COMMERCE GENERIC – SEM III – PROJECT MANAGEMENT – STUDY MATERIAL – UNIT II – COMPULSORY

Contents
Marketing Feasibility & Plan or Market & Demand Analysis ..................................................................... 3
I. Situational Analysis and Specification of Objectives.............................................................................. 3
II. Collection of Secondary Information .................................................................................................... 3
Evaluation of Secondary Information .................................................................................................. 3
Sources of Secondary Information ...................................................................................................... 4
III. Conduct of Market Survey ................................................................................................................... 4
Steps in a Sample Market Survey ........................................................................................................ 5
IV. Characterisation of the Market ........................................................................................................... 5
V. Demand Forecasting ............................................................................................................................. 6
VI. Marketing Plan or Market Planning ..................................................................................................... 6
Demand Forecasting..................................................................................................................................... 7
Jury of Executive Opinion Method and Delphi Method ........................................................................... 7
Trend Projection Method ......................................................................................................................... 8
Exponential Smoothing Method ............................................................................................................... 8
Moving Average Method .......................................................................................................................... 9
Chain Ratio Method .................................................................................................................................. 9
Consumption Level Method.................................................................................................................... 10
End Use Method ..................................................................................................................................... 11
Leading Indicator Method....................................................................................................................... 12
Econometric Method .............................................................................................................................. 12
Bass Diffusion Model .............................................................................................................................. 13
Uncertainties in Demand Forecasting..................................................................................................... 14
Coping with Uncertainty in Demand Forecasting ................................................................................... 16
Levels of Demand Forecasting ................................................................................................................ 16
Commercial Viability .................................................................................................................................. 17
Technical Feasibility/Viability/Analysis ..................................................................................................... 19
Manufacturing Process/Technology ....................................................................................................... 19
Material Inputs and Utilities ................................................................................................................... 20
Plant Capacity ......................................................................................................................................... 21
Location and Site..................................................................................................................................... 22
Machineries and Equipments ................................................................................................................. 25
Structures and Civil Works & Environmental Aspects of Technical Feasibility ....................................... 26
Project Charts and Layouts ..................................................................................................................... 27
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Schedule of Project Implementation ...................................................................................................... 28
Need for Considering Alternatives .......................................................................................................... 29
Product Mix & Key Product Inter-Linkages ............................................................................................. 30
Overall Financial Plan/Analysis.................................................................................................................. 31
Estimation of Fund Requirements/Project Budgeting .............................................................................. 34
I. Estimation of Sales and Production ..................................................................................................... 34
II. Estimation of Costs ............................................................................................................................. 35
Cost of Project .................................................................................................................................... 36
Cost of Production .............................................................................................................................. 39
Tools & Techniques of Project Cost Estimation................................................................................. 40
III. Working Capital Requirement and its Financing................................................................................ 40
IV. Profitability Projections or Estimates of Working Results ................................................................. 43
V. Projected Cash Flow Statement or Cash Flow Budget........................................................................ 44
VI. Projected Balance Sheet .................................................................................................................... 45
Sources or Means of Finance ..................................................................................................................... 46
I. Ordinary (Equity) Shares ...................................................................................................................... 47
II. Preference Shares ............................................................................................................................... 48
III. Long Term Debt or Loan Stock ........................................................................................................... 49
IV. Retained Earnings .............................................................................................................................. 50
V. Bank Lending....................................................................................................................................... 51
VI. Leasing ............................................................................................................................................... 52
A. Operating Leases ............................................................................................................................ 52
B. Finance Leases ................................................................................................................................ 52
VII. Hire Purchase .................................................................................................................................... 53
VIII. Government Assistance ................................................................................................................... 53
IX. Venture Capital .................................................................................................................................. 54
X. Franchising .......................................................................................................................................... 54
Planning/Choosing the appropriate Means/Source of Finance.............................................................. 55
Loan Syndication for the Projects .............................................................................................................. 57
Collaboration Arrangements ..................................................................................................................... 58
Legal Aspects of Projects............................................................................................................................ 60
Tax Considerations in Project Preparation: Assessing the Tax Burden .................................................... 62

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Marketing Feasibility & Plan or Market & Demand Analysis

I. Situational Analysis and Specification of Objectives

In order to get a “feel” of the relationship between the product and its market, the project
analyst may informally talk to customers, competitors, middlemen, and others in the industry.
Wherever possible, he may look at the experience of the company to learn about the
preferences & purchasing power of customers, actions & strategies of competitors, & practices
of middlemen.

