods given in the question.
Conversion ratio: Conversion ratio = Number of shares received per instrument = Face value of instrument ÷ Conversion price; Use it when the conversion price is given instead of the ratio.
Conversion price: Conversion price = Face value of instrument ÷ Conversion ratio; This is the effective price paid per share on conversion.
Conversion value: Conversion value = Conversion ratio × Current market price of share; Compare it with the bond's straight value to judge whether conversion pays.
Conversion premium: Conversion premium = (Conversion price − Current market price) ÷ Current market price × 100; A positive premium means the conversion price is above today's market price.
Dilution after conversion: New shares issued = Number of instruments × Conversion ratio; Add this to existing shares to find the new share count and EPS.
Warrant intrinsic value: Intrinsic value = Market price − Exercise price (if positive, otherwise zero); Warrants are exercised only when the market price is above the exercise price.
Net working capital: Net working capital = Current assets − Current liabilities; Gross working capital means total current assets only.
Bill discounting proceeds: Proceeds = Face value − Discount, where Discount = Face value × Rate × (Days ÷ 365); Use the discount rate on face value unless the question says otherwise. Use 365 days unless told otherwise.
Commercial paper discount: Discount = Face value × Rate × (Days ÷ 365); Issue price = Face value − Discount; Effective yield is higher than the stated rate because interest is paid upfront.
Cost of giving up trade discount: Cost = [Discount % ÷ (100 − Discount %)] × [365 ÷ (Credit period − Discount period)] × 100; Shows when it pays to take the cash discount.
Factoring advance: Advance = Invoice value × Advance % ; Net = Advance − Factoring commission − Interest on advance; The balance is released when the customer pays or on the due date.
Overdraft or cash credit interest: Interest = Amount used × Rate × (Days used ÷ 365); Interest runs only on the amount actually drawn, not the full limit. A commitment fee on unused limit may apply.
VC vs PE in one line: VC = early stage, high risk, minority stake, small ticket; PE = mature, lower risk, large stake or control, large ticket; Use this as your opening contrast. It is a general distinction, not a legal rule, so say 'usually'.
VC stages in order: Seed → Start-up → Early → Expansion → Bridge/Pre-IPO → Exit; Write them in this order. Add the purpose of each stage.
AIF categories: Category I (VC, angel, SME, social, infrastructure) | Category II (PE, debt, others without leverage) | Category III (hedge, complex strategies, may use leverage); Learn one example fund type for each category.
Investor return on exit: Gain = Exit proceeds − Amount invested; Multiple of money = Exit proceeds ÷ Amount invested.
Stake after funding: Investor % = Investment ÷ Post-money valuation; Post-money = Pre-money + Investment; Use this when a numerical on dilution is asked.
Finance lease: total lease payments: Total lease payments = Annual rental × Number of years (+ any guaranteed residual value); Finance charge = Total lease payments − Cost of the asset (when ownership risks sit with the lessee).
Hire purchase: finance charge: Finance charge = Total hire purchase price − Cash price; Total hire purchase price = Down payment + Sum of all instalments.
Hire purchase: financed amount: Amount financed = Cash price − Down payment; Interest is charged on this amount, and on the reducing balance if the question says so.
Present value of lease rentals: PV = Rental × Annuity factor at the discount rate; Compare with the cost of buying to decide lease or buy. Use the after-tax cost of debt as the discount rate when the question gives tax.
Lease vs buy decision rule: Choose the option with the lower present value of net cash outflow; Lease outflow = rental × (1 − tax rate). For buying, deduct the tax shield on depreciation and the present value of salvage value.
ADR vs GDR: ADR = receipts for US market; GDR = receipts for markets outside the home country, often in more than one country; Both are negotiable instruments representing Indian shares held by a domestic custodian. Market, listing and investor base are the main contrasts.
Depository receipt chain: Company shares → domestic custodian → overseas depository → DRs → foreign investors; Use this chain to explain the mechanics in any answer.
QIP investors: QIP allottees = qualified institutional buyers only; Applicable to listed companies. Retail investors cannot subscribe through a QIP.
IPO route: Offer document → price discovery (fixed price or book building) → allotment → listing; Add the eligibility conditions and post-issue compliances from the ICDR Regulations.
Public deposit check: Is it a deposit? → Is the company eligible? → Within limits? → Circular, deposit insurance and liquid assets complied with?; Exact limits and percentages must be taken from the Act and the 2014 Rules as in your study material. Do not quote them from memory.

Quick revision

Capital structure is the mix of equity and debt; the aim is a mix that supports value and manageable risk.
Equity gives ownership and no fixed repayment, but dilutes control.
Preference shares carry preferential dividend and capital rights, usually without voting rights in ordinary matters.
Debt has a fixed obligation and interest is a deductible expense in general, but it raises financial risk.
Debentures are issued to the public or privately, often with security and a trustee.
Term loans come from banks and institutions with agreed terms and covenants.
Convertible instruments turn into equity later, so they delay dilution.
Working capital finance covers day-to-day needs, for example trade credit and bank cash credit.
Venture capital and private equity bring funds plus guidance in exchange for equity.
In a lease, the lessor owns the asset; in hire purchase, ownership passes after the last instalment.
Securitisation converts receivables into tradable securities through a special purpose vehicle.
Always match the source to the need, term and legal eligibility, then justify the choice.

Common mistakes

Treating capital structure and financial structure as the same Fix: Capital structure covers long-term sources only. Financial structure includes short-term liabilities as well.
Listing factors without linking them to the facts Fix: Pick factors the case supports and explain each in one line using the company's details.
Saying preference shareholders never have voting rights. Fix: Write that they vote on matters affecting their rights and when dividend is unpaid for the period the Act specifies.
Treating preference dividend as a legal duty like interest. Fix: State that it is paid out of profits when declared. Cumulative shares only carry arrears forward.
Calling debenture holders owners or giving them voting rights in general meetings. Fix: Write that under Section 71(2) a company cannot issue debentures carrying voting rights, and that holders are creditors who receive interest whether or not there is profit.
Saying all debentures are secured. Fix: State that debentures may be secured or unsecured, and say that security is a feature of the issue terms.
Saying a warrant holder is a shareholder. Fix: Write that the holder has only a right to subscribe. Shareholder status begins after exercise and allotment.
Treating convertible debentures as pure debt or pure equity. Fix: Always state both stages: lender with interest before conversion, shareholder after.
Treating overdraft and cash credit as the same. Fix: State the difference: overdraft is for temporary needs on a current account, often repayable on demand; cash credit is for regular needs against hypothecated stock and receivables.
Confusing factoring with bill discounting. Fix: Factoring covers a book of invoices and may include collection and credit protection. Bill discounting is the sale of a single bill of exchange to a bank.

Exam tips

Always begin with a short definition; examiners award marks for it.
In case questions, name the factors that appear in the facts rather than reciting all of them.
State the long-term versus short-term split explicitly with matching sources.
If figures are given, show the working for proportions and ratios, and state the debt definition you use.
End with a clear recommendation, not just a discussion.
Difference questions score on a clean point-by-point comparison. Use at least five heads.
Always add the Companies Act, 2013 position on redemption and voting for preference shares.
In case questions, link the choice of instrument to the company's need for cash, control and cost.