II. Collection of Secondary Information

Secondary information is information that has been gathered in some other context and is
readily available. Secondary information provides the base and the starting point for the market
and demand analysis. It indicates what is known and often provides leads and cues for
gathering primary information required for further analysis. While the secondary information is
available economically and readily, its reliability, accuracy, and relevance for the purpose under
consideration must be carefully examined. The market analyst should seek to know:
Evaluation of Secondary Information
 Who gathered the information? What was the objective?
 When was the information gathered? When was it published?
 How representative was the period for which the information was gathered?
 Have the terms in the study been carefully and unambiguously defined?
 What was the target population?
 How was the sample chosen?
 How representative was the sample?
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 How satisfactory was the process of information gathering?
 What was the degree of sampling bias and non-response bias in the information
gathered?
 What was the degree of misrepresentation by respondents?
Sources of Secondary Information

III. Conduct of Market Survey

Secondary information, though useful, often does not provide a comprehensive basis for market and
demand analysis. It needs to be supplemented with primary information gathered through a market
survey. The market survey may be a census survey or a sample survey; typically it is the latter.
Information Sought in a Market Survey
 Total demand and rate of growth of demand,
 Demand in different segments of the market,
 Income and price elasticities of demand,
 Motives for buying,
 Purchasing plans and intentions,
 Satisfaction with existing products,
 Unsatisfied needs,
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 Attitudes toward various products,
 Distributive trade practices and preferences, and
 Socio-economic characteristics of buyers.

Steps in a Sample Market Survey

IV. Characterisation of the Market

Based on the information gathered from secondary sources and through the market survey, the market
for the product/service may be described in terms of the following:

• Effective demand in the past and present: Production + Imports – Exports – Change in Stocks
• Breakdown of demand as per nature of product, consumer groups and geographical areas.
• Price: Manufacturer, imported, wholesaler and retailer past prices for analysis & comparison.
• Methods of distribution and sales promotion used as per the nature of the product.
• Consumers: Demographic, Sociological and Attitudinal characteristics.
• Supply and Competition: Sources of Supply; Competition from substitutes and near substitutes.
• Government Policy: Laws, Policies, Plans that have an impact on market and consumer demand.

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V. Demand Forecasting

Refer to the next section on “Demand Forecasting”.

VI. Marketing Plan or Market Planning

A marketing plan usually has the following components:

1. Current Marketing Situation: This part of the marketing plan deals with the different
dimensions or facts of the current situation. It examines the Market Situation in terms of size,
growth, customer aspirations and buying behavior in the market under consideration. The
Competitive situation dwells on the major competitors, their objectives, strategies, strengths
etc. Distribution situation evaluates the availability of distributors and the distribution
capabilities of competitors. Finally, the Macroeconomic environment is analysed in terms of its
Political, Legal, Socio-Cultural, Economic, Environmental and Technological dimensions.
2. Opportunity and Issue Analysis: It primarily involves conducting the SWOT (Strength,
Weakness, Opportunity and Threat) analysis. Different findings from previous current
marketing situation analysis are categorised as either a Strength, Weakness, Opportunity or
Threat.
3. Objectives: Objectives have to be clear cut, specific and achievable. They may be defined in
terms of achieving break even in a time period, attaining specific sales volume or market share.
4. Marketing Strategy: A comprehensive marketing strategy should involve well reasoned
description of the target segment amongst prospective customers; how to Position the product
in customer’s mind; number and varieties of Products to be launched; Price range as per the
target customer; Distribution networks to be used and geographical locations to be covered;
number and proper training of Sales force; activities and campaigns to be conducted for Sales
Promotion; and Advertisement mediums, frequency along with their main content.
5. Action Program: Action programs operationalize the Marketing plan. They are conducted as
per a time line to show the gradual progress towards the objectives.

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Demand Forecasting
After gathering information about various aspects of the market and demand from primary and
secondary sources, an attempt may be made to estimate the future demand. A wide range of
forecasting methods are available to the market analyst. These methods may be classified into
three broad categories as shown below.
I. Qualitative Methods: These methods rely essentially on the judgment of experts to translate
qualitative information into quantitative estimates. The important qualitative methods are:
 Jury of Executive Opinion Method
 Delphi Method
II. Time Series Projection Methods: These methods generate forecasts on the basis of an
analysis of the historical time series. The important time series projection methods are:
 Trend Projection Method
 Exponential Smoothing Method
 Moving Average Method
III. Causal Methods: More analytical than the preceding methods, causal methods seek to
develop forecasts on the basis of cause-effect relationships specified in an explicit, quantitative
manner. The important causal methods are:
 Chain Ratio Method
 Consumption Level Method
 End Use Method
 Leading Indicator Method
 Econometric Method
 Bass Diffusion Model

Jury of Executive Opinion Method and Delphi Method

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Trend Projection Method

To estimate the parameters “a” and “b” of the relationship, the method of Least squares is used.
According to the least squares method, the linear relationship which minimizes the sum of squared
deviations of observations from the line of best fit is chosen.

Exponential Smoothing Method

In exponential smoothing, forecasts are modified in the light of observed errors. If

the forecast value for year t, Ft is less than the actual value for year t, St, the
forecast for the year t+1, Ft+1, is set higher than Ft. If Ft > St, Ft+1 is set lower than Ft.
In general
Ft+1 = Ft + α et
where Ft + 1 = Forecast for year t + 1
α = Smoothing Parameter (which lies between 0 and 1)
et = Error in the forecast for year t = St - Ft

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Moving Average Method

Chain Ratio Method

The potential sales of a product may be estimated by applying a series of factors to a measure
of aggregate demand. Ex: A firm planning to manufacture stainless steel blades in a country
tries to estimate its potential sales in the following manner:

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Consumption Level Method

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End Use Method

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Leading Indicator Method

Econometric Method

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Bass Diffusion Model

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Uncertainties in Demand Forecasting

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Coping with Uncertainty in Demand Forecasting

Levels of Demand Forecasting

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Commercial Viability

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Technical Feasibility/Viability/Analysis

Manufacturing Process/Technology
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Material Inputs and Utilities

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Plant Capacity

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Location and Site

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Machineries and Equipments

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Structures and Civil Works & Environmental Aspects of Technical Feasibility

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Project Charts and Layouts

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Schedule of Project Implementation

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Need for Considering Alternatives

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Product Mix & Key Product Inter-Linkages

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Overall Financial Plan/Analysis

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Factors influencing the planning of Means of Finance
1. Norms of Regulatory Bodies and Financial Institutions
2. Key Business Considerations like cost of funds, risk, control, and flexibility.

3. Estimates of Sales and Production

Refer to the next Section on “Estimation of Fund Requirements/Project Budgeting”.

4. Cost of Production
Refer to the next Section on “Estimation of Fund Requirements/Project Budgeting”.

5. Working Capital Requirement and its Financing

Refer to the next Section on “Estimation of Fund Requirements/Project Budgeting”.

6. Profitability Projection or Estimates of Working Results

Refer to the next Section on “Estimation of Fund Requirements/Project Budgeting”.

7. Break Even Point

The profitability projections or estimates of working results discussed above are based on the
assumption that the project would operate at given levels of capacity utilization in future. In addition to
knowing what the projected profits would be at certain levels of capacity utilization, it is also helpful to
know what the level of operation should be to avoid losses. For this purpose, the breakeven point,
which refers to the level of operation at which the project neither makes profit nor incurs loss, is
calculated.

8. Projected Cash Flow Statement

Refer to the next Section on “Estimation of Fund Requirements/Project Budgeting”.

9. Projected Balance Sheet

Refer to the next Section on “Estimation of Fund Requirements/Project Budgeting”.

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Estimation of Fund Requirements/Project Budgeting

It involves the estimation of Production, Sales, Costs, Working Capital
requirements, Profitability projections, projected Cash Flow Statement and
projected balance sheet for at-least about 10 years to facilitate financial planning.

I. Estimation of Sales and Production

Sales and Production are closely related and are typically the basis or starting
point for profitability projections. The following considerations should be kept in
mind:
1. Not advisable to assume a high capacity utilization level in first year of
operation.
2. It is not necessary to make adjustments for stocks of finished goods. For
practical purposes, it may be assumed that production would be equal to sales.
3. The selling price considered should be the price realizable by the company net
of excise duty. It shall, however, include dealers' commission, which is shown as
an item of expense [as part of sales expenses].
4. The selling price used may be the present selling price – as the changes in
selling price will be matched by proportionate changes in cost of production.

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II. Estimation of Costs

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Cost of Project

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Cost of Production

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Tools & Techniques of Project Cost Estimation

III. Working Capital Requirement and its Financing

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IV. Profitability Projections or Estimates of Working Results

After preparation of estimates of Production, Sales and Costs, the Profitability

Projections or Estimates of Working/Operating results are prepared for a period
of about 10 years. It broadly includes the following.

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V. Projected Cash Flow Statement or Cash Flow Budget

The cash flow statement shows the movement of cash into and out of the firm
and its net impact on the cash balance with the firm. The format for preparing the
cash flow statement as prescribed by all-India financial institutions is shown here.
While this format calls for preparing the cash flow statement on a half-yearly or
annual basis, for managerial purposes, it may be helpful to prepare it on a
quarterly basis. This would facilitate better financial planning, project evaluation,
and fund control.

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VI. Projected Balance Sheet

The Balance Sheet, showing the balances in various asset and liability accounts,
reflects the condition of the firm at a given point of time.

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Sources or Means of Finance

The long term capital funds or financing for a Project may be raised by the parent company
through any one or a combination of the following very popular sources:

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I. Ordinary or Equity Shares; II. Preference Shares; III. Loan term Debt or Loan Stock;
IV. Retained Earnings; V. Bank Lending; VI. Leasing; VII. Hire Purchase; VIII. Government
Assistance; IX Venture Capital and X. Franchising.

I. Ordinary (Equity) Shares

Ordinary shares are issued to the owners of a company. They have a nominal or 'face' value,
typically of $1 or 50 cents. The market value of a quoted company's shares bears no
relationship to their nominal value, except that when ordinary shares are issued for cash, the
issue price must be equal to or be more than the nominal value of the shares.

A. Deferred Ordinary Shares

They are a form of ordinary shares, which are entitled to a dividend only after a certain date or
if profits rise above a certain amount. Voting rights might also differ from those attached to
other ordinary shares.
Ordinary shareholders put funds into their company:
a) by paying for a new issue of shares
b) through retained profits.
Simply retaining profits, instead of paying them out in the form of dividends, offers an
important, simple low-cost source of finance, although this method may not provide enough
funds, for example, if the firm is seeking to grow.
A new issue of shares might be made in a variety of different circumstances:
a) The company might want to raise more cash. If it issues ordinary shares for cash, should the
shares be issued pro rata to existing shareholders, so that control or ownership of the company
is not affected? If, for example, a company with 200,000 ordinary shares in issue decides to
issue 50,000 new shares to raise cash, should it offer the new shares to existing shareholders,
or should it sell them to new shareholders instead?
i) If a company sells the new shares to existing shareholders in proportion to their existing
shareholding in the company, we have a rights issue. In the example above, the 50,000 shares
would be issued as a one-in-four rights issue, by offering shareholders one new share for every
four shares they currently hold.
ii) If the number of new shares being issued is small compared to the number of shares already
in issue, it might be decided instead to sell them to new shareholders, since ownership of the
company would only be minimally affected.
b) The company might want to issue shares partly to raise cash, but more importantly to float'
its shares on a stick exchange.
c) The company might issue new shares to the shareholders of another company, in order to
take it over.

B. New Shares Issue

A company seeking to obtain additional equity funds may be:
a) an unquoted company wishing to obtain a Stock Exchange quotation
b) an unquoted company wishing to issue new shares, but without obtaining a Stock Exchange
quotation

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c) a company which is already listed on the Stock Exchange wishing to issue additional new
shares.
The methods by which an unquoted company can obtain a quotation on the stock market are:
a) an offer for sale
b) a prospectus issue
c) a placing
d) an introduction.

C. Offers for Sale

An offer for sale is a means of selling the shares of a company to the public.
a) An unquoted company may issue shares, and then sell them on the Stock Exchange, to raise
cash for the company. All the shares in the company, not just the new ones, would then
become marketable.
b) Shareholders in an unquoted company may sell some of their existing shares to the general
public. When this occurs, the company is not raising any new funds, but just providing a wider
market for its existing shares (all of which would become marketable), and giving existing
shareholders the chance to cash in some or all of their investment in their company.
When companies 'go public' for the first time, a 'large' issue will probably take the form of an
offer for sale. A smaller issue is more likely to be a placing, since the amount to be raised can be
obtained more cheaply if the issuing house or other sponsoring firm approaches selected
institutional investors privately.

D. Rights Issue
A rights issue provides a way of raising new share capital by means of an offer to existing
shareholders, inviting them to subscribe cash for new shares in proportion to their existing
holdings.
For example, a rights issue on a one-for-four basis at 280c per share would mean that a
company is inviting its existing shareholders to subscribe for one new share for every four
shares they hold, at a price of 280c per new share.
A company making a rights issue must set a price which is low enough to secure the acceptance
of shareholders, who are being asked to provide extra funds, but not too low, so as to avoid
excessive dilution of the earnings per share.

II. Preference Shares

Preference shares have a fixed percentage dividend before any dividend is paid to the ordinary
shareholders. As with ordinary shares a preference dividend can only be paid if sufficient
distributable profits are available, although with 'cumulative' preference shares the right to an
unpaid dividend is carried forward to later years. The arrears of dividend on cumulative
preference shares must be paid before any dividend is paid to the ordinary shareholders.
From the company's point of view, preference shares are advantageous in that:
· Dividends do not have to be paid in a year in which profits are poor, while this is not the case
with interest payments on long term debt (loans or debentures).

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· Since they do not carry voting rights, preference shares avoid diluting the control of existing
shareholders while an issue of equity shares would not.
· Unless they are redeemable, issuing preference shares will lower the company's gearing.
Redeemable preference shares are normally treated as debt when gearing is calculated.
· The issue of preference shares does not restrict the company's borrowing power, at least in
the sense that preference share capital is not secured against assets in the business.
· The non-payment of dividend does not give the preference shareholders the right to appoint a
receiver, a right which is normally given to debenture holders.
However, dividend payments on preference shares are not tax deductible in the way that
interest payments on debt are. Furthermore, for preference shares to be attractive to investors,
the level of payment needs to be higher than for interest on debt to compensate for the
additional risks.
For the investor, preference shares are less attractive than loan stock because:
· they cannot be secured on the company's assets
· the dividend yield traditionally offered on preference dividends has been much too low to
provide an attractive investment compared with the interest yields on loan stock in view of the
additional risk involved.

III. Long Term Debt or Loan Stock

Loan stock is long-term debt capital raised by a company for which interest is paid, usually half
yearly and at a fixed rate. Holders of loan stock are therefore long-term creditors of the
company.
Loan stock has a nominal value, which is the debt owed by the company, and interest is paid at
a stated "coupon yield" on this amount. For example, if a company issues 10% loan stocky the
coupon yield will be 10% of the nominal value of the stock, so that $100 of stock will receive
$10 interest each year. The rate quoted is the gross rate, before tax.
Debentures are a form of loan stock, legally defined as the written acknowledgement of a debt
incurred by a company, normally containing provisions about the payment of interest and the
eventual repayment of capital.

Debentures with a Floating rate of Interest

These are debentures for which the coupon rate of interest can be changed by the issuer, in
accordance with changes in market rates of interest. They may be attractive to both lenders
and borrowers when interest rates are volatile.
Security
Loan stock and debentures will often be secured. Security may take the form of either a fixed
charge or a floating charge.
a) Fixed charge; Security would be related to a specific asset or group of assets, typically land
and buildings. The company would be unable to dispose of the asset without providing a
substitute asset for security, or without the lender's consent.
b) Floating charge; With a floating charge on certain assets of the company (for example, stocks
and debtors), the lender's security in the event of a default payment is whatever assets of the
appropriate class the company then owns (provided that another lender does not have a prior
charge on the assets). The company would be able, however, to dispose of its assets as it chose

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until a default took place. In the event of a default, the lender would probably appoint a
receiver to run the company rather than lay claim to a particular asset.

The Redemption of Loan Stock

Loan stock and debentures are usually redeemable. They are issued for a term of ten years or
more, and perhaps 25 to 30 years. At the end of this period, they will "mature" and become
redeemable (at par or possibly at a value above par).
Most redeemable stocks have an earliest and latest redemption date. For example, 18%
Debenture Stock 2007/09 is redeemable, at any time between the earliest specified date (in
2007) and the latest date (in 2009).
The issuing company can choose the date. The decision by a company when to redeem a debt
will depend on:
a) how much cash is available to the company to repay the debt
b) the nominal rate of interest on the debt. If the debentures pay 18% nominal interest and the
current rate of interest is lower, say 10%, the company may try to raise a new loan at 10% to
redeem the debt which costs 18%. On the other hand, if current interest rates are 20%, the
company is unlikely to redeem the debt until the latest date possible, because the debentures
would be a cheap source of funds.
There is no guarantee that a company will be able to raise a new loan to pay off a maturing
debt, and one item to look for in a company's balance sheet is the redemption date of current
loans, to establish how much new finance is likely to be needed by the company, and when.

Mortgages
Mortgages are a specific type of secured loan. Companies place the title deeds of freehold or
long leasehold property as security with an insurance company or mortgage broker and receive
cash on loan, usually repayable over a specified period. Most organisations owning property
which is unencumbered by any charge should be able to obtain a mortgage up to two thirds of
the value of the property.
As far as companies are concerned, debt capital is a potentially attractive source of finance
because interest charges reduce the profits chargeable to corporation tax.

IV. Retained Earnings

For any company, the amount of earnings retained within the business has a direct impact on
the amount of dividends. Profit re-invested as retained earnings is profit that could have been
paid as a dividend. The major reasons for using retained earnings to finance new investments,
rather than to pay higher dividends and then raise new equity for the new investments, are as
follows:
a) The management of many companies believes that retained earnings are funds which do not
cost anything, although this is not true. However, it is true that the use of retained earnings as a
source of funds does not lead to a payment of cash.
b) The dividend policy of the company is in practice determined by the directors. From their
standpoint, retained earnings are an attractive source of finance because investment projects
can be undertaken without involving either the shareholders or any outsiders.
c) The use of retained earnings as opposed to new shares or debentures avoids issue costs.

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d) The use of retained earnings avoids the possibility of a change in control resulting from an
issue of new shares.
Another factor that may be of importance is the financial and taxation position of the
company's shareholders. If, for example, because of taxation considerations, they would rather
make a capital profit (which will only be taxed when shares are sold) than receive current
income, then finance through retained earnings would be preferred to other methods.
A company must restrict its self-financing through retained profits because shareholders should
be paid a reasonable dividend, in line with realistic expectations, even if the directors would
rather keep the funds for re-investing. At the same time, a company that is looking for extra
funds will not be expected by investors (such as banks) to pay generous dividends, nor over-
generous salaries to owner-directors.

V. Bank Lending
Borrowings from banks are an important source of finance to companies. Bank lending is still
mainly short term, although medium-term lending is quite common these days.

Short term Lending may be in the form of:

a) an overdraft, which a company should keep within a limit set by the bank. Interest is charged
(at a variable rate) on the amount by which the company is overdrawn from day to day;
b) a short-term loan, for up to three years.

Medium term Loans are loans for a period of from three to ten years. The rate of interest
charged on medium-term bank lending to large companies will be a set margin, with the size of
the margin depending on the credit standing and riskiness of the borrower. A loan may have a
fixed rate of interest or a variable interest rate, so that the rate of interest charged will be
adjusted every three, six, nine or twelve months in line with recent movements in the Base
Lending Rate.
Lending to smaller companies will be at a margin above the bank's base rate and at either a
variable or fixed rate of interest. Lending on overdraft is always at a variable rate. A loan at a
variable rate of interest is sometimes referred to as a floating rate loan. Longer-term bank
loans will sometimes be available, usually for the purchase of property, where the loan takes
the form of a mortgage. When a banker is asked by a business customer for a loan or overdraft
facility, he will consider several factors, known commonly by the mnemonic PARTS.
- Purpose
- Amount
- Repayment
- Term
- Security
P The purpose of the loan A loan request will be refused if the purpose of the loan is not
acceptable to the bank.
A The amount of the loan. The customer must state exactly how much he wants to borrow. The
banker must verify, as far as he is able to do so, that the amount required to make the
proposed investment has been estimated correctly.
R How will the loan be repaid? Will the customer be able to obtain sufficient income to make
the necessary repayments?
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T What would be the duration of the loan? Traditionally, banks have offered short-term loans
and overdrafts, although medium-term loans are now quite common.
S Does the loan require security? If so, is the proposed security adequate?

VI. Leasing
A lease is an agreement between two parties, the "lessor" and the "lessee". The lessor owns a
capital asset, but allows the lessee to use it. The lessee makes payments under the terms of the
lease to the lessor, for a specified period of time.
Leasing is, therefore, a form of rental. Leased assets have usually been plant and machinery,
cars and commercial vehicles, but might also be computers and office equipment. There are
two basic forms of lease: "operating leases" and "finance leases".

A. Operating Leases
Operating leases are rental agreements between the lessor and the lessee whereby:
a) the lessor supplies the equipment to the lessee
b) the lessor is responsible for servicing and maintaining the leased equipment
c) the period of the lease is fairly short, less than the economic life of the asset, so that at the
end of the lease agreement, the lessor can either
i) lease the equipment to someone else, and obtain a good rent for it, or
ii) sell the equipment secondhand.

B. Finance Leases
Finance leases are lease agreements between the user of the leased asset (the lessee) and a
provider of finance (the lessor) for most, or all, of the asset's expected useful life.
Suppose that a company decides to obtain a company car and finance the acquisition by means
of a finance lease. A car dealer will supply the car. A finance house will agree to act as lessor in
a finance leasing arrangement, and so will purchase the car from the dealer and lease it to the
company. The company will take possession of the car from the car dealer, and make regular
payments (monthly, quarterly, six monthly or annually) to the finance house under the terms of
the lease.
Other important characteristics of a finance lease:
a) The lessee is responsible for the upkeep, servicing and maintenance of the asset. The lessor
is not involved in this at all.
b) The lease has a primary period, which covers all or most of the economic life of the asset. At
the end of the lease, the lessor would not be able to lease the asset to someone else, as the
asset would be worn out. The lessor must, therefore, ensure that the lease payments during
the primary period pay for the full cost of the asset as well as providing the lessor with a
suitable return on his investment.
c) It is usual at the end of the primary lease period to allow the lessee to continue to lease the
asset for an indefinite secondary period, in return for a very low nominal rent. Alternatively, the
lessee might be allowed to sell the asset on the lessor's behalf (since the lessor is the owner)
and to keep most of the sale proceeds, paying only a small percentage (perhaps 10%) to the
lessor.

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Why might Leasing be popular?

· The supplier of the equipment is paid in full at the beginning. The equipment is sold to the
lessor, and apart from obligations under guarantees or warranties, the supplier has no further
financial concern about the asset.
· The lessor invests finance by purchasing assets from suppliers and makes a return out of the
lease payments from the lessee. Provided that a lessor can find lessees willing to pay the
amounts he wants to make his return, the lessor can make good profits. He will also get capital
allowances on his purchase of the equipment.
· Leasing might be attractive to the lessee:
i) if the lessee does not have enough cash to pay for the asset, and would have difficulty
obtaining a bank loan to buy it, and so has to rent it in one way or another if he is to have the
use of it at all; or
ii) if finance leasing is cheaper than a bank loan. The cost of payments under a loan might
exceed the cost of a lease.
Operating leases have further advantages:
· The leased equipment does not need to be shown in the lessee's published balance sheet, and
so lessee's balance sheet shows no increase in its gearing ratio.
· The equipment is leased for a shorter period than its expected useful life. In the case of high-
technology equipment, if the equipment becomes out-of-date before the end of its expected
life, the lessee does not have to keep on using it, and it is the lessor who must bear the risk of
having to sell obsolete equipment secondhand.
The lessee will be able to deduct lease payments in computing his taxable profits.

VII. Hire Purchase

Hire purchase is a form of instalment credit. Hire purchase is similar to leasing, with the
exception that ownership of the goods passes to the hire purchase customer on payment of the
final credit instalment, whereas a lessee never becomes the owner of the goods.
Hire purchase agreements usually involve a finance house.
i) The supplier sells the goods to the finance house.
ii) The supplier delivers goods to customer who will eventually purchase them.
iii) Hire purchase arrangement exists between the finance house and customer.
The finance house will always insist that the hirer should pay a deposit towards the purchase
price. The size of the deposit will depend on the finance company's policy and its assessment of
the hirer. This is in contrast to a finance lease, where the lessee might not be required to make
any large initial payment.
An industrial or commercial business can use hire purchase as a source of finance. With
industrial hire purchase, a business customer obtains hire purchase finance from a finance
house in order to purchase the fixed asset. Goods bought by businesses on hire purchase
include company vehicles, plant and machinery, office equipment and farming machinery.

VIII. Government Assistance

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The government provides finance to companies in cash grants and other forms of direct
assistance, as part of its policy of helping to develop the national economy, especially in high
technology industries and in areas of high unemployment.

IX. Venture Capital

Venture Capital is money put into an enterprise which may all be lost if the enterprise fails. A
businessman starting up a new business will invest venture capital of his own, but he will
probably need extra funding from a source other than his own pocket. However, the term
'venture capital' is more specifically associated with putting money, usually in return for an
equity stake, into a new business, a management buy-out or a major expansion scheme.
The institution that puts in the money recognises the gamble inherent in the funding. There is a
serious risk of losing the entire investment, and it might take a long time before any profits and
returns materialise. But there is also the prospect of very high profits and a substantial return
on the investment. A venture capitalist will require a high expected rate of return on
investments, to compensate for the high risk.
A venture capital organisation will not want to retain its investment in a business indefinitely,
and when it considers putting money into a business venture, it will also consider its "exit", that
is, how it will be able to pull out of the business eventually (after five to seven years, say) and
realise its profits. Examples of venture capital organisations are: Merchant Bank of Central
Africa Ltd and Anglo American Corporation Services Ltd.
When a company's directors look for help from a venture capital institution, they must
recognise that:
· the institution will want an equity stake in the company
· it will need convincing that the company can be successful
· it may want to have a representative appointed to the company's board, to look after its
interests.
The directors of the company must then contact venture capital organisations, to try and find
one or more which would be willing to offer finance. A venture capital organisation will only
give funds to a company that it believes can succeed, and before it will make any definite offer,
it will want from the company management:
a) a business plan
b) details of how much finance is needed and how it will be used
c) the most recent trading figures of the company, a balance sheet, a cash flow forecast and a
profit forecast
d) details of the management team, with evidence of a wide range of management skills
e) details of major shareholders
f) details of the company's current banking arrangements and any other sources of finance
g) any sales literature or publicity material that the company has issued.
A high percentage of requests for venture capital are rejected on an initial screening, and only a
small percentage of all requests survive both this screening and further investigation and result
in actual investments.

X. Franchising
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Franchising is a method of expanding business on less capital than would otherwise be needed.
For suitable businesses, it is an alternative to raising extra capital for growth. Franchisors
include Budget Rent-a-Car, Wimpy, Nando's Chicken and Chicken Inn.
Under a franchising arrangement, a franchisee pays a franchisor for the right to operate a local
business, under the franchisor's trade name. The franchisor must bear certain costs (possibly
for architect's work, establishment costs, legal costs, marketing costs and the cost of other
support services) and will charge the franchisee an initial franchise fee to cover set-up costs,
relying on the subsequent regular payments by the franchisee for an operating profit. These
regular payments will usually be a percentage of the franchisee's turnover.
Although the franchisor will probably pay a large part of the initial investment cost of a
franchisee's outlet, the franchisee will be expected to contribute a share of the investment
himself. The franchisor may well help the franchisee to obtain loan capital to provide his-share
of the investment cost.
The advantages of franchises to the franchisor are as follows:
· The capital outlay needed to expand the business is reduced substantially.
· The image of the business is improved because the franchisees will be motivated to achieve
good results and will have the authority to take whatever action they think fit to improve the
results.
The advantage of a franchise to a franchisee is that he obtains ownership of a business for an
agreed number of years (including stock and premises, although premises might be leased from
the franchisor) together with the backing of a large organisation's marketing effort and
experience. The franchisee is able to avoid some of the mistakes of many small businesses,
because the franchisor has already learned from its own past mistakes and developed a scheme
that works.

Planning/Choosing the appropriate Means/Source of Finance

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Loan Syndication for the Projects

Loan syndication is the process of involving several different lenders in providing various
portions of a loan. Loan syndication most often occurs in situations where a borrower requires
a large sum of capital that may be too much for a single lender to provide or outside the scope
of a lender's risk exposure levels. Thus, multiple lenders work together to provide the borrower
with the capital needed.
Loan syndication is used in corporate borrowing. Companies seek corporate loans for a wide
variety of reasons. Loan syndication is commonly needed when companies are borrowing for
mergers, acquisitions, buyouts and other capital projects. These types of capital projects often
require large loans, thus loan syndication is mainly used in extremely large loan situations.
Loan syndication allows any one lender to provide a large loan while maintaining a more
prudent and manageable credit exposure because the lender is not the only creditor on the
deal. Large capital projects for corporate borrowers often need very large sums of capital to
complete the transaction; therefore, more than one single lender is often relied upon for loan
funding.
Within the loan syndication process, terms from all of the lenders on the deal are typically the
same although they may vary. Collateral requirements by the lenders can often vary
considerably. Usually there is only one loan agreement for the entire syndicate.
Lead Financial Institution: For most loan syndications, a lead financial institution is used to
coordinate all aspects of the deal. The lead financial institution is often known as the syndicate
agent. This agent is also often responsible for all aspects of the deal including the initial
transaction, fees, compliance reports, repayments throughout the duration of the loan, loan
monitoring and overall reporting for all lenders within the deal.
A third party or additional specialists may be used throughout various points of the loan
syndication or repayment process to assist with various aspects of reporting and monitoring.
Loan syndications often require high fees because of the vast reporting and coordination
required to complete and maintain the loan processing. Fees can be as high as 10% of the loan
principal. In 2015, Charter Communications topped the list of leveraged loan-funded
syndications at $13.8 billion for its merger with Time Warner Cable. Credit Suisse was the lead
syndicator on the deal. In the United States loan market, Bank of America Merrill Lynch,
JPMorgan, Wells Fargo and Citi are the industry’s leading syndicators of loans.

Essential Characteristics:
(i) Single borrower, (ii) More than one lender, and (iii) Common loan & security documentation.

Why is Loan Syndication Required?

• Banks are restricted to take funded exposure on a single borrower up to 15% of their capital,
and non-funded exposure up to 20% of their capital.
• Banks also set prudential loan limit internally to restrict loan exposure on a single customer.
• Infrastructure projects and capital intensive industrial undertakings require lumpy investment
that isn’t possible for a single bank to address.

Advantages of Loan Syndication

• Diversification/sharing of risks, cost sharing and pooling of resources and reputation.

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• Participating banks play useful roles by providing informative opinions and/or additional
expertise even after the funding has been extended.
• Popular scheme for financing large and medium scale projects.
• The ability of the customer to deal with single Bank/FI (“Lead Bank” and “Agent Bank”) as a
one-stop service point.
• Syndication provides borrower with a complete menu of financing options, which usually
results in more competitive loan pricing, product innovations and wider cooperation.
• The opportunity for the borrower to establish a track record with many banks from just a
single transaction.

Collaboration Arrangements

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Legal Aspects of Projects

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Tax Considerations in Project Preparation: Assessing the Tax Burden

For preparing the profitability projection, the expected tax burden for the forecast period,
which is usually about ten years, has to be figured out. So, one needs to be familiar with the
provisions of Income Tax Act that are relevant for determining the magnitude and timing of the
tax burden for a new project.

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